Oct 24, 2008 1
A few weeks ago I wrote a post about taking advantage of cloud services, SAAS and other online services to help accelerate a new business. Rightly so David Deans, from the Business Technology Roundtable, posed the question ‘how does this affect scalability?‘ When should you consider a dedicated managed service (internal/external)?
Scalability is an interesting term as it has a different context depending on the person you are speaking to. I’ll put other articles up in the next few weeks to consider different perspectives, however I’ll start with probably the one that is key to a lot of new businesses and that is COST!
In order to understand the operating cost of an environment you would look at possibly the lowest factor which is the cost per transaction. This figure is commonly made up of the following costs;
- hardware infrastructure (servers, storage, backup devices)
- network infrastructure (telecoms, security)
- support overheads (backup, performance optimisation, user support)
- software overheads (license, vendor maintenance & support)
Note: I’ve not taken into account the cost of the person actually executing the transaction, as this is required no matter where the solution is hosted.
In a new business venture, the cost per transaction tends to be extremely high for an internally managed infrastructure, as the costs cannot be absorbed efficiently across a transaction. When a cloud service provides a business with a cost per transaction, they are charging you for all of the above factors, but they are spreading the cost over many customers and hence obtaining an economy of scale.
Let’s take a very simplistic scenario. A new business is considering the most appropriate infrastructure. They’ve got 2 different options, 1 is a SAAS product and the other is a dedicated managed service.
The managed service will charge around £360k for build of infrastructure, and then an annual charge of £230k for annual maintenance and support. The hosted service is offering a £30k setup fee and £1.50 per transaction fixed for 5 years. Based on 100,000 transactions and an annual growth rate of 20%, you can see that by year 4 the managed service is actually more cost effective.
Now this is an extremely simplistic scenario, and in real terms the benefit of the managed service may be realised sooner or later depending on how you absorb the cost of the initial platform or add functionality. The key for me is in the growth rate, as this will determine the point whereby a business will realise economies of scale through controlling their own infrastructure.
This leads me onto my next article in considering the value-add of a cloud service or SAAS solution and how you should factor this into your decision process.