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Cloud ROI: Why It's Still Hard To Measure

Why does calculating cloud ROI remain so tough? Examine the tactics used by two cloud innovators, GE and Airbnb -- plus our exclusive survey.

and future capital costs. A third of respondents consider staff savings a top-three priority.

-- One third of respondents using infrastructure-as-a-service say it delivers better results at lower cost than in-house IT, and 20% say they're equal. The rest (47%) say IaaS costs are higher, the results worse, or both.

--For software-as-a-service, 37% of users say it delivers better results at a lower cost than in-house IT, while 26% say they're the same. That leaves 37% who believe costs are higher, results worse, or both.

--Forty-five percent of respondents whose companies use cloud computing say they have a formal policy or stated preference to evaluate cloud for any new application, while another 38% say their companies are headed in that direction.

--Fifty-two percent of companies say they're using SaaS, up from 40% in our Cloud ROI Survey two years ago. IaaS use is up to 38%, compared with 25% two years ago.

What's clear is that cloud use is growing fast, even as the ROI calculations for it remain complicated and fuzzy. What follows is a deep dive into how two companies, Airbnb and GE, are thinking about cloud computing, with additional survey data on how other companies are approaching ROI calculations.

Airbnb: Born in the cloud
Since its founding in August 2008, Airbnb has gone from an idea that couldn't possibly work -- helping people rent out their apartments and vacation homes to total strangers over the Web -- to a business that executes 4 million bookings a year. Today, Airbnb, despite the occasional bad PR about a trashed apartment and looming regulatory concerns, is making it work. When soccer fans traveled to Brazil for the World Cup, for example, 120,000 of them booked rooms through Airbnb. Private room owners serving as hosts pay a 6% to 12% booking fee, plus 3% for completing the credit card transaction.

[Read related stories: Cloud ROI Easy Win: Disaster Recovery and Milliman Strives For ROI With Azure System.]

What started out as three air mattresses leased out of its founders' loft has grown into a business valued at $10 billion by its venture capital backers in April. In 2011, when Augustine started with the company, it used 20 to 30 nodes on Amazon's EC2 cloud service. Now it's somewhere north of 1,000.

The cloud's value to Airbnb is its ability to let the company scale up its capacity quickly for the next round of business expansion. Under its "Belong Anywhere" rebranding campaign begun in mid-July, Airbnb is trying to shift its image, from being an impersonal way to find a room for a trip to being the means of finding just the right host and unique lodging experience. As part of the campaign, hosts and travelers can customize and share the new Airbnb "Bélo" logo -- so a host can change the colors and use it as wall art in the room they rent, for example. The company set up a new website, Create Airbnb, for that campaign. Augustine prepared Airbnb systems for a doubling or potential tripling of traffic, and he had less than two weeks to gear up for it.

"We talk about it all the time internally -- our speed to market and how important it is," Augustine says. "It's incredible how fast our internal systems can be built out." Being able to quickly increase the number of Amazon Web Services' large C3 servers using automated scaling makes right-sizing the infrastructure quite a bit easier than it would be with in-house servers. That kind of automated scaling -- letting Amazon add servers to meet whatever demand comes -- scares some cloud customers, because it could lead to runaway costs. In the InformationWeek Cloud ROI Survey, 89% of respondents using or evaluating cloud computing say they're somewhat concerned, concerned, or very concerned about runaway cloud costs. At Airbnb, that worry takes a back seat to meeting customer demand and quickly testing new initiatives.

Airbnb has 100 software engineers creating and supporting booking, marketing, and engagement systems. For IT operations, it has only four to eight people, because it's not actually running the data center and related hardware. With only that handful of ops staff, Airbnb has expanded into Australia, Asia, and Europe, buying up a German competitor earlier this year and expanding its own European services. "If we had to build our own infrastructure, it wouldn't have happened so fast," Augustine says.

In our Cloud ROI Survey, respondents give cloud a clear advantage in speed of delivery. Only 12% of respondents using IaaS think their IT organization provisions infrastructure faster than a public cloud service, while 24% say they're comparable. That leaves 64% saying the cloud is usually faster.

Airbnb isn't oblivious to cloud costs, even if its executives aren't interested in the specific details of cloud ROI. Airbnb can take that lax attitude in part because cloud providers keep cutting their prices. In March, Amazon announced its 42nd price cut since launching its AWS cloud service, reducing the price of its M3 servers by 38% and its Simple Storage Service by 68%, a move that followed equally steep cuts by Google for its Compute Engine and Microsoft for Azure. Companies like Airbnb that had justified adopting cloud services at earlier pricing levels now have even less interest in ROI metrics.

"Forty percent is a huge number. That definitely made a big difference in our bottom line," Augustine says.

GE: Cloud gets more complicated
Most business technology leaders will look at Airbnb with envy -- no legacy applications and infrastructure, and a business built around a single online function. On the opposite end of the legacy IT spectrum is GE, whose businesses span jet engines, medical devices, locomotives, power plant

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Charles Babcock is an editor-at-large for InformationWeek and author of Management Strategies for the Cloud Revolution, a McGraw-Hill book. He is the former editor-in-chief of Digital News, former software editor of Computerworld and former technology editor of Interactive ... View Full Bio

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User Rank: Moderator
8/12/2014 | 1:33:28 AM
Re: Cloud ROI - Application Development Cost
Privacy challenges are still a concern. There are also constraints in innovation with government cloud. There are also private cloud concerns which involve trust, enabling users the proper knowledge to understand what they signed up for and being able to measure while building trust and getting the user to collaborate in return of resources back to the pool.
Charlie Babcock
Charlie Babcock,
User Rank: Author
8/11/2014 | 6:29:46 PM
Can Linux containers help?
Keith, XComponents sounds like a good idea. Do you have other developers working with you on this project? Agreed app development for the cloud or migration of apps to the cloud is an important cost point. I'm looking for new ways of using Docker to cut  some of those costs. How about the micro services approach, where every application service is run in its own Docker container?  
User Rank: Apprentice
8/8/2014 | 2:21:49 PM
Re: Cloud ROI - Application Development Cost
In case I mislead anyone, XComponents are not finished yet.  They are a project of mine at BitBucket, which is an open source project hosting site, in the cloud.
User Rank: Apprentice
8/7/2014 | 2:40:06 PM
Cloud ROI - Application Development Cost
Here'a a project I just created at BitBucket which eliminates one of the CloudROI cost drivers: application  development time:

Application porting and development are the single biggest cost drivers.  A large organization like GE with substantial investment in I.T. infrastructure would benefit from leveraging this investment as much as possible into the next generation of data access applicaitons, which clearly is the Cloud.  XComponents allow the end user to design their own applications which access existing data stores via Java'd JDBC APIs, DataSource included.  They do this by providing a completely GUI controlled drag and drop design environment, where the user connects GUI controls, data sources, analytics, and views by simply dropping them into a view layout. 

My project management method is Scrum, so I need to hear from potential users.


User Rank: Strategist
8/5/2014 | 11:05:43 PM
Re: Hard to Believe
Absolutely agree. I think this idea of a hybrid cloud roll out is appealing to a number of companies. After all, there is just some data people aren't willing to put into a public cloud architecture. Solid story about the appeal and role of a hybrid cloud here:



User Rank: Author
8/5/2014 | 9:12:55 AM
Re: Hard to Believe
GE isn't making a wholesale shift to the public cloud; it's experimenting, measuring, while also building company-owned, private cloud capacity. We've seen other leading companies take a similar approach -- FedEx CIO Rob Carter has been driving this strategy, building a data center on a private cloud architecture that mimics a public cloud, so IF the public cloud makes sense in terms of security and economics in the future, they can shift there.  
User Rank: Ninja
8/4/2014 | 11:53:53 PM
Re: Hard to Believe
In some years, the GE story will be a legendary tale -it may be a great decision or 'a not-so-great one'. I believe all companies should not just jump the band wagon -everyone needs to evaluate where the stand and where they want to go.
User Rank: Author
8/4/2014 | 4:15:32 PM
Re: Hard to Believe
GE has a lot of incentive, unlike the vendors, to measure and report that data (internally) accurately. Most companies have learned from how bad their cost baselines were when they started down the road to virtualization ands hybrid cloud. Most people struggled to prove ROI becuase the "before" numbers were so questionable. I don't think IT wants to be in that spot again.
Lorna Garey
Lorna Garey,
User Rank: Author
8/4/2014 | 1:13:45 PM
Re: Hard to Believe
I think we tend to forget how relatively new the idea of running enterprise-class tech in the cloud really is. It'll take another couple of years to fully shake out the true numbers -- that is, IF the companies doing it track the right metrics and report on them objectively. Those are big "ifs."
User Rank: Ninja
8/4/2014 | 12:51:15 PM
Hard to Believe
It makes no sense to me that a company of GE's scale can "rent" it's services cheaper than it can own them. It's baking some nonsense into it's calculation.

My best friend works for GE Aircraft Engines in Cinci Ohio. Hard to believe GE would want to run that shop floor from the internet, I don't care how many redundant circuits they have. They have their own power substation at that plant, for God's sake. Yet outsource the IT infrastructure.

I'll be fascinated to see how this turns out.
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