The Cloud

Why the Cloud Can Be Like a Subprime Mortgage

Cloud computing looks easy. Looks can be deceiving.
Rob LivingstoneAugust 1, 2011

Given that cloud computing is at the peak of the Gartner Hype Cycle, now is a good time to pause, take off the oxygen mask, draw calm breath, and reflect on the view from the top of hype mountain.

Almost every aspect of the IT industry has been exposed to the cloud in one form or another. Indeed, if you don’t have cloud-something in your business, chances are you may feel left out. This made me think about the ways in which cloud computing resembles those subprime mortgages that dominated the news cycle not so very long ago.

Cheap now — expensive later? Just like a subprime mortgage, the barrier to entry in cloud computing is very low. Consequently, full life total cost of ownership (TCO) considerations are not always top of mind. In certain instances, the cumulative cost of paying for a perpetual subscription may well exceed the cost of a conventional capitalize-and-depreciate purchase. CFOs should know if — and at what point — breakeven will occur.

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Democratization of IT: Just like a subprime mortgage, almost anyone can have a cloud application. Far-flung parts of a business can do their own thing, as it were, without having to involve the IT department. This raises the spectre of an uncontrolled cloud implementation known as a viral cloud. A viral cloud is characterized by a localized initial installation of a cloud system (approved or otherwise) which expands in an uncontrolled manner. Do federated risk and governance problems concern you? They should.

Compelling initial offer: As in the first blush of young love, the purchaser of cloud services sees only what he wants. Your provider only presents its best side . . . just like those initially low-interest subprime mortgages. The seduction of the cloud is most evident at the board level and in the user community. IT becomes the grumpy parent, as it is often most aware of the cost, risk, and governance issues in the cloud. CFOs should know enough to ask probing questions and look for the facts behind the opinions.

Understand clearly what your contract states: Your relationship with your cloud provider pretty much consists of your browser and your contract. So pay attention to that contract (as people should have paid attention to those subprime mortgages): 

Cloud providers are reluctant to change standard contracts, unless you’re spending a lot of money. If you’re not, you generally have to take what’s offered. Does that work for you?

Your cloud contract may refer you to the terms and conditions posted on the vendor’s Website, which may change from time to time. In the cloud, changes can be made unilaterally by your provider by simply posting them to their Website. Think about that and understand what that could mean for your business.

Scalability is offered, but not very easily achieved: In theory, textbook cloud means you pay for what you use. But not all cloud services are costed on a true consumption model. Many (but not all) SaaS offerings are billed out on a named user subscription basis, regardless of how many times the users access the system. It’s as if the electric company billed you for the number of outlets in your home no matter how you used them. If your cloud provider markets itself as pay-as-you-go, ask it to bill you for your actual usage each month in arrears, and see what response you get.

Get that locked-in feeling: The cloud is easy to get into, not always so easy to get out of (just like those subprime mortgages the banks stocked up on). It’s generally easy to get your data out if you’re dissatisfied with service, but can you use it? Try having to rewrite all your business logic. You won’t like it.  Make sure your data will be usable when or if you want it back.

The cloud makes many promises, most of them good. But it’s up to you to make sure those promises are kept.

Rob Livingstone, a former CIO, is the author of the book Navigating through the Cloud — A plain English guide to surviving the risks, costs and governance pitfalls of Cloud computing. Visit Rob at