Everyone knows that the cloud, whether public or private, is good for reducing capital expenses. It's an environment built out of off-the-shelf parts instead of best-of-breed systems; virtualization drives up the utilization rate of the equipment; and automated processes reduce personnel overhead.

Chris Perretta, executive VP and CIO of Boston investment management firm State Street Bank, believes there is another rarely discussed--but potentially huge--source of savings from using private cloud computing: more efficient, lower-cost software development. At State Street, the savings could be hundreds of millions of dollars.

One source of development savings is that with a private cloud, both the development environment and production environment are standardized clusters of x86 servers. They frequently rely on Linux and other open source code, and they're managed as a pool of resources. That means a developer can spin up multiple servers and try out code in various iterations and configurations, without needing IT to procure and set up servers.

But even bigger savings at State Street could come from standardizing development on the private cloud. If everyone is writing software for the same cloud-based development platform, code sharing becomes easier, which could mean State Street has to write dramatically less code.

[Learn more about Private Clouds: What It Really Takes To Run Them. ]

"The cloud represents significant savings in our overall operating environment," Perretta says. "Internally, our goal is to drastically reduce the amount of code we have to write by 30-40%. We want to reduce test time 30%. These are conservative, achievable goals. We are starting to see the benefits as we start to write for the cloud."

Understand, State Street writes a lot of software. It manages money accumulated in hedge funds, mutual funds, tax-free investment funds, pension funds, and other sources. It has $2 trillion in funds under direct management and $23.2 trillion in assets under custody and administration. It doesn't buy off-the-shelf software to perform the specifics of managing these sprawling assets. It builds its own, highly customized software, and previously development has constituted 20%-25% of its annual IT budget.

"We write and construct much of our own software. We follow the sun with our clients in trading exchanges around the world," noted Perretta in an interview. To do that, State Street needs a customized software stack that does all the things its clients need it to do, while remaining in compliance with financial services regulations.

Like many other large companies, State Street used to have heterogeneous data centers with many best-of-breed systems. As it moved to a private cloud architecture last August, its leadership has understood that the key to lowering costs in the long run was to simplify and standardize the environment.

State Street IT has used the model of the x86-based public cloud to establish its private cloud data centers and laid down 10 rules that govern future software development, Perretta said in an interview. He didn't share the full list, but they include using certain pieces of vetted open source code and implementing a standard, parallelizable method of accessing database systems. That's a good approach when your future environment is a clustered server, private cloud.

Financial services firms are loath to say more than they have to about their internal environments. But maybe the important point is State Street expects to achieve $600 million in savings by moving to private cloud by the end of 2014. Some of these savings are achieved by changes in business processes and operations as well as IT, but a significant chunk comes from the reduced cost of developing software, he said.

State Street officials described the savings as consisting of some one-time savings and some recurring savings, as in the case of software development. But over the identified 2011-2014 period, they will amount to $600 million.

Six hundred million dollars is such a large figure that you need to remember the annual State Street IT budget was over $1 billion in 2010, when Perretta disclosed the figure in a previous InformationWeek interview. At that time, he described the IT staff as between 6,000 and 7,000 employees. Today, it's 6,900, so the IT budget may still lie roughly in the $1 billion range.