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Why Cloud Computing is Good for Your Financials

Here’s the way most people justify automation of a manual process: they replace a high variable labor cost with a relatively fixed system cost.  I’ll illustrate using graphs, then show how cloud computing fits into the picture.

Before: A Manual Labor-Intensive Process
Before any automation, the financials for a manual process look like this:

A manual process offers the business easy control over incremental cost: more volume, more people; less volume, less people.

With a manual process, there’s usually a direct relationship between volume and cost.  If your volume goes up, your existing people can handle the increased volume for a little while.  But if your volume continues to increase, then you need to add people, which raises your cost.

On the other hand, if your volume goes down, then you’ll probably hold on to the people you have for a while to make sure the decrease will persist.  Then when you’re sure the volume decrease is going to be with you for a while, then you’ll reduce the number of people through attrition or layoffs.

Traditional Process Automation
The financials for traditional process automation look like this:

showing a reduction in cost/volume due to the automation

The automated system is introduced to reduce the overall cost as well as the cost per volume.  This gives the business a savings, and lets the business expand its volume without adding more people.  The cost of the automated system is flat over a certain range of volume, and then has a few increases at higher volumes due to the need for additional hardware and software.

The Problem with Traditional Process Automation
There are a couple of big problems with this automation approach.  The business has replaced a flexible approach with a rigid automated process, and the business has traded a widely available and incremental cost — people — for a fixed cost that doesn’t respond to change nearly as quickly.

The fixed cost of traditional process automation results in a loss when volumes decline

So when volumes decline below the expected minimum levels — as they have in the past few years of recession — the business ends up with a higher cost for the automated system than the previous cost for a manual process.

That’s where cloud computing offers a huge advantage.

The Cost Advantage of Cloud Computing

Cloud computing offers an automated system using the traditional cost model of a manual process.

Cloud computing offers all of the advantages of an automated system with the more linear cost model of the old manual process.  If volumes increase, then your cost increases, but at a lower rate than the manual process.  If volumes decrease, then your cost decreases, but you don’t have the fixed cost minimum associated with the traditional automated system.  Cloud computing gives you all of the easy management advantages of the manual process, together with the productivity advantages of automation.  And it lets a small business with a small budget afford the high productivity systems that have been historically unaffordable to companies of their size.

This article looks only at the financial advantages of cloud computing.  For an overall look at cloud computing, see my article,  “What is Cloud Computing?  And Why Should You Care?.”  And remember that unless you’re using a private cloud, cloud computing is a form of outsourcing.  For an article on the advantages and disadvantages of outsourcing, see my article, “When to Outsource and When to Offshore.”

Comments on this entry are closed.

  • Barney Sperlin August 23, 2010, 2:39 pm

    This totally ignores the security problem introduced by letting a mass of people you don’t know handle your data. Are the drives safe from theft? Could someone unknown look at your data? As the data is in-transit more could it be intercepted? Cloud-computing introduces a host of additional security weaknesses.

    • Harwell August 24, 2010, 7:43 am

      Thanks for your comment, Barney. You are correct that the article only explains the financial advantages of cloud computing. I wrote the article knowing that I had written other articles on this blog which provide a broader perspective. But the new reader may not know that, so I’ve added a disclaimer at the bottom of the article which points to some of those other articles.

      Thanks again.

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