Calculating the ROI on Cloud
IDC calls cloud computing “one of the most potentially transformative developments in the information technology world in the last 20 years.”
Many companies have already chosen virtualization – generating a straightforward and easily measurable ROI through the deployment of basic applications such as email and collaboration. Assessing the ROI of further investments in private cloud and PaaS, for example, is more complex and the ROI is often unclear. This can raise a roadblock for further corporate investment in cloud. Additionally the recent economic recession has pressured corporate profits to cut technology spending and limited further investment in cloud. In spite of these roadblocks cloud computing will soon be a business imperative.
Before the ROI: The Cloud Assessment
Before actually calculating the ROI, companies must baseline the cost of their existing applications and determine suitability of current applications for cloud migration. This can be done in a variety of ways. At Persistent, we have developed a Cloud Assessment Tool which takes customers through the entire assessment and ROI process.
Figure 1: Showcasing Persistent’s Cloud Assessment Framework
This can be done in a variety of ways. In order to calculate ROI, one must:
1) Identify Deployed Applications in the Enterprise
2) Analyze Workloads and Business Heuristics for Each Application
3) Develop a Recommended Cloud Strategy (On-premise vs. Cloud)
It is important to understand how the overall ROI can be achieved even when spending more upfront. It is only after the Cloud assessment is done that the ROI of moving to the cloud can be calculated.
Cloud ROI is composed of 3 major benefit areas:
- Cost Reduction
- Productivity Enhancement
- Revenue Transformation
Cost Savings from Cloud
After categorizing an enterprise’s applications and base-lining its costs, companies can estimate their potential cost savings. It is possible to generate a ROI of 50% for a Tier 1 workload and a ROI of 70% for a Tier 3 workload. For example, the following are the results for a recent ERP migration to a public/private cloud performed at Persistent.
- Reduce number of servers from 82 to 11
- Reduce number of racks from 11 to 1
- Generate 50% CAPEX savings
- Generate 80% OPEX savings
Labor costs offer the best direct savings for every dollar of IT budget shifted into the cloud. A typical global enterprise spends 67% of its IT budget on labor, including 40% on application development and maintenance. In the Cloud, labor assigned to manage infrastructure can be significantly reduced if not eliminated altogether as applications in the cloud run on an automated platform. The typical person to server ratio in an enterprise can be improved from 1:5 to 1:10 or even 1:15 as a result.
Software expenditures make up 16%, the next largest piece of a global enterprise IT budget; including application licensing and maintenance fees at 12% and infrastructure software at 4%. In the cloud, software can be accessed at any station, by any user, independent of individual licenses, and is charged on a per-image basis. This reduces overall software licensing and maintenance costs as companies pay only for what they use, turning a previously fixed cost into a variable cost that can be targeted for optimization.
The typical global enterprise spends 8% of its IT budget on hosting, including 4% on application servers, 3% on facilities, and 1% on storage. That spending increases as the business becomes more complex and requires more powerful hosting infrastructure. Compared to the on-premises model, hosting in the cloud can produce returns in three areas:
- CAPEX vs. OPEX: The biggest difficulty as well as cost savings associated with hosting on premises is that all of the organization’s hosting costs are capital expenditures. Here the Cloud return potential is clear: in the Cloud, costs are completely operational (OPEX) and pay-as-you- go.
- Asset Utilization: Transitioning from an on-premises model to a cloud-based model allows enterprises to more efficiently utilize the IT infrastructure available on-site.When an organization is approaching full capacity with its existing hardware, the decision to move to the cloud can mean millions of dollars in cost avoidance.
- Power and Cooling: In allowing the organization to use its existing infrastructure more efficiently, and in reducing the need for new capacity, the cloud model can significantly reduce the costs associated with powering and cooling an enterprise’s data center.
Part 2 – The Cost of Cloud…
Article By Shreekanth Joshi
Associate Vice President, Practice Head for SaaS and Cloud /Persistent Systems