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The Cloud & Technology Transformation Alliance is a joint initiative of Channel Partners and The 2112 Group. CTTA's mission is to be a forum through which all members of the technology value chain – IT vendors, service providers, distributors, resellers, agents and end users ‒ can discuss the issues of next-generation technology and systems, define the value of technology in business context, create best practices for adoption and application, and provide guidance for the business community on what comes next. This blog covers some of CTTA's work. More information is at http://cttalliance.com.

Cloud Convergence Council Blog: Buy vs. Subscribe – The Cloud Value Debate

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By Lawrence M. Walsh, CEO and President, The 2112 Group

Vendor marketing would have you believe that everything IT is heading to the cloud, and on-premises resources such as data centers and desktop applications will disappear with some miraculous flip of a switch. A more realistic view is that of steady evolution over the next decade as businesses gradually adopt cloud-computing resources and integrate with on-premises infrastructure.

But will cloud computing eventually be the dominant model for business IT consumption? In time will cloud computing make on-premises IT economically unfeasible?

Despite the ambitions of cloud-computing advocates, the chance of some businesses completely changing over to a cloud model is unlikely.

The Channel Partners Cloud Convergence Council recently discussed the economics of cloud computing and agreed with conventional wisdom that hosted and managed resources, such as physical infrastructure and business applications, are making IT more accessible and affordable for midmarket and small businesses. Many heavy applications, such as ERP, and infrastructure resources, such as high-density network-attached storage systems, were simply too expensive for many businesses. But cloud computing has made them affordable by basing price on consumption.

But think about what the conversion of IT from a capital expense to an operational expense really means. Rather than paying $120 for an on-premises application, a business will pay $10 per month. That fractionalized expense makes the application more affordable for capital-starved businesses.

The benefit of this fractional pricing to the vendor and service provider is tremendous. Even though it may take months before the service provider recognizes profitable payments on the service, the service engagements will pay out more than they would’ve earned on the one-time on-premises sale. For instance, over a three year period, the subscriber will pay $360 for that application – three times as much as if they would have if they’d bought the on-premises version. And because subscribers can’t afford to lose access to data, they will continue paying the subscription in perpetuity.

Why would any business voluntarily pay more for a service than they would for the same on-premises product? The answer is capital – or the lack of it.

Many small and midsized businesses are cash strapped. They have enough money to meet their basic obligations on a monthly or quarterly schedule. Big infrastructure investments and software purchases often require them extending their lines of credit, something that puts necessities like payroll at risk. In the days when hardware was king, businesses would finance or lease gear, effectively turning the purchase from a capital to an operational expense. And on a recurring payment schedule, the price was broken down into fractions that ultimately added up to the principle plus interest.

The difference between the leasing and financing of the past and the cloud computing of today is the fractional payments are made in perpetuity. A subscriber’s failure to keep up with payments could result in losing access to mission-critical computing resources and data – something that no business can afford.

This is why some businesses will never convert entirely to cloud computing – or at least hosted and public clouds. Larger businesses – particularly enterprises – have a greater ability to fund capital projects. As such, they will not put their applications and data at risk in a public cloud; at the very least they will be highly selective in determining which applications they migrate to the cloud and which they keep on-premises. And because they have deeper pockets, they are more likely to build private clouds for internal consumption than use outside providers.

Enterprises will shed some of their internal resources for the cloud to capture the economic benefits of outsourcing. However, they will think hard about a cloud solution if the long-term financial equation ends up costing them more than the total cost of ownership for an on-premises equivalent.

Lawrence M. Walsh is CEO and president of The 2112 Group, a technology business advisory service that specializes in optimizing indirect channels and partner relationships, and principle blogger at Channelnomics . He’s also the executive director of the Channel Vanguard Council and moderator of the Channel Partners Cloud Convergence Council . He is the former publisher of Channel Insider and editor of VARBusiness Magazine. You can reach him at lmwalsh@the2112group.com.

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