EXPRESS: Procuring Cloud Services: an Economic Analysis of Multi-cloud Strategy

Federal agencies use reverse auctions to procure cloud infrastructure services offered by major public cloud providers such as Amazon, Google, and Microsoft. Although recent research has examined operational issues in cloud computing, these papers have not analyzed the vendor base design decisions when these cloud capacity instances are procured through the reverse auction mechanism. Therefore, several important research questions are still unaddressed. For example, how should federal clients decide on the number of cloud providers for the multi-cloud strategy? How should clients decide on private cloud capacity investments along with sourcing requirements from multiple cloud providers? We find that the client’s capacity portfolio decision is determined by factors such as vendors’ cost heterogeneity and available capacity. Specifically, we find higher cost heterogeneity leads to a smaller vendor base. Interestingly and somewhat counter-intuitively, we find that higher cost heterogeneity may increase or decrease private cloud investments. We also study the client’s decision on the type of capacity instances to be procured via reverse auctions. We find federal clients should only utilize the on-demand instances mechanism (where capacity is procured after demand realization) to fulfill the cloud computing requirements. We further observe that if vendors experience capacity outages, then the client should upfront reserve capacity instances.