Will cloud computing lead to the demise of large data centers?

I've heard this message repeatedly from public relations representatives at more than one industry forecasting agency: The concept of the data center is changing. They believe that many companies are rethinking data centers that are filled with computers, storage systems, networks, power, cooling and other equipment that supports internal IT operations.

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These so-called futurists believe the industry is moving away from large, centralized data centers toward many smaller ones: a combination of a company’s own data centers and those operated by cloud service providers. While the idea is superficially appealing, some of these experts appear to have forgotten basic economics.

We have to remember that businesses have IT departments for two different reasons. One reason is that the company offers IT-based products or services that rely on the company's own data, proprietary applications, and proprietary processes. Another reason is that the company uses IT-based data and applications to support non-IT-based products and services. How these businesses view their IT resources often has to do with whether IT is the foundation of the product or service or whether IT is supporting something else.

IT-based products

If companies offer IT-based products or services, they rarely buy everything they need to develop and deliver their products. The processes, the data that support those processes, and even the application software are custom, which is also what these companies are reluctant to share with others.

This type of business is unlikely to find a ready-made software-as-a-service solution that can help them develop and deliver products in the future. These companies are likely to use their own data centers rather than seek help from a service provider.

On the other hand, these companies may decide to purchase cloud services for non-essential applications; that is, aspects of their products or services that are not being developed, such as collaborative computing and customer relationship management.

Non-IT products

If a business provides products or services that are not IT-based, they often view their IT infrastructure and staff as a necessary cost of doing business. Companies in this category may fall into sectors such as manufacturing, distribution, and healthcare.

Companies in these categories often view IT equipment and staff as a thorny aspect of doing business. They often look for ways to reduce overall IT expenses, just as they constantly look for ways to reduce other costs. Many companies prefer to have their entire systems managed by someone else. Depending on which market they serve, outsourcing all of their IT infrastructure is not practical due to regulatory or legal compliance.

These companies are likely to see cloud computing as a way to outsource part of their IT infrastructure. They will reduce the IT footprint and lower the overall cost of doing business.

Economic factors play a role

Data centers are expensive tools that many companies use to manage IT costs and achieve performance, reliability, and manageability goals. This has led organizations (including cloud service providers) to install all computing, networking, and storage equipment, along with the necessary power, cooling, and security systems, in a few large data centers. They rely on economies of scale to reduce costs.

While these companies may build distributed IT infrastructure to improve local performance levels, reduce the number of single points of failure, or comply with local regulations to keep customer data in-country, they are unlikely to deploy many small data centers. If they deploy fewer large data centers, these companies can expect to purchase power, space, and necessary equipment in bulk and reduce overall costs, which may also reduce overall labor costs.

Snapshot analysis

Since large enterprises often have both IT-based and non-IT products or services, it is unlikely that they will completely outsource all of their IT infrastructure. Custom and proprietary workloads may remain in-house and under the direct control of the enterprise.

Even if an enterprise decides to use the services of a cloud service provider, the cloud service provider will likely use its own large data centers to reduce overall costs.

So the move to cloud services is not the same as the move to lots of small data centers. What's happening is the industry is seeing a shift in who owns the space, the systems, the networks, the storage and the software licenses, and who employs the staff to manage those resources.