According to McKinsey, the evidence says that cloud computing might have a cloudy future. Others disagree.

A McKinsey report, Clearing the Air on Cloud Computing, finds that "While it has great potential, many of the claims being made about cloud computing have lead some to the point of 'irrational exuberance' and unrealistic expectations. The purpose of this report is to focus the nascent cloud industry and its consumers on setting realistic expectations...." I've taken a look at their evidence, and so have many others. While McKinsey does provide valid evidence, they've apparently overlooked key parts of the equation. The report (pdf) is labeled as a "confidential discussion document", but it's available on the Uptime Institute web site. Shown here are numbers for per-unit costs for amazon's Elastic Compute Cloud (EC2) service.

¹ Cost for comparable configuration (75% of EC2 Large Standard Windows)
² Typical CPU/month cost for 3GHz dual-core Xeon Windows-based servers
³ Estimated based on 10% labor savings (from page 24)

Under a heading Current cloud computing services are generally not cost effective for larger enterprises, the report concludes that "Most EC2 options are more costly than TCO [total cost of ownership] for a typical data center" (page 23).

 

McKinsey shows "the thin green line" = TCA for typical data center around $45/month for CPU equivalent, where "Total Cost of Assets for 'typical' data center: 10% utilization, $20M/MW for facility, $.1kW-hour, $14K/Server (2 CPU, 4 core)."

A Wall Street Journal piece, Cloud Computing Could Cost More, McKinsey Says (behind paywall) says that "Using the model of Amazon.com Inc.'s (AMZN) cloud service, McKinsey said an actual customer, whose identity it didn't disclose, more than doubled the cost of technology by using a cloud service, compared with a typical corporate data center.... Some companies offering cloud services challenged McKinsey's findings.... IBM, which is pushing cloud services, said in an emailed statement that the report failed to consider that most companies would only use cloud services for a small portion of their technology needs." But that's not much of an argument -- as pointed out by Joe Weinman on GigaOM, "Unfortunately, that sounds a little bit like the argument that burning hundred-dollar bills is fine as long as you do it for only a portion of your portfolio. But there’s another reasons the McKinsey report missed the mark: Unit cost doesn’t matter — total cost is what counts."

There's other evidence to consider. Weinman continues: "I’ve argued the same thing before: It isn’t clear that alleged economies of scale exist for cloud service providers, since they use essentially the same building blocks as enterprises. The conclusion McKinsey draws from this fact is this that while cloud computing and services may make sense for smaller companies, enterprises should hold off until the financial disparity is resolved. But wait a minute.  If McKinsey had studied, say, automotive transportation, the conclusion they might have come to would be that, since enterprises and “cloud service providers” — rental car companies — use the same infrastructure components — cars — there really aren’t any economies of scale and the service provider premium then makes rental cars financially unattractive.... So wouldn’t the analogous conclusion then be that enterprises should be wary of using rental cars, until that industry comes up with a better value proposition? ...In other words, sure, service providers typically cost more for infrastructure on a unit-time basis.  So?  That’s not the relevant comparison, total cost is."

Innovation and flexibility are also important. As discussed on TechCrunchIT, Rajen Sheth, Google’s Senior Product Manager of Google Apps, responded in the blog post What we talk about when we talk about cloud computing: "While the cost advantages of cloud computing can be great, there's another advantage that in many ways is more important: the rapid pace of innovation. IT systems are typically slow to evolve. In the virtualization model, businesses still need to run packaged software and endure the associated burden. They only receive major feature enhancements every 2-3 years, and in the meantime they have to endure the monthly patch cycle and painful system-wide upgrades. In our model, we can deliver innovation quickly without IT admins needing to manage upgrades themselves. For example, with Google Apps, we delivered more than 60 new features over the last year with only optional admin intervention. The era of delayed gratification is over – the Internet allows innovations to be delivered as a constant flow that incorporates user needs, offers faster cycles for IT, and enables integration with systems that were not previously possible. This makes major upgrades a thing of the past, and gives the customer greater and greater value for their money."