TCO in the cloud: from science to art

Hosting business applications in the cloud is a good way for customers to avoid having to invest in their own computing environment. When infrastructure is provisioned as a service, fees are paid on a monthly basis based on the amount of allocated or utilized resources, with a positive and quantifiable impact on cash flow. Still, there is a lot more to fully understanding the cost difference between in-house IT and cloud-based solutions than just adding up the obvious items.

The scientific part: Factor in every variable

When comparing the costs of on-premises infrastructure with utility pricing in the cloud, simply calculating the hardware’s purchase price is not enough. The licenses for operating systems and other software infrastructure such as databases or application servers also need to be factored in – and don’t forget the associated network devices, firewalls, VPNs, DDoS protection, as well as the connectivity itself. Then there’s the overall cost of acquiring and operating your own data center or leasing co-located space, with various areas that include rack cabinets, UPS, cooling, wiring, and physical security. Total cost of ownership (TCO) calculations for on-premises infrastructure also frequently omit the associated vendor support contracts, installation costs, or significant parts of the general management, operation, and maintenance work.

Hidden costs

Even when you do the science of adding up all the conceivable costs associated with running your own game, however, the result still does not give you the whole story. For instance, planning for load peaks means you have to over-scale the infrastructure. There’s also a lot of supporting hardware to purchase to keep your computational hardware in continuous operation, back it up, monitor and administer it, or even just have resources on standby to jump in if there is ever an outage. The cost of making the wrong hardware choices is very high. Unlike other consumer toys, hardware cannot be returned to the shop once it has been installed. Even when you’re running IT services with highly predictable loads, ever-changing business and market conditions can still turn everything on its head with events like company mergers, acquisitions, or mere reorganizations.

On-premises TCO calculations give you a monetary figure, which is then divided by a number of months, typically derived from accounting depreciation rules. The applicable tax legislation varies considerably within the EU, with different countries allowing the depreciation of hardware over anywhere from three to six years. Does that mean the hardware, as it is purchased, is utilized productively over the following three to six-year period? The rapidly changing business environment, as well as the accelerated rate of current technological progress and even simple hardware malfunctions point to an obvious answer: no, it most likely is not.

The value of agility

Deciding the length of the time period over which an investment into IT infrastructure should be written off – that’s the point at which we move from science to art. It is simply impossible to predict the duration of utilization, and the related accounting rules are simply irrelevant from a business perspective. The only good news in all of this may be that, in a way, it doesn’t really matter. With agility becoming the dominant motivating factor for adopting a cloud-based model, the true value of the cloud lies in its ability to let companies react to changes promptly by instantly scaling existing IT services and quickly provisioning new ones. A new term has been coined to describe this: the “value of agility”. Although it sounds somewhat abstract, it really can be calculated. Putting a price tag on an organization’s ability to swiftly change the scale or nature of its IT services requires an in-depth analysis of the business processes involved, but it can be done.

This era of accelerated change brings with it a need to change how we value investment in IT technologies. The traditional concept of ROI may not be an accurate way of determining the true value of modern technologies for business – but if you do decide to quantify that value, don’t stop at calculating a purely financial TCO.

Author: Miroslav Pikus Cloud Expert
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