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Calculating Cloud ROI Is Harder Than It Looks

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By: Mary E. Shacklett (10/19/2010)

As companies investigate cloud computing, they are obviously eager to apply internal total cost of ownership (TCO) and return on investment (ROI) metrics to these deployments. And many of them are finding it hard to obtain truly useful results. One reason why is the immaturity of the cloud computing market. There simply isn’t much empirical evidence about cloud costs and returns yet — and companies are also still in the process of learning just how cloud implementations impact their IT operations and cost structures. At first blush, the process of establishing an ROI for cloud computing looks straightforward. Jobbing out a system or two to cloud providers reduces software licensing costs, cuts your data center footprint and energy use, and eases IT staffing costs. The cloud services provider charges for the service, but in virtually every case, the cloud solution comes across as the best ROI because it comes in with lower costs to implement and to operate. But evaluating the true ROI of cloud computing (or anything else) shouldn’t stop with the scratch of a sharp pencil on a spreadsheet in the Finance Department. For one thing, up-front cost savings may have a very different impact on ROI gained over an average IT lifetime (say, five years) of an investment. To this end, IT must be sure to extrapolate total costs of the cloud service over the term of the contract, and then compare that to its current view of on-premise IT resource utilization and support costs. If the cloud service value proposition still looks good at this point, the next step is to perform a total impact analysis on cost of operation. It is already known that a cloud solution will save server and other data center costs, along with expenditures on IT staff used to support the systems being outsourced. But does cloud computing create any new costs? The answer is “yes,” at least potentially, in two areas. The first area is contract management. At least one IT person at the Project Lead or Manager level will have to be dedicated part-time to manage the details of the contract, the relationships with the vendor, day to day performance of the solution, and communications with end users in the business. This is not a person with an entry-level skill set or an entry-level salary. Chances are good that this person already exists on the IT staff (perhaps in a Program Management Office), but in order to fulfill the new cloud environment management responsibilities, the person will have less time to devote to other projects. A second area of new costs that the cloud can introduce involves security. An April, 2010 PricewaterhouseCoopers survey of over 12,000 security and IT professionals around the world revealed that 35 percent were “very confident” in their own companies’ security, but only 29 percent felt the same way about the security of their partners and suppliers. Ensuring security compliance (and testing/certifying for it) with third-party cloud providers consumes both time and resources that otherwise could be dedicated to internal IT security. There is also early evidence that network Quality of Service (QoS) performance on third party services is not as high as it is on internal systems. This means that more IT time will likely be needed from senior level security and network professionals — a significant cost and organizational impact that can easily be overlooked in an ROI study. It is difficult now to predict just how cloud computing ROI will pan out. It is certain, however, that more useful results on the “real” ROI of cloud computing will be available in two or three years, after organizations have had enough runtime with clouds to assess its value. Meanwhile, many companies are making the leap into cloud computing anyway — perhaps out of faith that those long-term benefits really will be there.

As companies investigate cloud computing, they are obviously eager to apply internal total cost of ownership (TCO) and return on investment (ROI) metrics to these deployments. And many of them are finding it hard to obtain truly useful results.

One reason why is the immaturity of the cloud computing market. There simply isn’t much empirical evidence about cloud costs and returns yet — and companies are also still in the process of learning just how cloud implementations impact their IT operations and cost structures.

At first blush, the process of establishing an ROI for cloud computing looks straightforward. Jobbing out a system or two to cloud providers reduces software licensing costs, cuts your data center footprint and energy use, and eases IT staffing costs. The cloud services provider charges for the service, but in virtually every case, the cloud solution comes across as the best ROI because it comes in with lower costs to implement and to operate.

But evaluating the true ROI of cloud computing (or anything else) shouldn’t stop with the scratch of a sharp pencil on a spreadsheet in the Finance Department. For one thing, up-front cost savings may have a very different impact on ROI gained over an average IT lifetime (say, five years) of an investment. To this end, IT must be sure to extrapolate total costs of the cloud service over the term of the contract, and then compare that to its current view of on-premise IT resource utilization and support costs.

If the cloud service value proposition still looks good at this point, the next step is to perform a total impact analysis on cost of operation. It is already known that a cloud solution will save server and other data center costs, along with expenditures on IT staff used to support the systems being outsourced. But does cloud computing create any new costs? The answer is “yes,” at least potentially, in two areas.

The first area is contract management. At least one IT person at the Project Lead or Manager level will have to be dedicated part-time to manage the details of the contract, the relationships with the vendor, day to day performance of the solution, and communications with end users in the business. This is not a person with an entry-level skill set or an entry-level salary. Chances are good that this person already exists on the IT staff (perhaps in a Program Management Office), but in order to fulfill the new cloud environment management responsibilities, the person will have less time to devote to other projects.

A second area of new costs that the cloud can introduce involves security. An April, 2010 PricewaterhouseCoopers survey of over 12,000 security and IT professionals around the world revealed that 35 percent were “very confident” in their own companies’ security, but only 29 percent felt the same way about the security of their partners and suppliers. Ensuring security compliance (and testing/certifying for it) with third-party cloud providers consumes both time and resources that otherwise could be dedicated to internal IT security. There is also early evidence that network Quality of Service (QoS) performance on third party services is not as high as it is on internal systems. This means that more IT time will likely be needed from senior level security and network professionals — a significant cost and organizational impact that can easily be overlooked in an ROI study.

It is difficult now to predict just how cloud computing ROI will pan out. It is certain, however, that more useful results on the “real” ROI of cloud computing will be available in two or three years, after organizations have had enough runtime with clouds to assess its value. Meanwhile, many companies are making the leap into cloud computing anyway — perhaps out of faith that those long-term benefits really will be there.