Cloudonomics: The Business Value of Cloud Computing, + Website

Summary

It can be challenging to deal with variable demand using your own capacity. By aggregating demand—as a service provider can do—benefits arise through smoothing, as long as the individual demands are uncorrelated. These smoothing benefits drive higher utilization and thus a lower cost per delivered resource. Consequently, even if a service provider doesn’t have advantaged economics in terms of unit costs, benefits can be generated via lower aggregate capacity requirements.

This strategy will work as long as demands aren’t correlated and don’t have simultaneous peaks. If they do, the service provider will generate fewer or no benefits via demand aggregation but still may be able to generate benefits via economies of scale, less any additional provider cost structure elements.

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“The Central Limit Theorem and Combinatorics,” at http://complexmodels.com/CentralLimit.aspx, “The Value of Aggregation in Variability Smoothing and Peak Reduction,” at http://complexmodels.com/Aggregation.aspx, and “The Value of Resource Pooling and Load Sharing Across a Grid,” at http://complexmodels.com/Grid.aspx, illustrate the benefits of demand aggregation: reduction in peak capacity needed as well as increased utilization.