Cloud Computing: The Dangers of Irrational Economics

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This weekend saw the publication by Joe Weinman, coiner of the term "Cloudonomics," of a blog post called "Lazy, Hazy, Crazy: The 10 Laws of Behavioral Cloudonomics". Joe has published a great deal analyzing the economics of cloud computing, much of which illustrates that cloud computing can provide significant financial benefits. But this latest post is a must-read, because its implications are crucial to every IT organization.

Certainly, the published case studies and examples would seem to dictate that cloud computing should be aggressively considered as the foundation of infrastructure initiatives; however, all too often one encounters an attitude that can only be characterized in a fashion akin to a joke ascribed to economist reactions to various real-world outcomes: "Sure it works in reality, but will it work in theory?"

I repeatedly engage in discussions with IT executives who bring up various putative shortcomings in public cloud computing offerings, citing questions of personnel security, data integrity, virtual machine protection, and so on. Many times, when I query the status of these issues within their own organizations, I hear that their own practices fall far short of what cloud providers offer; however, when evaluating public cloud service providers, the standard is not "is this an improvement over what I can do on my own?" it's "does this meet the very highest standards I can think of?"

In other words, to quote Voltaire, the best is the enemy of the good, with executives choosing to stick with broken processes and inadequate measures rather than moving to an offering that, while perhaps imperfect, represents a significant step upward over their current environment.

And, by the way, these positions are often propounded with fervor, not to say bombastic insistence. One can't help but feel that the weaker the argument, the louder the voice.

Joe's post brings another perspective forward, which indicates why a topic like cloud computing, which should be evaluated logically and dispassionately, is all too often the arena of rigid positions and rapid reactions. Essentially, he examines various elements of irrational decision-making, and applies them to cloud computing.

Some of the elements he identifies:

• The Endowment Effect - People value goods that they already own more than they would pay to acquire them. [Dan] Ariely [see below for a reference to his book] showed that for [...] hard-to-acquire Duke basketball tickets, students were willing to pay up to about $170, but weren't willing to sell them for less than $2,400. Add in the choice-supportive bias, which rationalizes selected options and discounts unselected ones, and a stubborn fondness for existing IT technology and organization assets can be understood.

• The Status Quo Bias and Escalation of Commitment - Moreover, we tend to prefer things the way they've always been, and invest additional amounts in past strategies which we have pursued. Again, this can lead to inertia slowing the adoption of new approaches.

• Need for Status - [David] Rock points out that humans and other social primates have exquisite, fine-grained status detectors. For cloud adoption, the status associated with managing a large IT organization with a substantial asset base needs to be replaced by the status accruing to being perceived as an innovator through the use of cloud services.

If you've read Dan Ariely's book "Predictably Irrational," you're probably familiar with his experiments and his theme, which is that our decision-making processes, far from being the realm of impartial analysis, are skewed by experience, prejudice, coincidence, and happenstance - to a realm far beyond what almost anyone could imagine. Frankly, his work illustrates that rationality, far from being the dominant mode of decision-making is, perhaps, the rarest element in any choice process.

Given the fact that so much decision-making is heavily irrational, it's not surprising that the subject of cloud computing raises such emotions. The choice of pursuing a public cloud option is never going to be based completely - or maybe even partially - on its merits. It's going to be filtered through impulses regarding "The Endowment Effect" and "The Need for Status" and the like. It doesn't take a genius to recognize that those powerful factors are likely to overwhelm an objective evaluation of the opportunity.

By the way, cloud computing is by no means the first example of this kind of pitched battle regarding a new technology offering. Significant elements of IT organizations dismissed the PC at its introduction as a "toy." I well remember running an engineering organization in 1995, when someone in the group put an article up on the communal bulletin board that proclaimed "The Internet will never be used for important applications."

Nevertheless, despite similar irrational reactions, those technologies eventually became dominant. It's a rather laughable irony that many of the people resisting cloud computing are vehement proponents of these formerly revolutionary platforms, which were just as vociferously resisted by their predecessors. How did these upstart technologies transform from too-dangerous to touch to stuffy status quo?

It wasn't because of the force of logic convincing the antagonists. Far from it.

The transformation happened because end users and insurgents within IT, apprehending the potential of the new platform, bypassed the official channels and decision-making processes, and either created covert applications or forced them through over the protestations of the mainstream organization - which eventually resulted in the mainstream organization belatedly adopting the innovation.

To understand this process better, read Rodrigo Flores' article of a few days ago discussing how internal IT groups should respond to the use of public cloud computing. Rodrigo is CTO of newScale, a company that provides ITSM software, which is often used to implement ITIL practices (i.e., the mainest of mainstream IT practices). In his post, he cites a survey from a webinar HyperStratus and newScale did in April that indicated high use of public cloud computing. When we did the survey, the most frightening thing about it was that nearly one-fifth of the respondents, when asked about public cloud computing use in their organizations, said "I don't think so, or at least I hope not..."

Flores' article is a call to action, challenging internal IT groups to get ahead of the curve and place controls around public cloud use. I must say that I am not especially sanguine about the probable response to his entreaty.

I expect cloud computing will follow the same dilatory response that other innovative technologies have received from mainstream IT groups. Which is a shame. Cloud computing offers an opportunity to reconstruct the practices and economics of IT, freeing it from the Procustean bed of legacy infrastructure. Following the same old processes and living by the same old limitations - in a time when IT is literally becoming the foundation of our society - is a tragedy.

Cloud computing calls for visionary leadership with its eyes on the future and a willingness to upset the apple cart. Shrinking from its opportunities - and challenges - is a recipe for irrelevancy and obsolescence.

Bernard Golden is CEO of consulting firm HyperStratus, which specializes in virtualization, cloud computing and related issues. He is also the author of "Virtualization for Dummies," the best-selling book on virtualization to date.

Follow Bernard Golden on Twitter @bernardgolden. Follow everything from on Twitter @CIOonline.

Read more about virtualization in CIO's Virtualization Drilldown.

This story, "Cloud Computing: The Dangers of Irrational Economics" was originally published by CIO.

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