Whenever you talk to someone who has bought a used car you always get to hear different variations of the same story.
It goes like this:
When they first bought the car, it was in perfect running condition, with a few dings and scratches on the body.
But after a few months the transmission, engine, electrical systems, brakes, and tires will start acting up and by the time two years are up, the cost savings on the used car would be obliterated by garage bills.
You would be left holding the same sour bill of goods if you move to the cloud without doing due diligence. For, as attractive as the purported benefits of cloud are, it won’t be sustainable unless you are clear on the ROI and TCO.
Your cloud is not my cloud
Clouds come in different hues. A vendor like Amazon has different offerings for different businesses, and it’s up to you to find out what kind of cloud is best suited for your needs
Without going into specifics, you can either opt for SaaS, IaaS or PaaS based offerings when you are moving to the cloud. You can even opt for a mix and a match.
Then there are private clouds, public clouds and hybrid clouds, each of which is different in terms of features and costs.
It can be confusing to get a handle on TCO and ROI for cloud. It’s only when you can predict your infrastructure requirements based on your business goals that you will get a clearer picture.
How legacy applications complicate ROI calculations
The ROI calculation gets murkier if you have legacy applications hosted on premise.
In such cases you will have to factor in the cost of migrating applications to the cloud, and this might involve retooling them from ground up, or for even scrapping obsolete applications and building newer, cloud compatible ones.
One example of how this is being done comes from GE.
The conglomerate has almost 9000 legacy applications hosted in 34 data centers.
It aims to cut down that number to 5, and is evaluating different vendors by moving select applications to the cloud and then gathering data to fix baseline costs.
For evaluating the ROI for a cloud provider GE considers factors like:
• Cost per cloud instance.
• Solid state devices over traditional hard disk drives.
• Input/ Output operations per second (IOPS).
• Bandwidth between application to application and application to storage.
Calculating cloud ROI and TCO
There is no single formula to calculate ROI, just is there is no one way to design a website. But there are some numbers which can indicate whether you are moving in the right direction. For instance, a survey of around 400 companies by Information Week in 2014 that looked into cloud ROI found that:
• 50% of respondents will take 3 to 5 years to calculate ROI.
• 30% of respondents will take 2 years or less.
• Cost savings is the most important for only 20% of respondents, while 70% respondents feel it’s somewhat important.
• At least 50% of the respondents measure ROI against initial capital costs, operational expenses and future capital costs.
It’s trivial to go online and look up ROI and TCO calculators. The AWS TCO calculator, for example, looks at factors like location and number of CPU cores, virtual machines, and amount of RAM to spit out a number.
But these numbers don’t tell the whole story.
For really determining the ROI of the cloud, you will also have to consider that the cloud:
• Makes you more agile and efficient as there is no infrastructure procurement issue, letting you scale up from 5 to 1000 servers with the click of a mouse.
• Shortens the time to market and time to innovation as infrastructure bottlenecks that prevent you from deploying and testing new features are eliminated.
• Can radically change your business model, for example, by letting you move from a licensed download model to a pay as you go SaaS offering.
Even if the transition to the cloud gets ruled out because the before and after numbers for hardware and software costs don’t add up, hard to quantify benefits like the above can make the move a no-brainer.
This makes the ROI calculation a lot harder.
Calculating ROI on a case by case basis
Can you, for example, estimate whether shorter time to market means more value to your bottom line? If you are an app developer, the answer would be yes, but usually not much if you are a manufacturer.
Would it make business sense for you to fail fast and release prototypes by spending a few hundred dollars more in infrastructure costs? Again, that depends on your industry.
You would also have to weigh the tradeoffs associated with the cloud.
If you are dealing with really sensitive data would you keep your on premise set up with all the associated expenses or move to a private cloud? If yes, which one?
The true ROI of cloud cannot be predicted before the move. It’s only based on certain KPIs that you can determine, after some time, whether the move was worth it. These KPIs depend on the business you are in, and we will talk about them in a future post.