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Cloud Computing Cost Savings

How do you calculate the cost of Cloud? Is TCO still a valid option?
Hamish Haldane
September 10 2015

The most established, and common method, for estimating potential costs of cloud computing (or any form of computing) is by calculating “Total Cost of Ownership” (TCO).

In essence, TCO estimates the costs of acquisition, setup and maintenance of the equipment over its effective life. This is a crucial calculation because often you will only find a small difference between vendors in terms of purchase price, however, there will be large differences in terms of TCO. Additionally, the initial cost may only be a fraction of the TCO.

For example, the cost of a fully provisioned on-premise server is only about 15 to 25 percent of that server’s TCO, with the balance of the costs spread out over the effective lifetime of that server until it is decommissioned.

So does cloud computing save money when compared to traditional on-premise infrastructure?

Cloud Computing Cost Savings: Cloud vs. On-premise

While every business is unique and thus due diligence is required, generally you will find that cloud computing will have a lower TCO and will deliver savings.  This is one of the most compelling factors when replacing on-premise systems and infrastructure with Cloud Services. This belief is based on five high level advantages of cloud computing:

  • Acquisition costs are initially lower because equipment is rented not bought; and software licenses are also becoming increasingly subscription based. Businesses are also more aware of, and taking advantage of, existing licensing models that have subscription like flexibility (such as Microsoft SPLA Licensing)
  • Prices that feature an all-inclusive price-per-user-per-month,  pay-as-you-go or pay-per- -use models make calculating ongoing costs easier and predictable; and for many companies these costs become an operating expense
  • Cloud implementations have a longer lifespan than on-premise because hardware does not become obsolete or incapable of operating the software/application – and clearly it is also no longer your responsibility ensure the hardware can do its job!  Software is also easier to update and manage in the Cloud.
  • Server resources for compute can be scaled up or down, so operating expenses should align with internal and customer demand, or be included in the all-inclusive pricing (see point 2)
  • The ratio of in-house personnel to system resources can be lowered because Cloud providers monitor and manage server provisioning, configuration, maintenance and upgrades, so you can free existing IT resources to apply their time to innovation and to improve how the business operates – not on maintenance

One premise is that when using cloud services, total cost of ownership is lower, easier to calculate, easier to predict, and short-term expense management is easier to achieve compared to running your own on-premise systems.

However the fundamental differences between Cloud and On-premise mean the traditional methods of calculating TCO may not produce an accurate figure; particularly as this model was developed for use when on-premise deployments were characterised by large upfront capital expenditure that were written down over time.

So Is Total Cost of Ownership Still Valid In The Cloud?

As the trend toward service-oriented IT departments continues to expand, the concept of TCO may seem old-fashioned and even obsolete, since unexpected costs, or costs that are hard to quantify, are more difficult to predict without proper guidance or knowledge of cloud deployments and management.

However, many organisations are not turning over their entire IT infrastructure to the cloud, instead preferring a hybrid approach. For instance, the enterprise may choose to retain some on-premise capability for accessibility, efficiency or security reasons while some applications move to the Cloud. TCO, therefore, still can offer value for evaluating an optimal mix of on-premises and off-premises services that a company should maintain from a cost perspective.

Calculating Cloud TCO

Cloud TCO is certainly not entirely devoid of “unexpected” costs unfortunately. Besides any up-front costs outlined in the contract with the cloud provider and monthly or on-demand fees, there are other considerations to take into account that may cost you:

  • Storage and backup costs, if you exceed any stated limits in your contract; particularly if these data requirements have not been estimated or planned correctly (or even estimated at all). For example, how many weeks, months or years of data do you need to keep as a ‘live’ backup? How big is this database going to get?
  • The time to move on-premise software and data to cloud servers including the possibility of having to adjust licensing models
  • The initial increase in operational complexity and learning curve during the transition
  • The cost of ongoing on-premises personnel who monitor and manage the interface to the cloud provider and are in charge of cloud resource planning
  • The costs of decommissioning on-premises equipment including asset write-offs, resources redeployment, data cleanup, adjustments to vendor contracts and the cost of keeping the lights on in space that has been vacated
  • Estimated “rent” increases over time and penalties for early contract termination

Once an initial move is made from on-premise to cloud, up-front costs will diminish over time, which should be accounted for in a long-term calculation of TCO. Though more difficult to estimate, the trend of Cloud Services to lower costs and/or offer more compute and storage capacity for the same price over time should be taken into consideration.

There will be other cost savings such as a reduction in hardware sprawl, a more homogenous and easier to manage mix of compute resources and greater automation, which saves time and reduces errors.


Once you evaluate cloud providers, the best approach to calculating comparative total cost of ownership between on-premise and cloud is to run a time-limited pilot program before committing to a larger scale move.

At SaaSplaza we do that a lot for prospective new clients. Such a program will bring real life relevance to abstract calculations and ensure that most “hidden” expenses are uncovered with regard to managed Cloud services and utilisation. In parallel, the organisation should carefully analyse the data they already have for an accurate re-calculation of current on-premise equipment TCO for comparison.

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