Cloudonomics: The Business Value of Cloud Computing, + Website

Significance of

For independent demands with the same mean and variance, the inverse square root has implications on IT strategy and ecosystem evolution. As we’ve discussed, there may or may not be compelling economies of scale in the cloud. If there are no compelling economies of scale—that is, unit cost reduction in production or service operations—there still may be economies associated with the statistics of scale. If, as we’ve seen, the penalty costs associated with under- and overcapacity can be reduced merely through the expedient of demand aggregation and resource pooling, then bigger is better, assuming that bigger means more diverse.

However, this benefit has diminishing returns. Exhibit 15.5 shows the relative penalty cost of incorrect capacity compared to a single, unaggregated demand. As can be seen, the penalty is reduced by 30%, merely by going from one workload to two. It can be reduced to only 50% of the single-demand level by aggregating demands from four sources, since . If we want to aggregate demands to get a 75% reduction, we need 16 sources, since a 75% reduction equals a remaining .

EXHIBIT 15.5 Value of

What this curve shows is that in a company with just ...