The core problem with the “aggressive virtualization” as proposed by McKinsey is that it keeps customers, and their IT departments, in the enterprise software maintenance business. Not only are they in the business of maintaining and upgrading software they′ve written themselves, but the need need to maintain and upgrade someone else′s software. (I′m reminded of the “Someone Else′s Problem” invisibility joke from the Hitchhikers Guide to the Galaxy—Someone Else′s Problems are so big you can only see them from the corner of your eye!)
However, the situation is a little worse than this. Because all the risk is on the customer to do the upgrade, the ERP vendor has no incentive to make this problem easier for the customers — rather they have the main incentive to add as much new functionality into the product as possible, making it more attractive in the market and, perversely, even harder for the customer to upgrade. (All the new functionality means even more changes to all those database tables).
Contrast this with the “Cloud” economics: All of the cost and risk of the upgrade is the responsibility of the vendor, therefore the vendor has a massive incentive to make the cost of upgrading as small as possible. At the same time, the “Cloud” vendors are competing against fully featured ERP solutions and have the market incentive to bring out as much new functionality as possible. This is the core reason why “Cloud” vendors have created software architectures that handle change—something that ERP vendors have never really figured out.
All of this ends up in one place. If you want to talk about the economics of “Clouds”, be they “Private Clouds aka Aggressive Virtualization” or real “Public Clouds”, you have to compare apples to apples. There really is no point, as McKinsey have ham fistedly done, in just looking at the hardware costs You need to put all the costs of ownership on the table: hardware, software, maintenance, upgrades and innovation. When it′s all on the table, then real “Cloud Computing” wins out every time.