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July 30, 2010 • Vol.32 Issue 16
Page(s) 28 in print issue

Calculating Cloud ROI
Determine If A Move To The Cloud Will Be Worth It In The Long Run

Key Points

• Start with questions about what the cloud provider will charge, whether it’s a regular fee assessed monthly or quarterly or a usage fee based on transactions, users, or other measures.

• Continue with questions about what costs you can avoid by moving to the cloud: hardware costs, software costs, operational costs, and financial costs.

• Remember to consider exactly what the cloud provider is offering and to be sure that its SLA meets your needs for security, uptime, and other considerations.

You can’t swing a CAT 5 cable these days without hitting a cloud provider who says that you—yes, you!—can realize significant ROI by migrating to the cloud. And companies both small and large are saving money and avoiding future costs by running some of their functions on somebody else’s hardware. But knowing that other organizations are running around with wads of newfound cash doesn’t mean that you should run right out and start migrating everything to the cloud.

Instead, a careful ROI analysis will help you to figure out what, if anything, you should take to the cloud. Giving careful consideration to the following issues will help you to know exactly what you would spend, what you’ll get for your budget dollars, and whether what you save will really justify the move.

Sticker Price

Obviously, the first thing you have to ask is how much a cloud provider will charge you. Fortunately, this is often a straightforward cost; cloud providers tend to charge monthly, quarterly, or annual fees for as long as you have your application or applications in the cloud. Those fees may depend on your usage. For example, for ecommerce applications, the fees may be charged on a per-transaction basis. For others, the fee may depend on how many storage records you store or how many users you’re managing.

“The cost is usually straightforward, and there aren’t typically hidden costs,” explains Alexander Pasik, CIO of the IEEE (Institute of Electrical and Electronics Engineers; But costs don’t have to be hidden for you to fail to consider them. Part of your ROI analysis has to include whether you have sufficient bandwidth to handle accessing your application in the cloud; a higher cost for bandwidth has to go into your cost calculation.

You also have to take into account what kind of SLA you need from the cloud provider. If the application you’re considering is business-critical, then you need a way to monitor and confirm the performance of that application in the cloud. That means an SLA with the uptime you need and a way to track application performance metrics. “In a shared cloud environment, you don’t know what else is on the same server as your application,” says Lynda Stadtmueller, senior research analyst for Stratecast, a division of Frost & Sullivan. “If other applications on the same server have peak times at the same time as yours, it might have an impact on performance. So you need to make sure you know how you’re covered with SLAs and what kind of reporting or visibility they offer to see how applications are performing.”

Finally, you have to consider security matters. Although many organizations worry about security in the cloud, the physical security that cloud providers can offer actually often exceeds what many SMEs can provide for themselves. But your specific needs for security may dictate higher costs. “Cloud providers can offer high levels of physical security, but it’s usually up to the business to ensure that the application is protected from data loss or leakage, unauthorized access, denial of service, and other security issues,” Stadtmueller says. “This can be done through the cloud provider, through separate software, or [via] separate managed security services.”

Saving Grace

The next question is: What’s the cost of not going to the cloud? The draw of the cloud is everything that the provider does for you instead of doing it yourself. Aninda Bose, head of strategic marketing at NIIT Technologies (, suggests several categories of costs that matter when they could be taken over by a cloud provider: hardware, software, licenses, any client software you have to have installed on desktops or PCs, and storage costs, to name a few. The operational cost of maintaining those things and the cost of capital to finance them has to be taken into account, as well. “Any IT professional can do a clean calculation of the cost of maintaining a present application in-house vs. moving it to the cloud,” Bose says.

There are other costs you’ll be avoiding, as well. Maintenance, incremental upgrades, and support are usually part of the cloud provider’s package. And by definition, so are the power and cooling costs that your organization shoulders when the application is on-premises. If moving to the cloud means decommissioning or not having to buy a server, part of your savings will be the power, cooling, and other maintenance costs that you avoid.

Harder to quantify are headcount questions. Pasik notes that interest in moving to the cloud is often offset by concerns about what happens to existing IT staff. “If you can do a head count reduction, you do realize savings. But even if you don’t, the savings are often still there in the long term because of the time liberated,” he says. “The IT staff can be focused on other tasks that wouldn’t have been done otherwise, and by moving to the cloud, you might actually be able to avoid a head count increase.”

Even harder to quantify are missed opportunities. But you can consider what you would be able to do in the cloud that you can’t in your own infrastructure. “Are you getting all you can in terms of sales, or do you have a large shopping cart abandon rate because the server doesn’t serve up the application as quickly as need be?” says Stadtmueller. “A lot of small companies don’t have the ability to measure that kind of thing, but it’s a cost to them that could be mitigated with the right cloud provider.”

In the end, you will come up with some figure of how much you’ll save or avoid if you move something to the cloud. At that point, it’s up to the organization to decide whether those savings are worth the effort of migrating. But Bose suggests a rule of thumb: “If [the savings are] less than 15%, the question probably needs a lot more discussion,” he says. “If it’s less than 10%, it probably doesn’t make sense.”

by Holly Dolezalek

After ROI

Whether or not moving to the cloud has a positive financial ROI is a calculation that might be simple or might be complex. But considerations other than ROI can help you decide whether the cloud is right for you.

Alexander Pasik is the CIO of the IEEE (Institute of Electrical and Electronics Engineers; But before that, he was the CIO for the Guggenheim Museum in New York. “When I first joined the organization, there was no SaaS use at all,” Pasik says. “By the time I left, about 70% of core applications were provided by third parties. And it wasn’t just ROI that made the difference.”

Moving to the cloud helped Pasik and his team to shift the priorities of IT from managing the infrastructure of an application to focusing on working more closely with business to identify better solutions for the organization. “The role of IT doesn’t go away,” he says. “It changes to figuring out how to leverage technology to improve the business and how to make IT more of a partner with the business, even if implementations of what they decide on aren’t done internally.”
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