Our TCO analysis shows that, with falling prices for private cloud, on-premises offerings can emulate the flexibility and convenience of public cloud while giving CIOs the security, support and sovereignty they crave – if they're willing to pay for it. In this report, we take a closer look at service tiers available from managed private cloud providers, plus the conditions under which private clouds can be cheaper to operate than public deployments.
The 451 Take
Private cloud providers have picked up the gauntlet thrown down by large-scale public clouds, appealing to enterprises with lower costs, more flexible contracts, and a range of management options for CIOs seeking single-tenant visibility and control. Given last year's 22% decline in the cost of fully managed private cloud, providers have effectively moved the break-even goalposts in their favor. As before, the key for service providers and enterprises alike is to maintain a level of utilization and labor efficiency (in terms of VMs per engineer) that drives unit costs of compute and storage down to public cloud levels. From there, enterprises and providers can add value with services – either bundled or a la carte – that reduce overhead and protect against risk.
Private Cloud Providers Raise the Stakes
As detailed in our Cloud Price Index: Private Cloud Edition, Managed Services report, fully managed private cloud can be a good option where both cost and benefits are concerned. We found a wide range of prices for compute resources, with the public cloud on-demand benchmark for compute coming in at about the same level as the fully managed private cloud average – thanks in part to a steep price drop on the private cloud side.
In our second report, The Value of Private Cloud
, we parsed the price and service data and revealed three private cloud tiers, each with an associated price range, and with increasing value justified through resolution of CIO concerns: a cost-reduction tier where public cloud cost-effectiveness is the primary differentiator; an overhead-reduction tier that includes better monitoring and SLAs; and a risk-protection tier with multiple SLAs and better compliance. Each tier has an associated price range that enterprises appear willing to pay.
Full details can be found in the report for Cloud Price Index subscribers.
This segmentation aligns with Voice of the Enterprise: Digital Pulse, Organizational Dynamics 2018 data examining the biggest pain points for IT decision-makers: information security is the top concern (cited by 36% of respondents), followed by insufficient IT staffing (29%). The risk-protection tier, which costs the most, addresses the first issue; the overhead-reduction tier addresses the second. Cost is an underlying concern for any IT deployment, but particularly one that incurs capital expense, which lines up with the price-conscious cost-reduction tier.
Changing the Public/Private Cloud Equation
Of course, public cloud offerings aren't monolithic, either. They range from budget-rate cloud hosting services to soup-to-nuts platforms offering everything from on-demand bare-metal servers to sophisticated high-performance computing, artificial intelligence and machine learning tools. One way that public providers have differentiated their products is through commitment discounts, which charge a lower price – the Cloud Price Index pegs the average savings for a medium-sized VM in the US at 39% – in exchange for a long-term commitment or prepayment.
Many of these arrangements, which typically apply only to compute capacity, are 'use it or lose it' deals, which means they're susceptible to the same constraints as private clouds in terms of utilization: rather than pay-per-use, they're pay-per-provision, and leaving unused capacity on the table will result in higher unit costs. Meanwhile, private cloud providers have taken a page from the public clouds' playbook by offering on-demand pricing and contract flexibility, either via metered hybrid stacks, short-term leases or consumption billing for services running on top of vendor-owned hardware.
Variations in Private Cloud Management
Private clouds owned and self-managed by enterprises can be cheaper than public cloud. The magic number to beat is about $25 per VM-month at 100% utilization. If the cost of the whole stack comes in under this number, then even with the addition of labor to manage that private cloud, it should be cheaper than public cloud. Obviously, with better labor efficiency, unit costs versus public cloud are lowered further, and the relative value of benefits increases. Enterprises unable to achieve a labor efficiency of 300 VMs per engineer are unlikely to beat public cloud on price.
Partially managed clouds have good economics. If an enterprise is able to manage just the datacenter element of a private cloud at a ratio of at least 400 VMs per engineer, that cloud may cost less to operate than fully managed alternatives. We believe enterprises could easily beat this ratio.
Service providers should structure and price their products based on core CIO worries, clearly justifying how these concerns are addressed as a result of a higher price. Tiering with public cloud infrastructure and managed services can illustrate a good story of increasing value. Vendors should also show the revenue-protection benefits possible with self-managed private cloud, but they need to be mindful of cost comparisons with public cloud – the key here is to emphasize how tooling and simplified management can result in TCO/ROI savings.
Enterprises should determine their primary drivers for private cloud and their areas of labor strength and weakness. CIOs should be upfront about these – it is the service provider or vendor's job to offer a solution that matches the required capability and allay the CIO's concerns.