Cloudy transaction costs: a dive into cloud computing economics

Abstract Looking merely from the neoclassical perspective, cloud computing is price effective. However, according to institutional and transaction cost economics, cloud customers should estimate other costs beyond the price. Such costs may not be known to cloud customers, leading to unmet expectations and implementation challenges. The aim of this paper is to study transaction costs of cloud computing from the customer perspective to make the cloud journey less cloudy, i.e. more informed and well planned. This paper applies transaction cost theory to cloud computing through a 360-degree industry analysis. Expert interviews with vendor, customer and consultancy sides were conducted to understand costs associated with cloud computing. Findings were validated through a case study. Findings of this research indicate that cloud has high ‘asset specificity’ due to change management costs, meta services costs and business process reengineering costs. Cloud also has a considerable level of ‘uncertainty’ asking for managing contracts, investing in cloud-specific monitoring solutions and consciously reviewing of the legal compliance. Finally, cloud has high ‘transaction frequency’, which compensates for the needed investments triggered by ‘uncertainty’ and ‘asset specificity’.