How the cloud saves you money

Cut down the stated and hidden costs of IT.

Information technology is an indispensable tool for running most small businesses but it can also be one of the biggest costs.

Cloud computing can not only help you reduce the amount you spend on IT, it can give you access to enterprise features you couldn’t otherwise afford. It can reduce the money, time and effort spent running your IT by yourself.

Let’s look at the costs associated with IT in the average small business. These can be broken down into four areas; capital costs, operating costs, opportunity costs and downtime costs.


Capital costs

A small business would usually have at least one server to run its most important application.This might be a database with customer information that employees can access to make sales, an email system, or a booking database to make reservations.

A server is a fixed capital cost of at least $2,000 for an entry-level machine to $10,000 or more if it needs to run a resource-intensive application or several applications. Businesses that depend on accessing that application to make money might have a spare server as backup in case the primary server fails.

The server must have enough memory, storage and processing power to cope with the maximum demand that an application might require. For example, a florist which takes orders through its website would require the server to handle the volume of requests the day before Valentine’s Day.

A retailer would need a server that could handle traffic during the holiday sales. Included in the cost of acquisition for a server is the software required to run it, as well as the application it is required to run. Software licenses can add several hundred or several thousand dollars more.

There is also the cost of installation which, depending on the complexity of the application, requires a minimum number of hours’ pay to an IT consultant.

And finally there are associated costs with the server such as an uninterrupted power supply to prevent damage to the server in case of a blackout or accidental shutdown, cooling and optionally a storage rack, and possibly dedicated networking security devices such as a firewall.


How the cloud saves on capital costs
Cloud computing saves huge amounts on capital costs because it eliminates the need for a small business to own a server. Cloud services are provided to hundreds of customers simultaneously using a massive network of servers housed in a cloud computing vendor’s data centres.

The economies of scale mean that a service to one business can be offered at a fraction of the cost of buying and running a server on your own.
Cloud services are also paid for and sometimes sold on a per user, per month basis. That means a business will only pay for the IT that they require at any given time, instead of a high fixed capital cost paid up front.

Paying only for the IT that is needed reduces the pressure on cash flow and puts IT in sync with how a business is performing. When sales get busy and more part-time staff are required, the business pays for more IT services. During the quieter months the amount the business pays for IT should also drop.

One of the biggest selling points of cloud computing is that, with some services, the amount of computing power a customer requires can also be changed according to need. So during holiday sales a retailer can request that more computing power for its IT service, and pay for it on demand.

In most cases software licenses are included in the service and so are not an extra cost. As cloud computing is a service the only configuration is of the application itself and how it operates within the business. There is obviously no need to check that the application is being run on the servers in the data centre as that occurs invisibly to the customers.

Operating costs

Once a business has installed a server it must ensure that it is properly maintained. This either requires the business owner or other employee to spend time monitoring the server’s status and conducting maintenance, or the services of an IT consultant to do the same.

Maintenance can add extra expense and inconvenience. Upgrades to the server’s operating system or the application it is running can mean paying for after-hours labour or even turning off the server temporarily during work hours.

Upgrades can also cost money too, depending on their size.

If a business fails to upgrade its server or applications with software “patches” it becomes exposed to attacks by viruses, worms or hostile hackers. Associated IT hardware such as firewalls and routers also require patching against attacks.


How the cloud saves on operating costs

The cloud computing vendor is responsible for ensuring the application it provides as a service is running properly. It is also required to make sure its data centre has backup power supplies, cooling and ventilation, and that its network is secure.
All those costs involved in securing the operation of a server are undertaken by the cloud computing vendor.
Upgrades to the service usually happen invisibly within the vendor’s data centre and are often free. Incompatibilities between software versions is eliminated because vendors only provide one service to all customers.

What other costs can it save your business?

Next page: Opportunity costs and downtime

Opportunity costs

Small businesses in particular are less likely to try new software that could make their businesses run much more efficiently. In the past a business would have had to buy a server to test out a new application properly. Finding the money to buy and set up a server purely for testing purposes is often out of the financial or time budget for small business.

The consequences are that small businesses often miss out on technology that could help them grow faster or save money, and their growth from small to medium sized businesses is slower than the ideal rate.

There are other opportunity costs in cases where employees are required to be in the office to access an application on a local server. When access to information is locked down to a physical location, it increases the amount of travel within a business as staff return from customers and suppliers to update or download information for their next task.


How the cloud saves on opportunity costs

Cloud services can be easily tested by signing up to trial accounts over the internet. A single user can load up business information to a cloud service, test its functionality and then sign up more employees as the business can afford or needs.

Because cloud services are accessed over the internet, employees can interact with an application wherever they can get online. This often means reducing the amount of required travel and making staff more efficient; they can close a sale in a customer’s office instead of calling back the next day with the updated price list.

Downtime costs

When a small business’ server crashes there is not much to be done. A business might need to order a replacement part, wait for it to arrive, pay for someone to install it, reload all the company data from backup tapes, and then update the records with the sales generated over the time the server was out of action.

It can cost a business tens of thousands of dollars to be offline for the two or three days it takes to recover from a hard-drive failure in a server, which is a very regular occurrence.


How the cloud saves on downtime costs

Cloud services are generally run on servers which have been virtualised, which means that the service itself is not tied to one particular server. If a server has a hardware failure, the service moves seamlessly to another server in the network and continues running, without the customer being any wiser.
Cloud computing vendors run their services in very large data centres that are highly rated for security and include provisions such as backup air-conditioning, electricity and multiple levels of network and physical security.

Most cloud services come with commitments from their vendors to provide their service for a minimum number of hours per month. This service-level agreement (SLA) is often expressed as a percentage of “uptime”, or the amount of time a service is continually running.

A service-level agreement of 99.9% commits to only 43.2 minutes of downtime per month, or 10 minutes per week. Of course, it pays to check how the vendor defines uptime, downtime and penalty rates for exceeding the maximum downtime.

The other savings – time and attention

Cloud computing saves against intangible costs, such as the attention and time that running your own server takes up. A small business effectively outsources all the hardware associated with IT and just pays for the applications that it needs to generate revenue.

About Sholto Macpherson

Sholto Macpherson is a business technology journalist, consultant and analyst specialising in cloud accounting software.

Sholto is the author of the Macpherson Report, which examines the key technology trends facing accountants in Australia.

He lives and works in Sydney, Australia.

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