Utility Cost Structure for Cloud Services

DISA has just announced the Global Content Delivery Service (GCDS) cost structure for fiscal year 2012. It features a one-time annual fixed fee for services, with no recurring monthly costs. Is such a fixed cost consistent with commercial practices?

GCDS will cover all computing costs for DISA services, whether it is to download the latest security patches, check webmail, view information on portals, support decision making or analyze geospatial data. How DISA will calculate the amount of the annual fee and how the units of services will be defined was not specified. The question is whether a user will be able to make a competitive comparison between DISA and a commercial offering?

 For example, the Microsoft Windows Azure cloud bills only when an application is deployed. When developing and testing developers would remove computing tasks so that that services are not being used to minimize compute hour billing. A pay-as-you-go price plus the resources provided for each usage are listed in detailed pricing tables, such as 3.5 GB of memory for using a two core CPU, to cost $0.24 per hour of usage.

The most widely using cloud service is Amazon EC, which bills only for direct usage, on an hourly basis. Customers pay only for what they use.  There is no minimum fee. The prices are based on regions and on the configuration of servers, such as $0.085 per hour for Linux and $0.12 per hour for Windows.

An examination of pricing offered by hundreds of other cloud services firms repeats the pattern set by Microsoft and Amazon. There is quite a bit of variability how charges are metered but the principles of “utility” pricing remains for all firms. Everyone follows the pay-as-you-go approach.

SUMMARY
The strategic direction of DoD computing towards cloud computing has now been set by OSD policy. Through the pooling of computing capacity, customers would be able to make the choice where to process their workload. This includes using either DoD internal or commercial choices.

DISA has been designated as the “preferred option” for DoD computing. In this setting a mixture of both private as well as public processing will be used depending on economics and on security.

To make cost comparisons DoD customers will have to make in each instance tradeoffs between current operating costs and capital investments in application development. How such tradeoffs can be made when DISA offers annual fixed price allocations is not clear. The economics of computing dictates pay-as-you-go utility pricing.  That is the only way users can get a direct incentive to offset application improvement efficiencies against potential operating cost reductions.

The absence of a unit cost pricing structure in DoD is one of the deterrents in encouraging cost reduction. The infrastructure maintenance and security costs of the FY12 IT budget is 27% of total costs. If costs to pay for this overhead expense is collected as an annual levy (e.g. tax), there is no incentive to make cost reductions. In contrast, a commercial services firm will have good reasons to keep investing in overhead cost reductions, since every improvement will show up as a profit improvement. There is no accounting reason why DoD IaaS or PaaS cloud services should not follow the identical policy - the expense for any usage accounting can be negligible.