How IT Costs Change as Businesses Adopt the Cloud (Capital vs. Operational Expenditures)

Costs of Moving to the Cloud

There have been of number of studies in past years that address the cost composition of various assets types within IT. Traditional IT focused on capital assets and operational expenses. Capital assets were typically the physical infrastructure found both in the data center (servers, storage, network routers/switches/firewall, purchased software), and the end-user hardware (desktops, notebooks, tablets, printers, etc.) Added to capital assets were operational expenses such as software subscriptions, maintenance plans, power and cooling, labor, etc.

These studies were based on the then-accepted model of owning/leasing the tangible assets and either having a data center or co-locating assets at a third-party facility.

Over the last half dozen years, many organizations are shifting to a hybrid model where they own certain physical technologies and continue to host the hardware themselves and couple it with Cloud services. The Total Cost of Ownership (TCO) for the physical hardware is still calculated as it always has been. The inputs for the calculation have basically been

  • Anticipated Life of the Asset
    • Useful life of the asset
    • Replacement or Upgrade costs
    • Decommissioning expenses
  • Total Asset Cost
    • Hardware and software costs
    • Installation and Integration
    • Any purchased research
    • Warranties, Licenses, and Maintenance plans
    • Migration expenses
  • Operational Expenses
    • Facilities Cost (floor space, electricity, cooling, backup power)
    • Testing/validation
    • Patch management
    • Anticipated downtime, failure, and outage expenses
    • Backup and recovery
    • Staff Training
    • IT personnel
    • Insurance
    • Regulatory compliance

The newer variable having the most profound impact on IT Cost is the “Cloud” portion of the Hybrid model. Almost every client we have is shifting from physical IT investments to Cloud/Subscription services. Every company has a different view of what technologies they can shift to the cloud based on their perceived risk management and mission-critical resources, but they’re all making incremental moves. (There’s a long laundry list of benefits to subscription services, but that’s not the purpose of this specific article.)

The reason behind each asset shifting to the cloud is complicated, and the decision-making processes are detailed and well-thought out, but the underlying reasons are always based on perceived cost and agility. Organizations are figuring out that an Operational cost model has the potential to save them money.

Understanding the Cost of Ownership necessitates looking at costs in a different way. For tangible assets, TCO had a useful life. Shifting IT resources to a subscription-based service really alters that view. A specific subscription service (e.g., a Platform as a Service resource) is constantly being improved and has the added benefit of scalability (up or down). A physical server may be planned for five years of useful life; whereas the evolution of a cloud resource’s useful life is only limited by how long an organization needs that type of service. It’s constantly improving and delivering more value.

So how do you look at Cost of Ownership for the cloud or subscription services? It’s about adding those services to the Operational Cost column. We’re not making large asset purchases and depreciating the cost. We now pay as we go. Getting your arms around a Cloud-based TCO can be difficult (especially for enterprises).

Basically, your Cloud Cost of Ownership includes

  • Monthly subscription cost
    • Per user
    • Per resource
    • Note: It’s critical to factor in your anticipated changes in demand and headcount
  • One-time enrollment or deployment fees
  • Training expenses
  • Additional bandwidth/provision expenses (internet)
  • IT personnel and training
  • Regulatory Compliance

It’s critical that you offset your cloud costs with how much you’re NOT spending on future capital expenses. For example, if you replace your Exchange Servers with Microsoft Office 365, you’re not buying new servers and experiencing all the capital and operational expenses associated with them. When you backup your data in the cloud, you’re not paying for physical backup equipment or annual hardware maintenance contracts. When you build a Total Cost model, don’t forget to subtract the cost and support of the resources being replaced.

A major intangible benefit unrelated to cost is the fact that IT can change and react much quicker–and more effectively–to changes in business. Putting a value or cost on this business agility is difficult, but it is one of the primary drivers for so many organizations moving to cloud services.

Did you notice that there’s a difference in the operational expenses between tangible hardware and cloud services? Let’s touch on a few of the major changes or shifts that can occur when an organization moves to the cloud.

All these shifts can contribute to reduced operational cost.

Business Agility

Cloud services can be enabled and disabled rapidly. For example, we can add or reduce headcount, turn up or down servers, and build test environments using a portal in just a few minutes.

Gone are the days where we must order equipment, build it, and integrate it into the data center architecture. That could take weeks to months and force us to overbuild because of the “stair-step” incremental aspect of adding physical hardware. What’s the value to an organization to effect change that rapidly?

Technical Capabilities

Your IT staff will not need the deep knowledge that came from keeping complex hardware running. IT architects are expensive. System Administrators running cloud applications are not as expensive a resource. The composition of your IT headcount can be adjusted.

Outsourcing Services

Because you’re shifting resources to the cloud, it may be more cost effective to outsource support and expertise. Managed services providers have a broad wealth of knowledge and are purpose-built to support cloud technologies, more scalable than Full-Time Equivalents, and accessible 24×7. You’re not paying for employees, vacations, limited skills, benefits, etc.

Patch/Upgrade Management

Patch management and upgrades are the responsibility of the Cloud provider. This makes it easier to avoid downtime, bugs, and security vulnerabilities.

Facilities

Much like we saw a massive reduction in facility costs when virtualization and SAN were adopted, we’re seeing an equally profound reduction in facility costs when IT is shifted to the Cloud. Big purpose-built rooms with custom racks, cooling, and power go away. You may still need a small data center or co-location space for resources that aren’t destined for the cloud, but those expenses are a faction of the original.

Regulatory Compliance

Many cloud providers, such as Microsoft, are addressing regulatory compliance in their offerings. GDPR, HIPAA, PCI and other regulatory requirements may be a feature of a cloud offering. When they are, your compliance costs are reduced.

Backup and Recovery

Depending on the cloud service, your backup and recovery features are either embedded or an option from the service provider.

A Changing Landscape

Cloud and subscription services are forcing us to change how we think about IT costs. The CFO needs to adopt a fresh look when weighing the costs and benefits of a Hybrid IT model. If you apply the TCO models of old, you’re going to be missing a complete view on whether an IT service should be moved to the Cloud.

Tim Krueger, PEI

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