Can cloud computing help save money?

With IT budgets coming under pressure during the downturn, IT directors are keen to find low cost options. Cloud computing – where companies rent IT infrastructure or systems from suppliers, accessing them via the web – is often advertised as a cheap option and, if the hype is believed, the answer to a stretched IT team’s prayers.

And for some retailers, renting IT has benefits beyond its apparent affordability. At online fashion retailer Asos, IT director Daniel West has three clear options when it comes to getting new applications and services up and running, which he lists in order of preference: rent, buy or build.

When renting – the model offered by cloud computing – is a possibility, that’s increasingly the direction West takes. Where a suitable cloud service is not available, he will then look at buying a packaged application and running it in-house.

The third option – building from scratch – is only considered where a proposed application is unique to the company’s needs and will set it apart from the competition.

And even then West and his team look to build these new apps using cloud platforms, such as Microsoft’s Azure, the platform that was already used to build and host the company’s new magazine app for the iPad and where a new transactional mobile application for the iPhone and iPad is in the final stages of development.

“I see cloud computing as an opportunity to remove the constraints that have traditionally hindered retail IT in the past,” he explains. “Technology moves so fast in our business that if I tried to buy and build everything, I’d become landlocked. The business of keeping on-premise servers up and running would eventually take over, leaving little time for anything else.”

Today, the web content presented to Asos customers in every part of the world is delivered by a third party, cloud-based delivery platform. The company’s customer care environment is hosted and maintained by a software-as-a-service (SaaS) provider, as is the search functionality on its website.

West says his next steps will involve moving other commodity IT functions that currently reside in-house into infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) environments.

So Cloud computing brings Asos flexibility, but does it save money? Not necessarily, says West – the financial implications of adopting this new model of IT delivery are a good

deal more subtle. Initially, it will almost certainly be a cheaper way to get new applications online, because a cloud-based option doesn’t require Asos to buy and install new hardware on its own premises. Over the longer term, however, cloud computing has some way to go before it can truly deliver on its cost-efficiency promises, he says.

“If you delve down into the unit-scale costs of cloud providers, they’re not that different from traditional server costs,” he says. “The fact is that the commercial and licensing models that underpin most cloud services today are not as mature as they could be, once you start to do the maths – and that can be frustrating after the big promises made for the cloud, if cost efficiency is all you’re after.”

That view is echoed by Brian Hume, managing director at retail consultancy firm Martec International. Last year, he worked on five-year technology roadmaps for two retailers: one with a high volume of sales from online operations and one with a purely bricks-and-mortar model. In both cases, cloud computing plays a part in his clients’ IT plans, but the cost claims made by the pre-sales consultants of cloud providers can be something of a red herring, he says.

“Generally, the problem is that cloud providers apply minimum charges, usually on a monthly or annual basis. And to some extent, you’ve got to see it from their point of view: they need a charging structure that covers the whole year, because while revenue from their retail clients is bound to surge in November and December, it’s equally bound to fall in February and March.”

As a result, retailers need to consider the big picture when it comes to calculating the return on investment they expect to see from their cloud investments. The real savings only become clear over time, says West, and derive from the softer benefits that the cloud model can provide. These benefits include speed to market, resilience, the ability to scale the computing resources used up and down according to demand, and the opportunity to pay only for what’s used at any given time.

It’s also the savings made in internal IT costs that can make a real difference, says Mike Mojica, a partner in the retail practice of management consultancy firm Accenture. “There’s a lot of hidden cost in retail IT today, and much of it is devoted to supporting infrastructure. The opportunity to remove that cost from the equation is often the catalyst for further savings,” he says.

More for your money

Take, for example, Crabtree & Evelyn, which runs BT Expedite’s point-of-sale systems from BT’s data centre. On the face of it, the costs of the service are not so different from the costs incurred when Crabtree & Evelyn ran these systems in-house, says IT director Tim Johnson. In fact, the company may even be paying a little more, but he says: “We’re getting a lot more for our money for not much more financial outlay.”

The cloud-based point-of-sale system has delivered better, more up-to-date functionality, for example, and he can be confident that the systems are supported by BT Expedite 24 hours a day, leaving his staff free to concentrate on other tasks. In fact, when a member of the IT team left that team at the end of last year, there was no need to replace them – a substantial saving in itself.

The flexibility the system gives Crabtree & Evelyn also has important financial implications, says BT Expedite chief operating officer Richard Dodd, a former IT director at Tesco. “If the company needs to open new pop-up stores in the run-up to Christmas, or simply to get more point-of-sale systems online to cope with customer demand, we can simply switch on new servers within the hour,” he says.

“And if we do open more stores, I’m happy for my costs to rise accordingly – because sales will rise too,” adds Johnson. “What cloud is giving me is the ability to avoid high fixed costs and guarantee that the business has what the business needs in IT terms.”

But what about the charge that cloud-computing contracts still don’t offer the transparency promised? “In maturity terms, we’re not where I’d like to be yet,” says Dodd. “Pricing does need to be more focused on true usage, but I think that’s on its way. And if a retailer asked for a pure cost-per-transaction model, I’d certainly consider it.” Cloud computing may not have reached its full maturity yet, but the potential for retailers is clear.