Turbulence pushing banks into the cloud

Virtualized Computing v. Cloud Computing

Efforts to reduce costs in the areas of data center leases, power, support, hardware procurement and IT operations have typically focused on the virtualization of server infrastructure.  The result has been to reduce both variable and fixed costs, however the virtualized computing model is still based upon long term fixed costs.  These costs don’t decrease if the business model changes.

An external cloud solution can offer expansion and contraction of variable costs whereas a traditional IT model and even the virtualized model both lock in additional fixed costs (data center space, server infrastructure, and permanent staff).  IT needs to give the company CFO flexibility – this is essentially a lever to adjust IT costs as part of the arsenal of protecting the business over the long term.

Give the CFO a Lever

The CFO would much rather have flexibility built into the business which is what cloud computing offers.  The cloud shifts the mix of costs from fixed to variable which provides him that control. Specifically, he is looking for agility from IT – the ability to quickly scale up or scale down and then allocate costs appropriately.

Every server installation into a data centre, whether it is a traditional physical design or it supports a virtual environment, commits the bank to power costs, additional data centre floor space — this is in addition to the capital outlay costs from purchasing the server itself.  Since cloud computing solutions are based on cpu cycle or per-user consumption, they can be scaled based upon the business demand – users can be added or removed as the business grows or shrinks; and the same goes for CPU usage.

There are three primary risks with this approach.  The first is that variable costs can be more expensive than fixed costs in the long term.  This comes down to a case-by-case analysis.  However in the current dynamic environment, banks are typically willing to pay a bit more for that added flexibility.

The second risk is vendor lock-in which drives banks to cloud solutions that are open.  An alternative solution is for banks to build private clouds which are more capital cost intensive than a public cloud solution, however with a good cross-charging model it is still possible to assign variable costs to the respective business.

Third, regulatory concerns regarding data security in the cloud remains (see my previous blog ).  This drives many organizations to build private.  Although this is arguably a lesser cousin of the public cloud in terms of cost management, it is a good solution that is superior to the conventional fixed cost, single IT cost centre approach.
Moving Forward

• Look at the current IT operations to assess and identify systems that would be excellent candidates to be migrated over to the cloud.  Systems that are deemed non-sensitive and non-transactional are low risk candidates. 
• Understand the risks of cloud computing.  Despite the significant advantages of cloud computing, organizations need to appreciate data security risks and understand regulatory trends.  This impacts your system choice that could be allowed to reside in the cloud.
• Develop your IT team to think and embrace a cloud strategy for your organization ranging from private to public clouds. Most critically, work out an effective charge back model to support the strategy.

In summary, banking technology organizations need to think more like a bank – our internal customers and the CFO will appreciate the benefits.