Cloud Economics – Are You Getting the Bigger Picture?

February 5, 2020

Originally published by The Doppler

While few will dispute the hard cost savings of cloud, there is always a need to create a compelling business case that clearly defines the value of agility and other soft benefits.

Every company has its own ideas on how best to determine cloud ROI. For many, it’s capital expenses (CapEx) versus operational expenses (OpEx). Cloud computing shifts IT spending to a pay-as-you-go model, like utility billing; you only pay for what you use, when you use it. For startups or new applications, this well-established argument is sound. Why purchase hardware, data center space, power and supporting software when they can be rented by the hour at a higher utilization rate? For enterprises, however, the decision is not so simple.

Enterprises have invested in data centers and equipment that is already bolted into racks and partially depreciated. For these organizations, identifying and making the right economic decisions requires additional investigation into the detailed costs and benefits of enterprise cloud.

Thinking Beyond CapEx vs. OpEx

Most enterprises have hardware utilization rates significantly below 20% because of the excess capacity required to handle peak demand. As such, many companies carry up to 5 times the required hardware, networking, and data center space during steady state business cycles. If their computing demand is spiky, utilization rates outside of peak cycles are commonly below 10%. As a result, enterprises are spending much more on compute and storage than is required. Figure 1 depicts the traditional model where cloud shifts fixed CapEx expenses to variable OpEx expenses. To understand the full value of cloud for your enterprise, you must look beyond the CapEx vs. OpEx benefits and assess the other value drivers at play.

Closely associated with utilization is IT infrastructure’s ability to scale up and scale down to support business agility. Traditionally, high utilization reduces IT spend, but limits agility and negatively impacts innovation and business growth. Conversely, the cloud can provide significant savings (near 100% utilization) and nearly infinite agility. The value of this agility is challenging to calculate so we have a tendency to ignore it. That is a big mistake.

Are you quantifying agility?

The business value of cloud is more about agility and utilization than any other cost consideration. Consider that the cloud provides us with the ability to provision and de-provision nearly unlimited resources as needed with complete control. Moving from 20% to near 100% utilization provides significant cost advantages and even greater value in the ability to quickly solve business problems without waiting for software and hardware procurement and installation. With the cloud, businesses can enter into new markets, accommodate new customers, avoid compliance penalties, or just move fast when they need to move fast, all while concurrently maintaining fully-utilized hardware and networking resources.

What’s more difficult to quantify is the value of countless ideas and projects that are started, only to be stalled or placed lower on the priority list because by the time the resources are provisioned 3 to 6 months later, other initiatives have taken priority. With the agility of the cloud, projects can be conceived, provisioned, and deployed within 24 hours – allowing for real-time planning and execution.

Uncovering the Real Costs & Benefits of Cloud

Most cloud ROI calculations don’t factor in agility or fully capture the costs of poorly utilized hardware. While charts illustrating the differences between CapEx vs. OpEx are relevant to the potential value of cloud, a more complex assessment is necessary to reveal the full picture.

Defining ROI and TCO in the Cloud

Return on Investment (ROI)The financial gain from an investment in cloud divided by the cost of that investment.

Let’s first look at cloud ROI. While businesses often discuss their “cloud ROI,” more often than not they’re missing the bigger picture. Most cloud ROI calculations are focusing around IT cost savings and how they affect the bottom line. Instead, cloud ROI should be more about the value that is returned to the organization.

Value drivers that are often overlooked in typical ROI calculations include accelerated time to market, improved developer productivity, decreased provisioning time and many more intangible benefits of cloud.

Total Cost of Ownership (TCO)The sum of all direct and indirect costs of the IT estate including all application development, maintenance and support, operations, data center, network, and BC/DR.

Cloud TCO defines what will be spent on the technology after adoption – or what it costs to ‘run the engine.’ Typically, a TCO analysis looks at the costs of the “as is” on-premise infrastructure and compares these costs with the costs of the “to be” infrastructure state in the cloud. TCO analyses are much simpler to calculate than ROI analyses, however they only give the stakeholders a narrow view of the total financial impact of moving to the cloud.

So, the difference between a TCO and an ROI analysis is that a TCO defines the spending and savings, whereas the ROI determines what value is generated, while taking spending and savings into account. It’s critical that you understand both, and their differences, in order to effectively define the full value of cloud for your business.

Identifying the Types of Savings

Start by defining the hard benefits of cloud in terms of direct and visible cost reductions and efficiency improvements. These costs are typically easier to identify and easier to assign a clear value to.

Soft savings are those value points that are more challenging to accurately quantify, but can be as valuable, if not more valuable, than cloud’s hard savings. Any holistic cloud economics evaluation should have a thorough analysis of both hard and soft savings.

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