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The Nine Hidden Costs of Cloud Services

First, let's begin with a definition.

Cloud computing is the use of computing resources (hardware and software) that are delivered as a service over a network (typically the internet).  The name comes from the use of a cloud-shaped symbol as an abstraction for the complex infrastructure it contains in system diagrams.  Cloud computing entrusts remote services with a user's data, software and computation.  Source:  Wikipedia. 

There are an incredible number of useful and innovative Cloud Services available!  It is staggering to think most of these services did not exist in 2006, just 15 years ago.  So, what has changed to allow this to happen?  High speed internet.  In all cases commercial Cloud services need a local network and access to the internet via a HUGE "Pipe".  ISPs (internet Service Providers):  Charter, ATT and others, have increased the bandwidth and lowered the price which allows small and medium size businesses access to sophisticated Cloud based services.  AND the ISPs aren't done!  In the not-too-distant future we are going to have even larger pipes at very reasonable prices.

Redundancy and the associated costs are the first of "hidden costs" of Cloud computing. - If a Cloud service is critical to a business, there must be redundancy at many levels.  By redundancy we mean more than one internet "pipe" and serious redundancy / fail-over on the part of the Cloud provider.  For the end user to set up the level of redundancy necessary to ensure a high level of uptime will require a serious expenditure in hardware, not to mention the recurring cost of redundant "pipes".  

"Piling on" of expenses is the second, and sometimes most staggering, "Hidden Cost" of Cloud Computing  - While we are talking Big Pipes, Cloud services are truly a GREAT service for small businesses but the larger the business, the more expensive it's going to be.  Cloud Services don't scale well.  There is a point that Cloud based services are just too expensive and you have to go in-house.  As an example, a small business with 25 users sign up for Hosted PBX, saving $500 a month with better features and everyone absolutely LOVES it.  So much so they signed up with a Cloud service provider to host their billing and accounting system.  It didn't save much money, but the convenience is AWESOME.  They also signed up with a Backup and Disaster Recovery service for $800 a month to ensure that they have backup.  If something happens to their building they can be up and running in a different location in a matter of minutes, provided there is Internet.  Again, two GREAT experiences in Cloud Computing that didn't save them money, but they were able to have people work from home if necessary and they are assured of business continuity.  Then they heard about Office 365 from Microsoft and Hosted Exchange and saw them as the advantage that will make a difference.  Unfortunately, their redundant 50MB Internet connection won't handle the additional load, so they had to get redundant 10Gig fiber connections for $2,400 a month (with a one-time $8K hardware upgrade, plus maintenance).  The problem is when business is cranking, the 10Gig "Pipe" just isn't big enough to handle it and there is a noticeable response lag on all their Cloud services.  When they look at what they were paying the various Cloud Providers, they realize they are paying $64,000 more a year than when they had everything in-house with no real d ay-to-day benefit to the Cloud services.


Mandatory technology updates & associated problems are the Third "Hidden Cost" of Cloud Computing - Cloud services typically must stay cutting edge to be competitive.  What that means to the people and businesses using them is there is a need to keep technology (PC's & software at a minimum) at the user site, compatible with the Cloud provider.  Often this requires hardware of software updates as soon after updates are out as possible, sometimes before.  This requirement often causes incompatibility with older services or programs.  This all adds additional expense where before they could "skip" an upgrade or two with little or no repercussions.

On-going training is the Fourth "Hidden Cost" of Cloud Computing -  As we said, change is an on-going occurrence with most Cloud providers.  It must be because of the competition.  Because of the constant change, customers must adjust their training schedules to meet the Cloud Providers schedule.  Some Software as a Service (SaaS) providers may have two or three updates a year with corresponding training webinars that all employees must attend.  Some providers include training in your monthly fees, others claim to be saving you money by not rolling training into your monthly bill, but "save" you money by billing you for training "as needed".  What no one mentions is the labor costs to train employees 2 to 3 times a year, a couple of hours at a time.  Remember when you had in-house software and training was rare except for new hires?

Unexpected buyout of your Cloud Vendor is the Fifth "Hidden Cost" of Cloud Computing - While discussing change with Cloud providers we must touch on how Cloud providers evolve.  Competition is fierce among Cloud Service providers serving most industries because Cloud services are incredibly profitable.  When one or two vendors get market share, the competition is ripe for acquisition before they go under.  The leading vendors attempt to "capture" new customers by buying a weak competitor and moving them to their product.  It's great for the vendor but an additional expense to the businesses that are using the service. .

Complicated, often ugly, situations is the Sixth "Hidden Cost" of Cloud Computing - It appears easy to change Cloud providers.  You just point your browser at the new company and you're up and running.  Not Quite.  Your old provider holds your data and really doesn't want to give it up without a fight, or at least a sizeable chunk of money.  When you signed up with your current Cloud provider, they either said, or it was in the agreement, that they would provide you with your data if you moved to another company.  They didn't tell you what form that data was going to be in or how responsive they would be in helping you move to their competition.  often vendors hold your data hostage because they "require" additional fees to export your data.  Unfortunately, your agreement states that any legal action must be in their territory.

ADDITIONAL FEES are the Seventh "Hidden Cost" of Cloud Computing - Cloud providers LOVE to figure out ways to improve their products and offer you more "options".  They rarely offer beneficial options at no additional cost, although they do improve their base products and keep them current and competitive at no additional charge. Two examples of additional fees are when the Cloud provider writes a killer iPhone or Android app to access their service, they will charge $9.00 per iPhone or iPad.  Or, when they write an interface to automatically pull data from another source that is HUGELY beneficial to you, they will charge you $5K initially and $80 a month in maintenance.  

Insurance and possible fines are the Eighth "Hidden Cost" of Cloud Computing - The connection between the end user and the Cloud provider must be secure which is rarely an issue.  The issue of security is usually a human factor at either the user's end or more likely at the Cloud providers end.  The eighth hidden cost is the one we never want to experience, the loss of data or confidential information.  Yes, it can happen and for a few of you, it will happen.  That is why there are now insurance riders specifically for these two possibilities, and they aren't cheap.

New Taxes will be the Nineth "Hidden Cost" of Cloud Computing - Finally, there is one cost that hasn't been realized but it won't be long until it is, and that taxation.  Federal, State and Local governments are anxious to figure out ways to tax internet usage.  They have been trying to pass legislation for the last few years that would allow them to figure out who is doing what and then tax it.  It hasn't happened yet, but it probably will. 

With all these "hidden costs", it almost sounds like it isn't worth it.  It probably will be more expensive to use Cloud Computing over the long run for most services, but the benefits and convenience seem to greatly outweigh the drawbacks.  The two that do make sense for small businesses, Hosted PBX and Hosted Exchange, will save money.  Of course, you have to decide what is best for your business.  Ask questions, read the contracts and of course consider these Nine Hidden Costs.

Contact us with any questions you may have to discuss options.  We would love to answer all your questions.

Copyright © by Ellegent Systems, Inc.  2012

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