Calculating Cloud Computing ROI

The Cost of the Cloud: Insights into Calculating Cloud ROI

Thursday, August 04, 2011 | Staff Writer

Cost savings are frequently named as a primary driver for cloud adoption, but costing out the cloud remains unchartered territory for many organisations. Perhaps the biggest obstacle for companies seeking to develop a strong ROI model is that there exists no formal methodology for understanding the economics of cloud computing.  Here we examine the most pressing questions related to calculating cloud ROI, as well as insight into leveraging cost-saving opportunities in the Cloud.

Capex vs. Opex
One approach to discussing the cost of cloud computing is to think in terms of capital expenditure versus operating expenditure. Owning an asset is generally considered a capital expenditure, while operating expenditure is most commonly associated with the cost of operating a business over a defined period of time. In practical terms, running an application and paying for the related resources on an "as used” basis is an operating expenditure, while running the same application and using resources that were purchased as a business asset would be a capital expenditure. The question of whether a capex or opex approach to cloud computing is less expensive is a source of great debate, further complicated by the move to private clouds and the shift to virtualisation. The shift appears to be in favor of a complex model where resource consumers receive granular, use-based costing, organisations provide private cloud capability that supports sophisticated cost analysis, and little motive for providers to impose fees on top of base costs.
Working within an Opex, High-Risk Model
In light of this shift, IT organisations will need to become more sophisticated about managing and shaping use. As organisations increasingly bear utilisation risk, yield management will play a significantly more important role to ensure sufficient utlisation and financial viability. Pricing must exist in direct relation to utilisation, and IT financial talent will become crucial as IT operates more and more like a business. Finally, risk management will become a central concern and task as IT organisations struggle to find a way to manage very high risk exposure.
Cost-saving Opportunities in the Cloud
There may be no standard formula for performing detailed ROI of cloud-based solutions, but there are several cost-saving opportunities organisations need to consider in the Cloud. Organisations should determine whether a cloud-based application (versus an on-premises application) makes the most sense for a business, and how the Cloud can be used to reduce application development time. Another cost-saving opportunity involves scaling up during peak business cycles. Organisations must strive to always be in lock-step with their growth and success, which means they need to know how to scale up quickly when necessary. Organisations must also be able to keep unit costs in check. In order to compute actual costs, organisations must make calculations in terms of the life of the contract, not just the cost of starting a project. CIOs must also be willing to negotiate cloud pricing as they would the prices for software, hardware or other major purchases. Organisations often overlook the cost of moving data to a second provider should the first provider suffer from service issues. CIOs must calculate the potential cost to business in the case of a service interruption. In short, organisations need to enter the cloud with a close watch on their budgets and their eyes wide open.
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