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Demystifying cloud economies of scale for enterprises

Demystifying cloud economies of scale for enterprises

Cloud economies of scale is benefit that organizations derive by migrating to cloud. Economies of scale is a business or economics concept. We will look at how customers or organizations can achieve economies of scale by migrating to cloud based services or infrastructure.

In simple terms it states that cost of production of goods goes south as number of units of production of goods goes north. Here is the Investopedia definition of economies of scale.

When organization invest in their data centers they incur significant cost$. Costs include real estate, servers, storage, power and other hardware required for data center. Another set of costs comes from software licenses, automation or orchestration of services. Other costs include cost of managing infrastructure security and man power for operating those

For small enterprises or service based firms, its costly affair.
When IT or enterprises migrates to cloud immediate savings are cost of real estate (a rented premise) and upfront cost of storage and servers. Migrating infrastructure to cloud enables businesses to pass on those savings to their customers

It is important to understand total cost of ownership (TCO) of software licenses over a time (say t1). It is also possible that after certain period (say t1+1), some software license are not used increasing TCO factor.

As enterprises grow, their demand for computing power also grows so is the need of investment. Migrating to cloud help organizations to scale without incurring upfront large scale investment. This is what cloud economies of scale for customers or organizations. Growth for startups or new edge enterprises is quick and initial investments are low.

Here we would like to also introduce diseconomies of scale, another economics concept counter to economies of scale. Migrating to cloud also helps in avoiding diseconomies of scale when man and machine do not go hand in hand. The opportunity cost of not moving to cloud could be significant. That includes loss of business or inability to cope up with growth or competition. When thinking of cloud economies of scale, organization must think of opportunity cost. The benefit enterprises would gave up by not moving or migrating to cloud. By including opportunity cost in making decisions, organizations can achieve true cloud economies of scale. In true sense, we can conclude that cloud platforms helps enterprises leverage economies of scale as a service.

By Mandar

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