Gartner Blog Network

Economies of Fail

by Tom Bittman  |  December 7, 2010  |  2 Comments

Interesting discussions here at Gartner’s Data Center Conference in Las Vegas. While discussing the importance of economies of scale to cloud providers, I pointed out that economies of scale is a double-edged sword.

cardsWhile enterprises tend to have many (often hundreds, or even thousands) IT services that they provide, cloud providers tend to have only one, or a handful, but provided on huge scale. Standardization makes automation much easier, and certainly makes economies of large scale very attractive. But what happens when a “service” suffers a decline in demand? For an enterprise, diversification makes this much less of an issue – usually, a decline in one “service” will be made up by growth in another. The capital expense risk is real, but not huge. But what about a cloud provider that focuses on just that service?

Economies of fail.

Megaproviders in the cloud are not immune to economic declines, or changing demand. One of the benefits of cloud computing for end users is transferring their own capital risk to cloud providers. Doesn’t this sound an awful lot like the mortgage crisis in the U.S.?

For cloud providers to be successful, they must protect themselves. As much as possible they must find corollary markets for their services that are not directly related to their core service market – without abandoning the simplification and standardization that enables automation and economies of scale.

Potential customers of cloud providers should be very aware of a cloud provider’s business risk, and protect themselves. Cloud provider resiliency, market diversification and stability should be selection criteria. Remember: a provider cannot be too big to fail – in fact, some providers might become so big and so focused that failure is inevitable.

Category: cloud  

Tags: cloud-computing  gartnerdc  

Thomas J. Bittman
VP Distinguished Analyst
20 years at Gartner
31 years IT industry

Thomas Bittman is a vice president and distinguished analyst with Gartner Research. Mr. Bittman has led the industry in areas such as private cloud computing and virtualization. Mr. Bittman invented the term "real-time infrastructure," which has been adopted by major vendors and many… Read Full Bio

Thoughts on Economies of Fail

  1. All capital expense is a risk, as with all organisational activities, the management of risk must be part of the closed loop process for ongoing mitigation or transfer of this risk. The customer has transferred their capital expense to the cloud, but he has also transferred some of risk in some areas and increased his risk in others.

    Under-utilization is as you say a major problem for the long term viability of the enterprise … something else that is a major problem is the disaster recovery procedures especially if there is no geographic diversity for the installation.

    The failure in any part of the internet from the customer to the cloud will disable the cloud. The failure of the installation itself will put them out of business, as the risk of a future failure will make such exposure to the cloud too high for risk adverse corporations, especially when it comes to their very viability such as financial management systems… you can minimize this risk, but you cannot eliminate it.

    I use the cloud for backup, but to use it live data is way too much risk and exposure.risk .

  2. […] This post was mentioned on Twitter by Jovi Umawing, Suvish Viswanathan and Toshio Matsuda, Uptime Devices. Uptime Devices said: Economies of Fail […]

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