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The Economics of Cloud Computing: Addressing the Benefits of Infrastructure in the Cloud

Software & IT Track

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Cloud computing is a new approach to providing IT services at a greatly reduced cost relative to current distributed IT environments. The potential savings are expected to be significant— so much so that the Office of Management and Budget is embracing cloud computing as the preferred federal IT environment. Why is this necessary? First, the federal IT budget for 2010 has grown to nearly $76 billion, and is expected to reach $88 billion for 2011. The federal government cannot maintain this spending trajectory. Secondly, the proportion of spend required simply to maintain IT infrastructure—at least $20 billion, or more than 25 percent
of the 2010 budget—crowds out opportunities to invest in new initiatives and technologies.

But how much cost savings can the government really expect to realize by adopting cloud computing as the preferred federal IT environment?
To answer this question, Booz Allen constructed a proprietary cost model that has capabilities for creating Life-Cycle Cost (LCC) estimates of public, private, and hybrid clouds. We used this model and our extensive experience in economic analysis of IT programs, to calculate three key economic measures:
• The Net Present Value (NPV), or the Present Value (PV) of out-year cost savings minus the PV of the one-time investment costs.
• The Benefit-Cost Ratio (BCR), or the PV of the out-year cost savings divided by PV of the one-time investment costs.
• The Discounted Payback Period (DPP), or the length of time required for PV of the one-time investment costs to be recouped by the PV of the out-year savings.

Our analysis considers how agencies might migrate to a cloud-based environment and what the costs and potential savings might be under a variety of scenarios. Specifically, given long- standing efforts to protect the privacy and security of the federal government’s data and systems, a key variable will be whether agencies seek savings by taking advantage of public clouds, by building their own private clouds, or by adopting a hybrid approach.
In addition to the economic measures, our approach also provided a sensitivity analysis that revealed the key cost drivers in adopting a cloud computing approach. Factors such as the size of the data center to be transitioned into the cloud, and the length of the migration period, and the complexity of the migration effort can have a substantial impact on the economic benefit. We highlight that scalability and the length of the migration period can have a substantial impact on the economic benefit. Our approach also shows that as the payback period stretches out, due to higher up-front investment costs and lower cost savings in the out-years, the total economic benefit decreases.


Ted Alford
Booz Allen Hamilton, Inc
Ted Alford, an Associate at Booz Allen Hamilton, has 20 years of professional experience providing cost and economic analysis support to federal government clients, including the National Security Agency, Department of Defense, Department of Labor, Federal Aviation Administration, and Defense Logistics Agency. He has specifically focused on estimating the costs and benefits and analyzing the economics of information technology projects. Over the years, Mr. Alford has been the lead analyst supporting the development of analyses of alternatives, program office estimates, economic analyses, and cost benefit analyses. In supporting these efforts, he has developed life-cycle cost estimates, estimated quantifiable benefits, analyzed cost and schedule risks, and analyzed justification of investment decisions.

Gwen Morton
Booz Allen Hamilton
Gwen Morton is a Senior Associate in Booz Allen Hamilton’s economic and business analysis practice. She has more than 16 years of experience supporting both government and commercial clients in conducting financial, economic, and market analyses to support executive decision-making, with particular expertise in IT capital planning, benefits estimation, and performance measures and management. Ms. Morton’s major clients include the Department of Treasury, Department of Agriculture, Social Security Administration, Department of the Interior, and General Services Administration.

Ann Repczynski
Booz Allen Hamilton
Ann Repczynski is a Senior Associate in Booz Allen Hamilton’s economic and business analysis practice. Ms. Repczynski has more than eighteen years of professional experience in the areas of cost estimating, economic analysis, IT outsourcing, capital planning, enterprise architecture, business case analysis, cost/benefit analysis, cost effectiveness analysis, total cost of ownership, life-cycle cost estimating, functional economic analysis, cost/schedule control, and contractor performance measurement. Ms. Repczynski is currently engaged in the firm’s Cloud Computing and Cyber Security campaigns, providing the economic capabilities and thought leadership to our clients across the federal market space. Previously, she led a team of analysts that perform investment decision analyses and assessments required to justify funding requests for various agencies within the Federal Government, and specifically within the Intelligence Community (IC).