The enterprise market is a bit like a a riddle wrapped in a mystery inside an enigma. On the one hand, the investment by service providers in “enterprise class” cloud services continues to accelerate. On the other hand, pretty much all I hear from enterprise customers is how they are primarily interested in private clouds. What to make of this, I wonder?
At “The State of the Cloud” conference in Boston today, most of the users talked about their concerns over public clouds and their plans for (or experience with) private clouds. There was some openness to low-value applications, and for specific cases such as cloud analytics. We do hear about “a lot” of enterprise cloud usage these days, but most of that is dev/test or unified communications, and not strategic business applications. So where’s the disconnect?
One of the speakers said it best — “we’re just at the beginning stages here and the comfort level will grow.” So enterprise IT is getting comfortable with the operational models of clouds while the technologies and providers mature to the point that “we can trust them.” It’s understandable that this would be the case. If enterprises fully adopt cloud automation models and cost optimization techniques internally, any scale benefits for external cloud providers will take longer to become meaningful. IT can be far more efficient than it is today in most companies, and if the private cloud model gets the job done, it will delay what is likely the inevitable shift to public cloud utilities.
Stated another way, the more successful we are at selling private clouds to the enterprise, the longer it will take for the transition to public clouds to occur.
As you see in the chart above, it is likely that the TCO gap between traditional IT and the public cloud will narrow as enterprises implement private clouds. Some enterprises are already at or below the TCO of many public cloud providers – especially the old-line traditional hosting companies who don’t have the scale of an Amazon or Google. Over time, the survivors in the public cloud space, including those with enterprise class capabilties, will gain the scale to increase their TCO advantage over in-house IT.
It may take a long time to see this out, and this is a general model. Individual companies and cloud providers won’t fit this chart, but it’s likely that the overal market will trend this way. TCO is not the only factor – but where costs matter the public cloud model will eventually win out.
John Treadway 
hmm, seems like all of this reminds me of the days when Enterprise Grid was poised to take off. In my opinion, the public cloud will kick in (and the people will gain agility to deploy apps and even save money in tco). At the same time, enterprises have a hugh portfolio of apps and such deployment will take time and need more process around such public cloud deployment. Such processes will essentially cost to manage and add to the tco. This will bring private clouds closer in tco to the public clouds. Ultimately, hybrid clouds will prevail. It seems that private clouds are perfect for those workloads that are predictable while public clouds are perfect for workloads that are unpredictable. Essentially, workloads are driven by the business processes. This whole tco topic will indeed have a lot of fud by those vendors most likely to have weakness in their portfolio. I expect a lot of “tco” consulting by, hopefully, independent consultants.
You're right on John! Indeed, there are at least a couple of factors at play here. Firstly, a good rule of thumb is that for any new technology to displace an older one the ROI on the new tech needs to be >10x. Secondly, as you rightly say, the security (real and perceived) requirements are very high for applications that go beyond the non-strategic (eg. CRM). I call for the need of “Hybrid-SaaS” – a way to exploit the value of muti-tenant applications on the public cloud while maintaining the benefits of dedicated, single-tenant apps running either on a cloud or a private data center. You can read more here: “SaaS not for all Enterprise Software Apps: Hybrid-SaaS Required” (http://ht.ly/1MJSE ) The path to the other side winds, and the landscape on the other side is far from homogeneous.
James – thanks for the comment and link to your blog. How is “Hybrid-SaaS” any different than the old ASP model?
I equate ASP with todays SaaS – a multi-tenant platform a la salesforce.com. Unified, monolithic, one-size-fits-all. With our application we've split the problem of delivering enterprise software via the web as-is – the sales and marketing, authentication, collaboration, etc. pieces are SaaS (ASP), but the way that the end users of the enterprise software are accessing and using it in a single-tenant fashion via a remote desktop on a dedicated server. This way an enterprise software vendor gives access to their products via the web without having to re-engineer the millions of lines of code they already have that work fine. It also enables a multi-vendor environment (something that is a long way off for SaaS). Today the model is being used for evaluations, hands-on demonstrations and training. Make sense?