Booz Allen Hamilton

The Economics of Cloud Computing

The Economics of Cloud Computing

Although $20 billion has been allocated in the President’s FY 2010 budget for federal IT infrastructure investments, the government is increasingly concerned about such massive expenditures. One viable option for reducing IT costs may involve adopting cloud computing as the federal IT infrastructure model.

Cloud computing provides computing resources, storage, and applications as internet-accessible services. The federal budget submitted to Congress in February of this year suggested adopting a cloud computing business model, virtualizing agency data centers, and consolidating data centers and operations. Long-term savings from this effort are expected to be many times the upfront investment costs in cloud computing technology.

Booz Allen Hamilton conducted an economic analysis to examine the plan’s potential savings and related implications. Called “The Economics of Cloud Computing: Addressing the Benefits of Infrastructure in the Cloud,” the study used Booz Allen’s proprietary cost model and extensive experience in economic analysis of IT programs to estimate lifecycle costs of implementing public, private, and hybrid clouds. Unlike most studies, “The Economics of Cloud Computing” considered transition costs, lifecycle operations, and migration schedules.

Study results indicate that cloud computing offers clear opportunities for agencies to reduce costs associated with server hardware and support and meet the long-term savings expectations. The amount of savings depends on the scale of the data center and the amount of time required to move operations into the cloud.  But to give one example, the benefit-to-cost ratio of a non-virtualized 1,000-server data center could reach 15.4:1 after implementation, and total lifecycle cost may be 66% lower than maintaining a traditional data center.

Several critical factors outlined in the study, however, would greatly impact the degree of economic benefit. Oversight organizations such as the Office of Management & Budget, National Institute of Standards and Technology, and General Services Administration must provide timely, well-coordinated support and drive the careful planning needed to enable agencies to select future cloud scenarios that yield the best trade-offs between costs, benefits, and risks.

Senior Associate Gwen Morton and Associate Ted Alford were part of the Booz Allen team that contributed to this study.

study posted October 6, 2009