The main thrust of early cloud computing discussions--even before that particular term became popular--was fundamentally about economies of scale. For example, in his book "The Big Switch," author Nick Carr writes that: "Once it becomes possible to provide the technology centrally, large-scale utility suppliers arise to displace the private providers."
This was an imagined future of computing that reprised a journey taken by power generation technology in which expensive and customized local water turbines or steam engines driving gears and belts largely gave way to motors connected to the electric grid. This early-on discussion wasn't so much about how computing took place--presumably it would be handled efficiently by the mega-service providers offering this new type of utility. Rather it was about the economic model: standardized pay-as-you-go services delivered at massive scale.
The evolution of the electric grid was presented as the clearest parallel to cloud computing. However, many types of industrial processes are more efficient at large scale; backyard steel production doesn't work out well.
But something funny happened on the way to the cloud. Many applications, especially those used by consumers and smaller businesses, did indeed start shifting to public cloud providers like Google. However, with some exceptions, the trend in large organizations is something quite different. As I've written previously, the idea of there being a "Big Switch" in the sense of all computing shifting to a handful of mega-service providers is, at a minimum, overstated.
In part, this is because computing is a lot more complicated than electricity. The electrons powering a motor don't have privacy and security considerations. The electrons encoding a Social Security number in a data center do. Plenty of other technical and governance concerns also conspire to make computing less utility-like.
However, as CA's Andi Mann writes in a recent post on his personal blog, even the cost benefits of public clouds aren't necessarily a given:
Public cloud can be cheaper than on-premise IT or private cloud, especially for selected services and SMBs. However for large enterprises, while there are plenty of reasons to use public cloud, cost reduction is not always one of them.
Public cloud certainly has a low start-up cost, but also a long ongoing cost. For all practical purposes, the ongoing cost is never-ending too. As long as you need it, you keep paying as much as you did on day one, without adding an asset to your books or depreciating your facilities investments.
The only hard data I've seen is in a McKinsey report that Mann also references in his post. However, when I speak with CIOs at large enterprises, I don't think I've heard one argue that public cloud resources can universally reduce costs. And this isn't a matter of reflexive "server hugging." There is equal unanimity that using shared resources for certain workloads and use cases does save money and bring other benefits.
The key to economically running many or most IT services internally seems to be a level of scale at which, to use a term from retired IBMer Irving Wladawsky-Berger, data center operations can be "industrialized"--which is to say standardized, process-driven, and highly automated. In other words, at a scale that the operational processes associated with large public cloud providers can be implemented in a dedicated manner for a single organization.
From the perspective of a company that owns and operates its own facilities, this point is probably somewhere around one or two data centers (given the need for some spare capacity for redundancy), although co-location providers and other ways of obtaining dedicated capacity within a shared physical infrastructure may drive necessary scale points even lower. And these economic realities are reflected in the forecasts of IT analyst firms like Forrester and IDC, all of which see rapid growth in private clouds.
And it's this widespread interest in building private clouds that's been one of the big surprises of cloud computing's still early years. The cloud discussion began as a shift to a fundamentally different economic model under which even large organizations would rent computing rather than building and owning it. Some of that's happening, but it's turning out to be just part of the cloud computing storyline.
Indeed, for organizations that view IT as a strategic asset--and more and more do--cloud computing is often less about adopting public clouds for their low costs and more about adopting their processes and applying them to the private cloud. In this case, cloud computing is far more about helping the business increase revenues than cutting the total cost of IT.