Calculating the TCO (Total Cost of Ownership) of Cloud Computing

Before embarking on any cloud initiative, it’s essential for business leaders to understand and measure the potential costs involved. A frequent question that organizations ask when researching cloud computing solutions is, “What is the total cost of ownership (TCO)?” TCO is a common measuring tool for evaluating the direct and indirect costs and benefits involved with implementing a specific project. The end goal is to come up with a final “purchase price.” In order to effectively determine TCO for cloud computing, organizations must understand the true value of cloud computing technology. Following are some insights for how to evaluate the TCO of cloud initiatives.

The TCO of cloud computing is enterprise-dependent

The benefits organizations reap from using cloud computing solutions relate directly to the type of organization and the business processes it supports. For example, a healthcare organization would benefit from implementing a compliant cloud-based solution that would safeguard protected health information (PHI) while adhering to regulations prescribed by HIPAA (Health Information Portability and Accountability Act). However, the organization should weigh the benefits of this solution against the existing skills of its staff, their existing IT investments (hardware, software and facilities) and any existing regulatory requirements. This allows them to evaluate the TCO based on a holistic view of the company.

Cost savings isn’t the only factor to consider when calculating TCO

The benefits of cloud computing include hard cost savings (IT departments don’t need to invest in servers, storage, facilities, etc.)  However, organizations should also factor in the benefits of having an IT team that can react faster and more effectively to business changes and opportunities.  Implementing cloud computing solutions allows organizations to shift day-to-day responsibilities for maintaining IT operations to an experienced cloud provider including data storage and administration, security and availability, compliance, etc. This frees up the time and resources of an organization’s internal IT team to focus on more strategic initiatives. Other benefits of cloud-based solutions to factor include the following.

  • Faster deployment and productivity

    • Organizations are up and running in less time as they have no need to acquire, install and test infrastructure.
    • Applications can be accessed from anywhere, at any time and through any device.
  • Streamlined use and management

    • Most cloud-based solutions provide web-based, self-service access to business solutions.
    • The cloud provider manages and updates the infrastructure, eliminating the need for organizations to do so.
  • Increased flexibility

    • Organizations can expand or contract services as their needs change.
    • Cloud providers are developing solutions based on an increasingly mobile workforce and the adoption of BYOD (Bring Your Own Device) policies.

Define your cloud TCO model

If cloud TCO models are enterprise-dependent, then organizations should utilize some of their own metrics to define their model. One approach is to draw up a list of attributes for the model and list the degree to which they are important to the organization.  While not an exhaustive list, following are some attributes to consider.

Existing infrastructure

Organizations need to consider their existing IT assets including data centers, servers and software. Before replacing them with cloud-based solutions, they should factor in the costs to replace or reuse these assets.

Existing skill sets

Moving to cloud-based platforms often requires skills that are  different from what an organization already has in place. Organizations need to factor in the cost to transition to these new skill sets – whether it involves training existing personnel or hiring additional human resources to bridge the talent gap.

Service level agreements (SLAs) and contract terms

By leveraging a cloud computing solution, organizations give up some control to the cloud provider. Some questions to ask a cloud provider include the following.

  • Does the contract require an upfront long-term commitment?
  • How easy is it to change the number of users? What penalties or per-user price charges are associated with these changes?
  • Does the SLA provide an uptime guarantee of at least 99.999%? What penalties are imposed on the vendor if there is an outage?
  • What options and penalties does the vendor provide if an organization terminates the service? If an organization terminates the contract, how do they get their data back.

Application customization requirements

Most SaaS (Software-as-a-Service) applications are customized via configuration versus source code customization. Therefore organizations should aim for an 80/20 rule. They should ask, “Can the cloud-based solution get us 80% of what we need? How much will it cost to add any necessary customization?”

Value of shifting from a CapEx to OpEx model

Adopting cloud-based solutions reduces or eliminates traditional capital expenditures (CapEx) in favor of operational expenditures (OpEx). Organizations often prefer OpEx over CapEx since all payments during the year count against the income statement and do not directly affect their balance sheet.

Considering a move to the cloud? Take the time to evaluate and understand the true value of it. While cost and budgets are key considerations, they are only part of the TCO equation. Download our white paper, Cloud Computing Opportunities for Mid-market Companies, for more information you can use to create your own cloud computing TCO model.

Cloud Computing Opportunities for Mid-market Companies

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