Why McKinsey's Cloud Report Missed the Mark

Sixty years ago, the first Kinsey Report was released, challenging conventional beliefs and causing consternation in the community. Last week, a McKinsey report did more or less the same thing, showing that for most enterprise customers, moving applications to cloud infrastructure would more than double their total costs. McKinsey’s conclusion: moving to the cloud may be a mistake for most enterprises.

A major software, systems, and services vendor in this space retorted that the McKinsey analysis “failed to consider that most companies would only use cloud services for a small portion of their technology needs.”  Unfortunately, that sounds a little bit like the argument that burning hundred-dollar bills is fine as long as you do it for only a portion of your portfolio. But there’s another reasons the McKinsey report missed the mark: Unit cost doesn’t matter — total cost is what counts.

The McKinsey analysis was very thorough: benchmarking a variety of Amazon EC2 (s amzn) options against a do-it-yourself approach, considering operations, administration and maintenance cost savings, and even tax implications and equipment depreciation schedules. However, one doesn’t need to conduct this level of analysis to realize that if an enterprise buys or leases a server, it’s probably going to cost less than if a service provider buys that server and adds in SG&A and margin. I’ve argued the same thing before: It isn’t clear that alleged economies of scale exist for cloud service providers, since they use essentially the same building blocks as enterprises. The conclusion McKinsey draws from this fact is this that while cloud computing and services may make sense for smaller companies, enterprises should hold off until the financial disparity is resolved.

But wait a minute.  If McKinsey had studied, say, automotive transportation, the conclusion they might have come to would be that, since enterprises and “cloud service providers” — rental car companies — use the same infrastructure components — cars — there really aren’t any economies of scale and the service provider premium then makes rental cars financially unattractive.  In fact, the rental car industry may have been “getting away” with an even higher premium than the cloud computing industry; a Chevy that one can finance or own for $10 a day might rent for four or five times that.

So wouldn’t the analogous conclusion then be that enterprises should be wary of using rental cars, until that industry comes up with a better value proposition?

Tell that to Hertz, which made roughly half of its over 6 billion dollars in car rental revenues last year from enterprises. Rental cars and other “meatspace” utility services create value for customers by cost-effectively addressing unpredictable or variable demand with dynamically provisioned resources on a pay-per-use basis.  So do cloud services.  And, as enterprises consolidate data centers, they’d best leverage content delivery clouds and other dispersed infrastructure services available from cloud service providers to meet interactive application requirements.

In other words, sure, service providers typically cost more for infrastructure on a unit-time basis.  So?  That’s not the relevant comparison, total cost is.

Joe Weinman is Strategy and Business Development VP for AT&T Business Solutions.