Cloud Computing and the Variable Cost Model

This week I have a guest Blogger, Michael Hugos, a leading authority on Business Agility and Emerging Technologies. Michael recently completed speaking engagements in Europe and Asia, and is currently on a tour of US cities. Here are his thought provoking ideas on Cloud Computing.

Economic prosperity in this high change and unpredictable real-time economy that we live in means companies need to free themselves from the constraints and risks of fixed cost operating models. In the last century business models were largely based on fixed cost operating models that employed capital investments to leverage economies of scale and produce incremental profits by turning out ever increasing volumes of standard products and spread operating expenses over larger and larger numbers of units sold.

This model worked as long as product demand was reasonably predictable and stable because it allowed companies to allocate labor and capital to optimize production and maximize return on investment. But when product life cycles are shortened to months instead of years and when the predictability of mass markets is replaced with the uncertainty of a global real-time economy and rapidly evolving consumer preferences, the capital intensive fixed cost business model is just too risky.

So how can companies reduce their risk and move toward a variable cost operating model? One of their best opportunities lies in the use of a technology known as “cloud computing”. Over the last 10 years information technology (IT) has moved from driving mostly back office functions to driving front office, customer-facing functions – IT is now mission critical to just about every function a company performs. And cloud computing delivers computing power and services to customers on a variable cost pay-as-you-go basis determined by the number of users and their volume of transactions.

Companies that understand how to leverage cloud computing and software-as-a-service (SaaS) offerings such as the popular sales support software enabled by cloud computing will enjoy variable cost operating models that make them optimally suited to succeed in our present economy. Business operations and IT are so closely intertwined there is hardly any meaningful distinction left between the two, so companies using cloud computing will see operating costs rise as business grows, but just as importantly, they will see operating expenses drop automatically if their business declines. They will be free to enter new markets quickly and experiment with introducing new products without big investments in IT. They will not have the risk of being stuck with large sunk costs in technology if demand for their products and services does not meet expectations.

Some of the companies (and their stock symbols) providing cloud and SaaS offerings are: (AMZN); Cisco Systems (CSCO); Google (GOOG); Hewlett-Packard (HPQ); IBM (IBM); Microsoft (MSFT); and (CRM). Cloud computing provides ubiquitous storing and processing of data just as public power grids provide ubiquitous availability of electric energy. And providers of cloud and SaaS offerings enjoy economies of scale that enable them to provide their services at lower price points than most companies can achieve if they try to do it on their own.

Universal access to low priced electric power delivered by electric utilities drove a wave of innovation in business operations and made possible the introduction of thousands of new products based on related technologies such as electric motors, transistors and electric lights. We have only begun to see the business innovations and new products that will be introduced based on universal access to low priced cloud computing services and related technologies. Cloud computing and the variable cost business models it supports will drive sustainable economic growth for many years to come.

[Michael Hugos, principal at Center for Systems Innovation [c4si], delivers seminars and executive briefings and mentors project teams in agile systems development. His newest book is Business in the Cloud: What Every Business Needs to Know about Cloud Computing.]


Center for Systems Innovation
Amazon listing for Business in the Cloud

One thought on “Cloud Computing and the Variable Cost Model

  1. Planning then executing. Thanks for your interesting post.

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