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Across papers and articles, cost-efficiency remains the number one reason for cloud migration. But is it true? Do cloud platforms help companies cut costs? The answer to this question depends on how you move to the cloud, which resources and services you opt for, and how you set up the environment. However, there is a way to gain control over the cloud costs, and it’s the cloud total cost of ownership (TCO). This analysis encompasses a long range of costs and expenses that culminate in the cloud TCO costs that you can use to assess the transition.
In this article, we’ll discuss the TCO assessment for cloud migration, take a look at the benefits of running this analysis, and examine factors that influence it. Additionally, we’ll explore how to calculate TCO and compare the total cost of ownership cloud vs on-premise.
In cloud computing, the total cost of ownership (TCO) is the summation of expenses associated with provisioning, setting up, operating, and acquiring cloud infrastructure. The main goal of conducting this calculation is to gauge whether cloud migration is financially viable and reasonable for a given company to follow through. The cloud TCO analysis allows businesses to compare different cloud providers, assess cloud return on investment (ROI), and weigh cloud costs against the expenses related to current on-premise infrastructure.
The issue with calculating cloud TCO is its multifacetedness: the analysis is dependent on a variety of factors and attributes. Unfortunately, the calculation goes beyond the simple one-to-one comparison between the services and involves more than the initial purchase price of hardware and tools.
Cloud total cost of ownership can be broken down into two categories, namely, direct and indirect costs. Direct costs, also known as tangible costs, are expenses that are on the surface and can be easily integrated into the calculation. Indirect costs, or intangible costs, are a lot more complex and require a better understanding of the company’s IT infrastructure and cloud services in general. Also referred to as hidden costs, these expenses are hard to exactly pinpoint as they describe potential financial losses during downtime, costs of not moving to the cloud, security risks, etc.
Although both TCO and ROI in cloud computing are essential parts of decision making, they serve different purposes. ROI stands for return on investment and calculates how well the investment is performing or going to perform. It compares the sum of money you’ve invested in the project with the value that the project has generated.
While ROI focuses on performance, TCO measures costs. The cloud total cost of ownership is also more comprehensive, taking into account hidden costs, opportunity and innovation costs, etc. Additionally, TCO is used to evaluate the upsides and downsides of a certain purchase, while ROI is designed to capture benefits.
Why should business leaders execute a cloud total cost of ownership analysis? In this part, we’ll discuss the core benefits of calculating cloud total costs to help you understand the full scope of the TCO analysis.
The main goal behind calculating cloud TCO is to develop a ground for strategic decision making. In the abundance of deployment options available for businesses, including public, private, multi-cloud, on-premise, and their combinations, selecting the right strategy for your organization can’t be done without concrete numbers. The analysis enables companies to prioritize investments and make technological choices that align with their objectives and financial capabilities.
As a consequence, opting for the most effective strategy will improve your business agility. This deep assessment of the cloud infrastructure offers businesses a cloud transformation strategy roadmap that they can rely on to make business decisions in the future. For example, when launching a new product, companies can run the analysis to gauge the impact of their new creation on the goals and revenue before investing money in a potentially unfeasible idea.
An in-depth examination of cloud costs also implies a more detailed look into the company’s current cloud usage. During the analysis, you’ll have to challenge your existing infrastructure costs, uncover unused or underused instances and idle resources, and address overprovisioned storage. This step will help you better understand your cloud infrastructure and optimize its usage to remove inefficiencies and redundancies. Not only will this calculation reduce cloud TCO, but it will also allow for a better overall performance.
Another major benefit of running a cloud TCO analysis is financial forecasting and planning. Since the calculation encompasses both real-time and historical data, the examination allows organizations to anticipate expenses and plan accordingly. Knowing how much you’ll be expected to pay in the next quarter helps business leaders to take proactive measures and avoid devastating losses.
An additional factor that goes into cost savings is the heightened visibility that the cost analysis of cloud services provides. During the calculation, the overall expenditure is broken down into smaller components, such as compute, licences, storage costs, etc. Creating and maintaining a clear overview of what exactly you’re paying for increases transparency for your stakeholders and investors, making you a more trustworthy partner.
Finally, cloud costs can be minimized by promoting a stronger accountability culture. The elevated transparency that the cloud TCO analysis provides helps organizations tie cloud spending to different departments and teams. This way, the assigned employees have to carefully monitor their monthly cloud costs to ensure they stay within the budget. This shared accountability model allows companies to redistribute the cloud total cost of ownership among the teams, making the cost tracking less burdensome and overwhelming.
As part of calculating cloud TCO, companies assess the potential return on investment (ROI) that cloud services will aid in generating. Although cloud migration goes beyond simply cutting expenses, cost savings do play a role in decision making. Cloud total cost of ownership is a way for businesses to ensure that their cloud computing costs don’t exceed their future earnings.
Taking control over your risks is another major element of cloud TCO. Conducting an in-depth analysis of your cloud infrastructure, including on-demand resources, paves the way for minimizing and even eliminating common risks. A TCO assessment allows businesses to acknowledge and monitor various anomalies and inefficiencies in cloud services and manage them before they spiral out of control.
When you’re searching for a cloud provider, coming to the negotiating table with a well-executed, deep analysis of the cloud total cost of ownership will give you a significant leg-up. The TCO insights that you’ll identify in the course of the examination will help you to get better pricing and optimal cloud services. Well-informed customers are harder to trick into buying something they don’t need or signing contracts with bad deals.
The cloud total cost of ownership is a complex and broad analysis that includes a plethora of factors. In this section, we’ll take a look at the most critical factors that will affect your calculation and explore why they matter in the examination.
The costs of cloud services are heavily dependent on the type of business, such as small, medium, and large. Since smaller companies and startups handle fewer resources and less complex cloud solutions, their total costs are significantly lower than those of larger enterprises. Dealing with complex storage options, higher requirements for compute and networking resources, and a greater need for customization puts larger companies in a different expense bracket.
Business domain can also impact the cloud costs analysis, with heavily regulated industries like energy and healthcare demanding more advanced security tools, which, in turn, increases TCO. Cybersecurity aside, some companies are bound by GDPR laws that force them to host their data in European countries, resulting in more expensive multi-cloud environments.
Moving an on-premise application system to the cloud requires a team of cloud specialists that can prepare and migrate your digital assets to the cloud. Most of the time, companies acquire additional workforces to execute the transition, which comes at a cost. But even after the cloud migration services are complete, the newly established infrastructure needs to be monitored and maintained, requiring a team of in-house or external cloud experts.
Particularly to address cloud data security challenges, businesses are in need of cloud consulting services from dedicated specialists who will help them optimize costs, ensure a high level of data protection, and evaluate cloud providers.
Your choice of pricing model is also an important consideration when calculating cloud TCO. While pay-as-you-go (or on-demand pricing) has become the default option that all vendors promote, you might unlock even more benefits from other models. For example, the reserved instances model offers significant discounts for companies with a commitment of one to five years. Not to mention that these models can be combined to create a hybrid plan that works for your organization and helps you minimize cloud investments.
Expenses associated with cloud migration go beyond simply data transfer fees and encompass setup costs, integration costs, and more. Additionally, you should take into account the salaries of consultants and third-party agencies that will accompany you on your cloud-driven digital transformation journey. On top of that, cloud migration costs involve software and licensing, potential downtime, post-migration, refactoring, rearchitecting, etc.. Below, let’s examine the most vital expenses linked to cloud migration.
The on-premise infrastructure requires significant initial capital expenditures, including data center and hardware, which creates a striking barrier for smaller companies. At the same time, cloud providers offer more flexible models that distribute costs and allow startups to utilize cloud services without major investments from day one.
Operating costs comprise ongoing cloud computing spending and can vary depending on the chosen cloud provider. These fees include compute usage, storage, networking resources, consulting, maintenance costs, and more.
Disposal costs arise when organizations discard their legacy equipment and software in lieu of the cloud environment. For instance, some hardware can’t simply be thrown away as it requires special utilization services, which incur additional costs.
Another cost that you need to consider in your cloud TCO model is sunk costs. These expenses come about when businesses cancel services and equipment that are no longer in use after the migration. While some tools can be sold, the price of reselling is usually lower than the initial purchase price, adding to the capital expenditures.
How a company decides to move to the cloud can also impact the overall expenditure. While rehosting and replatforming are the most affordable types of cloud migration, refactoring or rebuilding the app from scratch comes at a much higher price tag. Sometimes, it might even be cheaper to discard your applications and rely on cloud application development services or Software as a Service (SaaS) solutions.
Cloud adoption is not complete without a robust cybersecurity plan following cloud security best practices to protect your assets from hackers, insider traders, and non-compliance. Modern cloud service providers offer numerous security practices and solutions, such as multi-factor authentication, data encryption, permission control, and others. In addition to cloud security protocols, businesses require regular cloud audits to ensure their data is safe and adheres to privacy laws.
The geolocation and physical infrastructure of the cloud provider can play a role in monthly cloud costs. For example, if the data centers are located far from the customers, this may lead to delays and latency, which will affect data transfer costs and negatively impact user experience. To mitigate customer dissatisfaction, companies deploy resources in multiple regions, increasing the cloud costs even more. These include cross-region data transfer costs, additional compute instances, higher network bandwidth, and duplicated storage.
Before we dive into cloud vs on-premise cost comparison, let’s explore a concise guide on how to calculate cloud TCO. While calculating on-premise vs cloud TCO is a complex process involving dozens of factors, it’s important to learn at least the most basic ones.
The first step involves noting down your current setup and assessing the costs of each component of the infrastructure:
This part of the cloud TCO analysis focuses on infrastructure costs, which are usually comprised of tangible costs. Intangible, or hidden, expenses will be added to the calculation in later steps.
The exact total costs of cloud services are contingent on the provider itself and the offering that you choose. For example, the AWS cloud total cost of ownership can be estimated in a pricing calculator that you can find on the website. In this step, we’ll identify the main factors that will help you assess the approximate cloud costs.
A big chunk of migration costs depends on how you choose to move your data to the cloud. For example, rehosting is a strategy that doesn’t require any major changes and is considered the most affordable migration strategy. If your systems need more changes to be compatible with the cloud environment, you can opt for refactoring or replatforming, which are more invasive and come at a higher cost. Finally, replacing the application completely and starting anew will incur the biggest expenses. Additional data transfer costs that you should take into account:
Indirect costs are also hidden expenses that are more difficult to pinpoint but that can quickly snowball into a considerable sum. These costs are also included in cloud TCO and comprise the following:
Lastly, take a closer look at your calculations and compare the costs of staying on-premise with cloud costs. Generally speaking, cloud services offer lower upfront costs, democratizing the entry barrier for smaller companies, but in the long run, they may accrue larger expenses. Traditional infrastructure costs may be a bit lower each month, but you don’t get access to on-demand services that help you innovate, deploy more frequently, and protect your data.
In this part, we’ll compare the TCO calculator cloud vs on-premise and provide a breakeven analysis. First, we’ll calculate the cloud vs on-premise total cost of ownership, compare the numbers over a five-year period, and then continue with the breakeven analysis to identify the point at which the traditional environment becomes more cost-effective.
We’ll simulate a cloud vs on-premise TCO calculator with a few examples. Here, let’s take the Amazon EC2 P5 instance with eight NVIDIA H100 GPUs as an example. For on-demand pricing, this server will cost you $98.32 USD per hour, which can be reduced with reserved instances. With a one-year plan, you’ll save 21% and pay $77.43, and with a three-year reserved instance, you’ll save 45% and pay $53.95 per hour. If we extrapolate these numbers to a five-year plan, we must multiply the hourly costs by 43,800 (number of hours in a five-year period). A traditional contract will cost you $4,306,416, a one-year reserved instance – $3,391,303, and a three-year plan – $2,362,812.
Of course, this is a simplified version of calculating cloud TCO, as the analysis includes data transfer costs, storage options, compute requirements, data egress fees, and more.
For this example, let’s choose ThinkSystem SR675 V3, an equivalent to our selected cloud model. The initial costs of acquiring the server are $833,806 USD, as well as ongoing operational expenses at $0.87 per hour. If we calculate the five-year plan as we did above, you will be paying $871,912, which includes the costs of the server and $38,106 in power over five years, or 43,800 hours.
Similar to the cloud example above, the on-premise cost breakdown also involves other factors, such as data center infrastructure costs, licensing, personnel, maintenance, security, disaster recovery, and compliance.
To finalize the calculation of on-premise vs cloud TCO, let’s conduct a breakeven analysis. To find the breakeven point, or the point at which your investment has paid off, you must compare the two models:
cloud cost = $98.32 * x and on-premise cost = $0.87 * x + 833806
To calculate the breakeven point, the number of hours at which the total cost of ownership is equal to the costs of on-premise infrastructure, we must equate the two calculations.
$98.32 *x = $0.87 * x + 833806
x = 8556 hours
The derived number is equal to 11.9 months of continuous usage and represents the point at which on-premise infrastructure costs become more cost-efficient than cloud. In other words, prior to 11.9 months, cloud services are more cost-beneficial, and after, on-premise offers more cost savings.
Finally, let’s move on to the best practices to reduce your cloud bill. There is a common misconception that cloud services are almost cheaper than on-premise, but it’s clear from our calculations that it’s not necessarily true. Cloud environments can be cost-effective if you know what strategies to employ to reduce cloud TCO. Common cloud cost optimization strategies include:
Much like with any other critical decision, migrating to the cloud environment without conducting a thorough and comprehensive analysis is not a smart idea. If you feel stuck while comparing the total cost of ownership cloud vs on-premise, get in touch with our team at NIX. Our decades-long experience allows us to offer top-notch cloud cost optimization strategies, tailored to the client’s unique goals and circumstances. Reach out to NIX to request a cloud vs on-premise cost comparison by our experts and discuss your cloud needs.
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The cloud total cost of ownership comprises the assessment of your current traditional environment, cloud costs, including the expenses associated with migration, and intangible costs. The latter describes hidden costs like opportunity and elasticity or downtime and slower speeds. Lastly, compare on-premise vs cloud TCO over a certain period of time, typically five years, to identify which scenario is more lucrative.
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While TCO entails a calculation of all costs of cloud computing, including migration, labor, hidden costs, licensing, and much more, ROI is focused on gained value. More specifically, ROI measures the gain from cloud adoption by subtracting TCO from the total benefits received. Simply said, ROI is about the value that the business gained from a specific purchase, while TCO solely calculates the costs.
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Among the most common best practices that aid businesses in reducing cloud TCO are reserved instances, storage optimization, process automation, and working with a specialist firm. Also, calculating TCO in and of itself is a good step to minimizing it and using it in negotiations to get a better deal from your cloud vendor.
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