Procuring cloud services: An economic analysis of multi-cloud strategy

Various 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 in information systems have studied operational issues in cloud computing, these papers have not analyzed the interaction between vendor base 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 client firms decide the number of cloud providers to be selected from the bidding competition? Along with sourcing on-demand requirements from multiple cloud providers, how should client firms decide on private cloud capacity investments? Our analysis reveals that higher heterogeneity in the vendor’s cost structure leads to fewer cloud vendors chosen for the award of the contract. Interestingly, and somewhat counter-intuitively, we find that higher cost heterogeneity may increase or decrease private cloud investments. We find that if the number of cloud providers in the cloud computing market is very few, then the federal agencies may implement a pure private cloud investment strategy. However, if the number of vendors is very large, the client firm may adopt a public cloud computing strategy. If the number of cloud providers is moderate, implementing the hybrid cloud computing strategy is appropriate for the client firms.