Working in the Cloud

When I was younger, my father occasionally remarked that I had my head in the clouds and, for the last month or so, his remarks have borne some resemblance to the truth. Along with Mike Schussler from Economists.co.za, I have been working on a study entitled The Economic Impact of Cloud Computing in South Africa. To our knowledge, this is the first attempt to quantify the effect of cloud computing on the South African economy and to evaluate how it will benefit the economy in general and, more particularly, the ordinary man in the street.

What exactly is cloud computing, you may ask? In simple terms, cloud computing means running software on your phone, personal computer, or other device without that software having to occupy space on the device in question. Instead it is stored elsewhere, on someone else’s server. Most of us are familiar with Google mail (or Gmail) because it has been around for a number of years. What might surprise you to know is that this is a form of cloud computing. The software required to operate the Gmail programme is installed in a data centre, which may or may not be located in the country where you reside. Many of us use search engines on a daily basis. This, perhaps, is the most prevalent form of cloud computing and has become a virtually indispensable part of our everyday lives. With cloud computing, we have entered a new era of transformational change and our lives should become easier and the economy should grow.

According to the McKinsey Global Institute, “By 2015, cloud computing could represent a $70 billion to $85 billion opportunity, with the market doubling every two years. Some technology watchers forecast that by 2015 cloud computing infrastructure and applications could account for 20 per cent of total spend in these areas. The impact could reach 20 to 30 per cent of the total IT budget for businesses willing to leverage this new technology”.

So what makes cloud computing such an attractive proposition? A favourite term in economics is “economies of scale”, which means that the cost reduces when you can serve more people with the same resource, and cloud computing provides exactly that. Cloud computing lowers costs because scarce resources are pooled. Individual entities no longer require large facilities on site as many users/clients are able to store their information in one central place. The more users/clients there are, the lower the fixed costs per user. By pooling the resource requirements of a large number of individual companies, cloud centres are able to provide them with access to computing power and a diversity of programmes that they would otherwise not be able to afford. This means that resources are more efficiently used. The greater the pool of entities served by the cloud, the greater the economies of scale, which in turn leads to lower costs and higher overall levels of efficiency for every company.

Savings are also realised due to lower technical IT staff requirements. Companies will require fewer IT specialists in-house, since most of the administration will be carried out by the cloud computing host. In-house IT specialists will be able to concentrate on building new capabilities in the company and improving services to customers.

Cloud computing allows companies to adapt to changing market circumstances more quickly and provides greater agility for customers who require varying amounts of capacity in line with fluctuations in demand for their product or service. For example, traditionally, organisations tended to buy capacity in line with what they required for peak periods and for the rest of the time the spare capacity sat idle. Cloud computing offers a pay-as-you-go system allowing users to use what they require at the time, thus changing previously large fixed capital outlays into variable costs. For example, retailers may lease server space and increase capacity during their busiest periods and then scale back during less busy periods. For small businesses, the cloud can make a life changing difference, because with it, they have access to the latest software programmes, whereas, in the past, they were limited to what they could afford.

According to IT specialists Eric Knorr and Galen Grumen, “Cloud computing comes into focus only when you think about what IT always needs: a way to increase capacity or add capabilities on the fly without investing in new infrastructure, training new personnel, or licensing new software. Cloud computing encompasses any subscription-based or pay-per-use service that, in real time over the Internet, extends IT's existing capabilities”.

With the enhanced computing capabilities of cloud computing, and increased bandwidth made available, communicating and conducting business in South Africa will become even easier. This improvement in the well-being of South Africa’s citizens is of an intangible nature, and official economic activity statistics are unlikely to be able to capture the true extent of the benefits. How do we quantify the benefits of improved and increased communication that has arisen out of the proliferation of mobile cellular phone subscriptions? Cellular telephones have become almost ubiquitous across South Africa, indeed, the world, and now perform an indispensible role in modern day living.

Developing countries are in a particularly fortuitous position because they are able to piggy-back off of technology that has already been developed and fine-tuned in other countries. The cloud makes it possible for developing economies to catch up with developed economies even faster as it allows them to have access to the same IT infrastructure, data centres and applications. For example, cloud computing allows researchers based in developing countries to access data hosted on clouds in developed countries.

The future of cloud computing in SA, however, is crucially dependent on broadband capacity. There have been a few significant advancements in undersea cables and several planned cables will increase capacity dramatically and lower the costs to users in the future. But the challenge thus far has been to increase access to everyone and, although wireless communications have increased access to a certain degree, the next wave of technological advancements probably lies in what is now known as “Super Wi-Fi”. Wi-Fi has, until this point, been limited in that it doesn’t travel too far or too easily through walls and buildings. “Super Wi-Fi” promises to address these challenges. Although Wi-Fi is not part of too many of our lives, “Super Wi-Fi” gives us the opportunity to leap-frog up the developmental ladder. Much like cellular telephones, which made it possible for people living in developing countries where there were insufficient fixed lines, to communicate with family members and business colleagues elsewhere.

Amazingly, cloud computing also helps us to address South Africa’s most pressing social challenge, namely, unemployment. We estimate that cloud computing would lower the capital-labour ratio by approximately 1 per cent. Considering that fixed capital remains the best indicator of jobs in the South African economy with a relationship close to 90 per cent, this indicates that the adoption of cloud computing would increase the uptake of jobs – assuming other factors such as skill sets remain at the same ratios. In our analysis, we find that cloud computing currently lowers the cost of creating the average job by approximately R3,500 and we anticipate that, as the technology takes hold, this estimate may increase to as much as R14,500 in real terms. Currently, the South African economy requires R2.2 million for every eight jobs. Using the same capital in real terms, our study finds that the amount of jobs that R2.2 million can provide would increase to 8.1.

While this is not a significant increase, it indicates that for every 80,000 jobs that the South African economy created (at a cost of R22 billion) on its previous capital to labour ratio, cloud computing would potentially add about an extra 1,000 jobs. It is important to note that these jobs will come at no additional cost to the economy.

Small and large firms, government, everyone, should start thinking about how they can use the cloud to save money, increase efficiency, start new businesses, improve education and health care – the possibilities are endless. And perhaps some young head in the clouds South African will come up with a great new creative idea for using the cloud that will leave us all wondering why we did not think of it first.

AUTHOR Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 25 October 2011