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How the Cloud’s Specialization and Economies of Scale Decrease IT Costs

In a previous article about how IT hosting can decrease businesses’ IT costs, we listed these as the four main reasons that IT hosting is more cost-efficient than onsite IT:

You only have to pay for the portion of the physical server that you use

The hosting providers have less human administrators per solution than an in-house IT department

You can access hosted IT solutions from low-cost devices

Hosting providers are better at preventing costly IT disasters than in-house IT departments

In today’s article, we’re going to be talking about two additional reasons that IT hosting is more cost-efficient than onsite IT: the specialization and economies of scale of hosting companies.

As we mentioned in the previous article about the cost-efficiency of IT hosting, virtualization software allows hosting providers to securely and privately host multiple IT solutions for multiple different customers on the same physical server.

This lowers costs in two ways: first, it minimizes the hosting provider’s hardware costs, because it allows the hosting provider to host the maximum amount of IT solutions on the minimum number of servers, and these savings can be passed on to the customer; second, customers only have to pay for the portion of the physical server that they use, which is a lot more cost-efficient than, for example, purchasing a $1,000+ onsite physical server and then hosting a solution on it that only uses 25 percent of the server’s resources.

However, even if it wasn’t possible for IT hosting companies to host IT solutions for multiple customers on a single physical server, hosting companies would still be able to host IT solutions more cost-efficiency than in-house IT departments due to the hosting companies’ specialization and economies of scale.

Specialization

IT hosting companies are more specialized in the sense that all of their efforts as organizations are focused on IT hosting, while in-house IT departments are focused more generally on managing all aspects of their companies’ IT. Every decision a hosting company makes (such as the hardware and software it buys and the staff that it hires) is therefore focused on how it can improve the performance, security, and reliability of their hosted solutions, while minimizing the company’s overall costs.

For an illustration of how specialization can reduce costs in IT hosting, consider the process of setting up a hosted server.

Many hosting companies can deploy a hosted server in just a few mouse clicks, since they already have all of the necessary physical servers, storage devices, and networks in place and the virtualization software installed. When the hosting company purchased the physical servers, storage devices, networking equipment, and virtualization software, it used its extensive knowledge of these products and its longstanding relationships with vendors to select the ones that offered the best quality at the lowest price point.

Then, the hosting company’s datacenter staff would install and configure this hosting hardware and software much quicker and more effectively than someone without their training and experience would.

An in-house IT department, in contrast, would be unlikely to have the necessary hardware and software in place to be able to deploy a hosted server with just a few mouse clicks, unless it had enough space for a hosted server on an already deployed physical server. In any case, an in-house IT department wouldn’t be nearly as efficient at acquiring and setting up the necessary hardware and software for a hosted server, since the staff of in-house IT departments don’t have as much experience and training at acquiring and setting up these specific assets.

Economies of Scale

IT hosting companies can also host a given IT solution more cost-efficiently than an in-house IT department due to their economies of scale.

In a lot of cases, IT hosting companies can get better deals on IT hosting hardware and software (including servers, storage devices, networking equipment, operating system licenses, virtual machine licenses, and application licenses), as well as on resources like electrical power and Internet bandwidth, because they’re purchasing these assets and resources at the discount bulk rate.

In addition, IT hosting companies can afford to hire IT hosting specialists, to buy the most advanced IT hosting software, and to purchase or rent large datacenters with advanced climate control systems, fire suppression systems, and physical security measures (including biometric access panels, servers cages, and 24x7x365 onsite security guards), and at the same time offer affordable hosted solutions, because the costs of all of these assets are shared amongst the IT hosting company’s thousands of clients.

The client’s share of the costs of all of these assets (including cloud specialists with $100,000+/year salaries and datacenters that cost millions to purchase, set up, and maintain) ends up being a small amount per user (let’s say about $5-$10 per user per month), whereas most businesses would never be able to afford purchasing these assets by themselves for their own in-house IT department.