Thursday, August 13, 2009

The Cloud Option

A few months back, I participated in a panel on the evolution of cloud computing that was hosted by Union Square Advisors. Alongside me on the panel were executives from Amazon, Adobe, Cisco, and NetApp. Someone in the audience claimed that their economic analysis of running an application on Amazon AWS indicated the services were not cost competitive relative to an internal deployment. My response was that the analysis was likely based upon a simple, non-volatile application demand scenario. I said that the analysis should have instead considered the option value of Amazon's services subject to some level of demand volatility. What is an option worth that allows you to quickly scale up and scale down with application demand with costs scaling (or descaling) proportionately? How many applications in your portfolio could benefit from this type of risk management hedge? What type of premium should you be willing to pay for a cost profile that is correlated more closely to your demand profile? To capture without big capital outlays the benefits of terrific demand while simultaneously avoiding the costs of over-provisioning when demand fails?

My response to the simplistic Amazon cost analysis struck a chord with the audience, and I have since been thinking quite a bit about the metaphor of financial options as applied to the value of cloud computing. A financial option basically allows the holder of the option to participate in the market for a particular asset at some future date for a defined price (the premium) today. Aside from their value as a tool for market speculation, options provide a low cost way to manage the risk associated with sudden and significant swings in the market for important portfolio assets. The cloud option provides just this risk management function for the portfolio of applications that any given enterprise must execute and manage in the course of delivering on the promises of its business. In exchange for a cloud architecture premium, the owner of the application gets both upside and downside protection associated with a demand forecast (and its related budget) that is almost certain to be inaccurate.

The objective of this blog, The Cloud Option, is to discover the various costs and benefits associated with the premium of a cloud architecture. By analyzing the structure of the various cloud offerings and the technologies which underpin them (i.e. virtualization, programming APIs, etc), we will provide application owners with a context for evaluating which cloud services and technology might provide the best option for managing their demand risks. At the level of the enterprise, IT planners will be able to more effectively undertake an analysis of their application portfolio in order to lay out a broad demand-risk management strategy based upon cloud technology and services.

Contributing to this blog alongside me will be Steve Bobrowski. Steve is the former CTO of SaaS at Computer Sciences Corporation, former Director of SaaS Technology at BEA Systems, and currently freelances as a technical, strategic, and marketing consultant to prominent cloud vendors. Because of the variety and breadth of our experiences, we should be able to cover the material fairly broadly and with a compelling level of depth. To provide some context on my historical perspective of cloud, I have posted below the cloud related entries from my open source blog dating back to November of 2006.

Cloud technology and services are certainly going to change the landscape of enterprise computing. I believe it can substantially lower the risk adjusted cost of delivering applications. We hope to help elucidate the cloud option – insuring that the premium paid to adopt the architecture truly helps manage cost and risk instead of simply making a technology fashion statement.

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