Cloud vs In-house: How to Explain Cloud ROI to Decision Makers

May 15 2016 | by Yoav Mor

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Public cloud computing offers you many advantages over traditional on-premises infrastructure. Not only does it provide a modern, secure and flexible IT platform that can give you a competitive edge over your competitors. It can also help your cash flow by eliminating the need for capital investment in new hardware. While you may well be persuaded by the compelling benefits of the cloud, decision-makers within your organization will take a little more convincing.

They’ll want to know what it will cost and how your company stands to gain financially by moving to the cloud. So how do you go about calculating cloud ROI and drawing up an estimate that will help senior managers make an objective and informed decision?

At first glance, this may seem like a daunting challenge. So, in this post, we’ve simplified the process by tackling the four main points you should consider when preparing a case for cloud adoption.

Know Your Data Center Costs First

In order to get a measure of your cloud ROI, it’s important you calculate the total cost of ownership (TCO) for the on-premises first. This will help put the cost of a cloud solution into perspective.

Calculating TCO on in-house data center is still considered as one of the most complex IT business planning problems today. But, in the early stages of evaluation, you just need to get the ball rolling. So start out simple and present a calculation using only the basics.

The three most important figures you should begin with are:

  • The cost of the equipment you need
  • The projected lifespan of the equipment
  • The cost of capital

In simple terms, the cost of capital is how much you could expect to earn if you invested that money elsewhere. In other words, the cost of the equipment + interest over the projected lifespan.

Next, add in your estimated operating costs over the projected lifespan. These are typically the cost of:

  • Providing floor space
  • Staff to administer your servers
  • Electricity to run your equipment
  • Cooling, security, backup and other auxiliary systems

Finally, divide your total by the number of months in your projected lifespan to arrive at a ballpark figure for the monthly cost of ownership.

Explain the Value of the Cloud

When someone buys an electric drill, they’re not buying the drill but buying the hole. They’re buying the benefits or value that the drill brings. Likewise, decision makers want to know what value the cloud will bring to their organization.

Flexibility is a particularly compelling benefit of the cloud. You can scale up or scale down the resources you need on demand. By contrast, with on-premises infrastructure, when demand is high you may lose out on performance. And when demand is low you’re pouring money down the drain on unused capacity. The flexibility of the cloud, together with the pay-as-you-go (or pay-as-you-grow) model can create a great balance between what you pay for and what you get.

It’s also important to highlight the time and cost savings of developing on an IaaS platform. For example, if you want to set up a new testing environment on an in-house machine, you’d need to provision a new volume or account. You’d then have to install the operating system, furnish it with any necessary middleware, install all interrelated applications and finally copy over live data for testing. By contrast, in AWS, you can simply create everything in one single click by launching an instance from a preconfigured AMI.

Understand the Full Cost of Migration

As well as the monthly bills, consider other factors that affect the overall cost of moving to the cloud. You may have to spend significant time and money on migrating your applications. So make sure you assess the options available [insert link to Rehost vs Rearchitect post] and understand the costs involved.

Think about training costs, particularly in new technologies. You will need to recruit new members of staff to deal with compliance and privacy issues. And don’t forget the cost of any third-party cloud services such as DevOps, security and backup tools.

Lastly, most of the leading vendors offer some form of online cloud cost calculator, such as the AWS or Azure TCO calculator. Use these to get an initial idea of your expenditure. You could also unearth other hidden costs by phoning up vendors and asking them what factors their pricing tools take into consideration.

Show How You’ll Manage Costs to Determine Cloud ROI

With so much elasticity, senior managers will want to know you can monitor cloud costs and keep them under control. So research the various cloud cost monitoring services available. Explain how they can help your business get full value from the cloud—by helping you to compare costs between cloud vendors, spot trends and sudden changes in usage, mitigate inefficiencies and achieve the sought-after balance between performance and costs.

Again, most of the major cloud vendors offer baseline cost tracking and resource management service. But there are also a few third-party tools that can provide additional functionality. These include our own product, Cloudyn, which offers in-depth understanding of usage and cost across multiple accounts and vendors.

Present a Balanced View

A move to the cloud is an exciting opportunity to break free from outdated IT methods and the financial constraints of the traditional CAPEX model. But it’s important you approach cloud adoption objectively and show a balanced view of the pros and cons. That way, decision makers will be more receptive to your case and more likely to make the move sooner rather than later.

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