The Cost of Cloud: 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.

Productivity Enhancement

Productivity enhancements are more subjective in nature than direct cost savings; they are dependent on the type of business and the current organizational set up.

Application Development

The notion of Platform as a Service (PaaS) is to extract the common set of services as a platform and enable the cloud developer to become more productive and agile. The set of services provided by the platform can be categorized as

  • Middleware – Identity, authentication, worlflow, mashup

  • Computation – logic execution, messaging, transactions

  • Data Layer – Relational data, large data

Our experience indicates that 25-50% less effort is required if the application were to be developed using one of the available PaaS platforms. This assumes that the UI required from an enterprise point of view is fairly standardized, and the relevant tools for data modeling are used from the PaaS toolkit.

Maintenance

In a legacy scenario, there are several applications that need to scale over time, however they have an inherent overhead of having to rewrite the whole code base in order to do so. The other alternative is to make use of additional infrastructure; however this is not cost effective. There are tools that work with the existing code base and make use of caching, protocol tuning and dynamic routing. There are several categories of previous generation or legacy applications that are maintained as part of the overall enterprise application portfolio:

  • Mainframe

  • Oracle Forms

  • Lotus Notes

  • Power Builder

  • VB Access

  • Delphi

  • COBOL

While the maintenance costs on the legacy setup increases with time, it is possible to modernize these sets of applications towards a more standard PaaS set of applications. This can reduce the maintenance and time/ labor costs because of normalization of the setup post migration.

Infrastructure

Standard stacks imply that one can optimize deployment and ongoing administration of resources. For example, if the stack is in open source, then utilities from companies such as Groundworks Open Source could help. Often, web applications follow a standard pattern in terms of deployment. If these can be standardized, standard admin utility scripts and automation would provide benefits.

Revenue Transformation

Revenue transformation is the third and potentially largest benefit of moving to the cloud. Revenue transformation can be achieved in two ways:

  • Savings from cost reduction and productivity enhancement yield can be reinvested into revenue generating activities
  • Cloud infrastructure itself allows generation of additional revenue at a lower cost

Data Sharing

Application siloes can trap important business data and make it inaccessible without the application shell. Protocols like OData allow for key information to be shared with associated contextual metadata. Implementing support for such data sharing mechanisms will allow applications to integrate more elegantly without the additional cost of legacy approaches of ETL and data integration. PaaS based messaging can enable this seamlessly.

Mobility

With mobile becoming the main channel of interaction with the end users, availability of a mobile interface is extremely crucial to expanding revenue opportunities. Leveraging a PaaS based mobile enablement framework that can:

  • Create a cross mobile platform application without additional recoding per device category

  • Increase user productivity in operations support, sales, etc.

  • Utilize data sharing mechanisms above to enable key data to reach the end mile on mobile side

Social Enterprise

Enterprises need to manage interactions with their customers as well as be aware of how their customers are interacting with one another.

Leveraging PaaS extentions allows applications that enable the social enterprise to be built easily. Increased collaboration amongst the enterprise can have a 30-40% productivity benefit. Integrating social networking can cut down on customer feedback cycle by approximately 40%.

Capability Store

Instead of an Application Store, the Capability Store provides several enterprise capabilities and services that are candidates to be shared in the context of partner or community ecosystem. The ready existence of PaaS and enterprise cloud allows sharing in a flexible manner thereby enabling a completely new revenue stream for enterprises.

The Cost of Cloud

Clearly, there is great return potential associated with Cloud-based model. However, transition to Cloud-based model from an on-premise model is not without cost.

  • Direct Ongoing Cloud Costs

While the cost savings associated with a cloud-based model over an on-premises model are clearly substantial, there are two areas where an IT organization will face new costs associated with Cloud: those associated with the Cloud platform (~5%) and those associated with Cloud databases (~4%). However, these are operational expenditures – pay-as-you-go costs, that depend entirely on the business’ demand.

  • On-time Migration Costs

In addition to direct costs associated with transitioning to the cloud, migration to the cloud represents a considerable change to the way IT operates in both infrastructure and staff. In the short run, enterprises may experience disruption to business continuity and costs related to change management, integration, and incompatibilities among solutions.

  • Risk

Risk management can be a source of savings through Cloud; automation and standardization can reduce human error and additional layers of security can be more easily added in the Cloud. However there are risks associated with Cloud that an enterprise doesn’t face with the on-premises model.

  • Incompatibility/Uptime issues

  • Security/Compliance

  • Quantifying Risk

Conclusion

Organizations have traditionally seen the potential return from cloud investment as generated by cost savings: labor efficiencies, cost avoidance on the software side, and the savings that come from turning capital expenditures on hosting and hardware into pay-as-you-go operational expenditures. However, benefits from productivity improvements and revenue transformation opportunities are why the cloud is viewed as truly transformational.

In order for IT executives to ensure that they achieve ROI of Cloud in their organization, a thorough assessment of internal applications suitability for the cloud must be done. In addition, it is essential that the IT department works with the business side closely to determine what potential revenue opportunities are possible from moving to the cloud. It is only then that the true long term benefit of cloud can be realized.

By Shreekanth Joshi

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