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August 11, 2015

Don’t Dive In: Knowing the Costs of the Cloud

Zahl Limbuwala, CEO, Romonet highlights the need for businesses to understand the costs of the cloud before making the move.

By Cbr Rolling Blog

The cloud has cemented its place as one of the major technology trends of the 21st century. From AWS to SalesForce to Netflix, from large enterprises to home consumers, we are all seeing the benefits of jumping to cloud-based solutions. Naturally, when adopting IT as a service, organisations have a number of concerns.

For example, there will be questions of how data security is guaranteed; who retains ultimate control; how the service will be managed; and whether it will match the organisation’s compliance obligations. Yet surprisingly, especially for organisations as financially sensitive as modern enterprises, there is far less attention paid to cost.

Why make the move?

The primary reason for a move to the cloud is, nine times out of ten, cost. Quite simply, the business believes that switching to cloud-based services will save money. This involves a large number of assumptions. For instance, businesses will assume that the costs of energy, infrastructure, management and skills can be passed on to the cloud provider, in return for fixed, predictable costs. However, the most common assumption made is that the cloud is automatically the more cost-effective option.

This means that organisations will put a lot of work into investigating cloud service providers; comparing SLAs, jurisdiction and, yes, cost without stopping to consider whether they know for sure that cloud is definitely the most cost-effective option for the business.

Know your house:

Again, the majority of organisations cannot say for sure that adopting cloud services will result in savings because they don’t know how much those services cost to run in-house. At best, the organisation might know the total cost of IT infrastructure, software and skills, and be able to roughly split that between the services provided. The decision to move to the cloud will therefore be based on this estimate; yet this ignores the fact both that the real costs are far more complex and that, by moving services to the cloud, you are not removing costs, but changing them.

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For instance, an organisation with its CRM service presently hosted in a data centre may decide to move CRM to the cloud. Comparing the cost of software licensing, data centre infrastructure and management, it identifies the cloud provider that can offer the biggest saving and migrates the service there.

However, the infrastructure and resources that supported CRM in-house don’t simply vanish. The business now has a part-empty data centre, that still consumes energy at almost exactly the same rate as before, but which provides less value to the business. Taking this into account, the actual saving the move to the cloud provides is miniscule; and may even end up costing more than keeping IT in-house.

First steps:

Before moving services to the cloud, or indeed before embarking on any major IT project, an organisation needs to understand its in-house costs. First, it should know precisely what it spends on every part of its IT infrastructure, where those costs come from and, most importantly, how they change when different factors are modified.

For instance, if a data centre cooling system is switched off, would costs fall due to removing the system’s energy use? Would they rise because temperature rises increase the need for maintenance? Or would they stay static but have impact elsewhere in the IT environment?

Once it has this understanding, the organisation needs to calculate the costs for individual services in the same manner. In the example of the CRM service mentioned above, what proportion of its costs come from the data centre? How is that divided between computing hardware, energy and the data centre’s capital expenditure? Ultimately, how much does it cost the business to perform a single customer interaction?

Once you have this level of insight, you can begin to compare like with like when looking at in-house and cloud IT costs. However, ideally the business should go one further, and also predict the effect that moving one service to the cloud will have on every other service. For example, if the CRM service moves to the cloud, the empty data centre space will mean other services will, in turn, cost more as they each take up a greater proportion of data centre cost; potentially invalidating the expected saving.

Never say never:

This isn’t to say that the cloud will always come out worst in such comparisons. There’s every chance it will prove to be the most cost-effective action, meaning the IT department can support the move to the cloud in complete confidence. Similarly, if the organisation plans to use newly vacated data centre space for another purpose; or is at the point of downsizing, consolidating or refreshing its IT infrastructure, this should be included in any calculations and might make the move to the cloud more attractive. It may be that, even with minimal savings or even extra costs, the organisation prefers the cloud business model.

Regardless of the decision the business makes, the cloud isn’t always the best option, or the worst. It is simply another tool available to the business and should be chosen based on firm knowledge of what will bring the greatest benefit, not best guesses and assumptions.

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