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Cloud Computing Cost Savings

How do you calculate the cost of Cloud? Is TCO still a valid option?
Marinka van der Eng
May 30 2017

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. That poses the question: 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. (But there's a note of caution in this blog.) This is one of the most compelling factors when replacing on-premise systems and infrastructure with Cloud Services. This belief is based on six high level advantages of cloud computing:

1. Acquisition costs are initially lower because equipment is rented, not bought; plus, software licenses are also becoming increasingly subscription based. Businesses are also more aware and take advantage of existing licensing models that have subscription-like flexibility (such as Microsoft CSP).

2. Price models that feature all-inclusive:
  • Per-user, per-month price,
  • Pay-as-you-go price, or
  • Pay-per-use price.

This makes calculating ongoing costs easier and more predictable. For many companies, these costs become an operating expense, hence moving IT-cost from CAPEX to OPEX.

3. Cloud implementations have a longer lifespan than on-premise because hardware does not become obsolete or incapable of operating the software/application. It is also no longer your responsibility ensure the hardware can do its job! 

4. Software is easier to update and manage in the Cloud.

5. 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).

6. The ratio of in-house personnel to system resources can be lowered because Cloud providers monitor and manage server provisioning, configuration, maintenance, and upgrades. You can free existing IT resources to apply their time to innovation and business operation improvements instead of maintenance.

One premise is that when using cloud services, total cost of ownership is:

  • lower
  • easier to calculate
  • easier to predict
  • (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 off 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 or even obsolete. This is true because 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, an enterprise may choose to retain some on-premise capability for accessibility, efficiency, or security reasons, while some applications move to the Cloud. TCO, therefore, can still offer value for evaluating an optimal mix of on-premise and off-premise services from a cost perspective.

Calculating Cloud TCO

Cloud TCO is certainly not entirely devoid of “unexpected” costs. There are, of course, the known up-front costs outlined in your Cloud provider’s contract and monthly/on-demand fees. Beyond that, other variables may cost you, such as:

  • 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). Consider how many weeks, months, or years of data you need to keep as a “live” backup.
  • How big is this database going to get in the future?
  • The time to move on-premise software and data to Cloud servers. This includes the possibility of having to adjust licensing models.
  • The initial increase in operational complexity and learning curve during the transition.
  • The potential 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 potentially 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 the initial move is made from on-premise to Cloud, up-front costs will diminish over time, which is something that should be accounted for in a long-term calculation of TCO. Though it can be more difficult to estimate, the transition to Cloud services will ultimately lower costs and/or offer more computing and storage capacity for the same price over time.

SaaSplaza strongly believes in the lowering TCO with cloud computing, however, we'd like to make a note of caution: Just migrating to the cloud, without properly architecting and configurating, is not a given cost-saving. Lowering TCO with cloud computing is also achieved by making the right choices for tooling and technology, intelligently utilizing economy of scale and automation. To prevent that the costs of cloud computing are getting out of control, you might want to consider working with a specialist cloud provider. Expert knowledge and cloud experience will lead to even lower cloud costs, higher time savings and reduction of errors. 

Conclusion

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. 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. 

At SaaSplaza we do that for prospective new clients. Such a program will bring real-life relevance to abstract calculations and ensure that most “hidden” Cloud service and utilisation expenses are uncovered. Contact us today to see if Cloud solutions are right for your business.

Original post of this blog was on September 10, 2015, updated on June 1, 2017.

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