Cloudonomics: The Business Value of Cloud Computing, + Website

Capacity Inertia

Even if demand is variable and unpredictable, it would not represent a problem if it were possible to rapidly purchase or sell the owned capacity needed to fulfill demand. Unfortunately, there typically is friction or inertia in increasing capacity. It may take time to realize that there is a gap and determine how much additional capacity is needed. Companies must forecast to try to predict how much capacity will be needed by the time the demand arrives. Ordering the capacity and deploying it requires additional time. However, after a peak subsides, there is friction in decreasing it. Some equipment may be on a three-year lease, which is a problem if the peak lasts only a few days or months. If the equipment is owned, it has almost certainly depreciated. There are transaction costs associated with disposal (e.g., sale or auction, contracts, transportation).

Capacity may not just be equipment, such as servers. If it is people, the same principles apply: It takes time to post job ads, interview, select, on-board, and train. In some countries, workers may not be downsized without a lengthy process, severance, and works council approvals. So, human resources are not that different from other resources when it comes to increasing or decreasing “capacity.” Some businesses do not have these constraints: In employment at will, in many cases for day laborers such as, say, some construction work or farmwork, a truck picks up as many workers are needed that day, with no commitment ...