Calculating the ROI on Cloud

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

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

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.

Hosting

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

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Comments

  1. Michael W Mascia says

    The article focuses on the server/application specific costs but fails to include a very heavy cost burden to a company when using cloud services- network connectivity. Everyone simply assumes the Public Internet will be used for transport and there are virtually no costs. Most enterprises, however will not utilize (to any significant degree) cloud services if the only transport option is Public Internet. Enterprises typically want secure connectivity that affords some level of visibility and control. Dedicated VPN, MPLS connectivity is most often the response. The costs of such connectivity to an enterprise (and the cloud provider) can be extraordinary. Example: on avg dedicated VPN capability from a location on east coast to a cloud provider datacenter in SanJose is = $9k/month and for 5 cloud apps = $40k/month. These are ranges because of the dependency on bandwidth reqs but can be higher. Other costs that must also be included are, lost time to market (coordinating configuration between the two companies and telcos, getting long term carrier contract in place or added to existing contract, etc.) can take upwards of 120days- that could be lost revenue (it is to the cloud provider), costs for ckts- dedicated pipe and local loops, additional hw, people resources to configure/manage, colo at provider’s site for customer devices such as WAN acceleration are all costs that must be included. And let’s not forget that this type of connectivity is not on-demand which is the antithesis of the cloud. Before selecting a cloud provider, IT needs to understand whether a cloud provider can/will offer such dedicated connectivity. Many will not due so because it is a heavy cost burden for their business model as it adds a substantial cost to the provider’s side of the business.

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