Cloud Economics-Are you getting it Right?

Earlier in our blogs, we have covered the concepts of cloud readiness assessment and why it is important for successful cloud migration. Just as cloud readiness assessment, cloud Economics is one such concept organizations cannot ignore to explore and understand before migrating to the cloud.

Cost optimization is one of the major reasons why organizations choose to move to the cloud. Pay as you go model drastically cuts off the operational costs. Cloud Adoption must be a strategic long-run plan which focuses on measuring the holistic value of cloud by analysing short-term and long-term goals of the organization with specific technology solutions in mind

Cloud Economics:

Cloud Economics is a study that calculates the value of the cloud, it gives a deeper analysis of its CapEx (capital expenses) vs OpEx (operational expenses). In any business solution ROI (return on investment) and TCO (total cost of ownership) are the key elements that need to be assessed, cloud economics clearly defines the ROI and TCO of migrating to cloud over an on-premises solution. When organizations recognize the economics of cloud computing, they can optimize their investments and achieve the highest possible value with their migration to cloud

Cloud economics is the discipline that studies the principles, benefits and costs associated with cloud computing. In every organization CIOs are always challenged to integrate IT services that provide great value for their businesses, and therefore with the cloud they must also define precisely how cloud migration will show an impact on their IT budget and staffing needs. In evaluating cloud economics, IT leaders and CIOs assess the costs concerning to infrastructure, security, support, research and development (R&D), to conclude if migrating to the cloud is beneficial for their organization. 

Although cloud computing can ease flexible pricing and resource provisioning, there are various other costs that need to be considered. With a regular pricing model many cloud service providers include security, networking, storage, backup, load balancing, redundancy, operating system (OS) licenses and software services. Apart from these costing, bandwidth, expertise and resource utilization are few aspects that need to be closely examined by the IT leaders before moving to the cloud. 

Economic benefits of the cloud?

There are two primary principles involved in cloud economics, they are economies of scale and global reach. 

Economies of scale: Cloud Service Providers (CSPs) allow the organization to hire computing resources at a lower cost and allow them to make use of shared resources, by this they can substantially have cost savings by avoiding CAPEX costs for buying their own infrastructure. The pay-as-you-go model is a great opportunity for the organizations to pay for the resources which are actively in use and they have the flexibility to scale up or scale-down the services at any point of time

Global Reach: Cloud computing facilitates organizations to operate from anywhere from the world, and to spread their global reach. This helps businesses to gain substantial savings, as it’s no longer necessary to set up servers in house on-premises, they can be placed anywhere in the world and lot of labour cost will be reduced in setting up the infrastructure. IT teams will not have to spend time maintaining complex hardware.

Other than cost savings and tremendous efficiencies, business agility is another economic benefit of cloud computing. Organizations that opt for cloud tend to have faster application deployment and can ramp up computing power and storage as per their demands. 

Cloud Economics – Top 3 Concerns for a Valuable Migration

Cloud migration is not about merely shifting the applications and data from On-Premises platform to the cloud platforms. The cloud migration process is complex, and organizations need to build new competencies to be a “cloud-first” environment. It also involves companies to create an overall framework that describes the Cloud journey and related ROI. This framework allows IT leaders to take timely and risk-aware decisions pertaining to cloud migration, it also gives a deeper insight into the economic bearing of cloud migration. Cloud economics framework helps CIOs and CFOs to have clear visibility on cost reduction in line with increased productivity and agility. 

TCO Analysis

Creating a base level TCO model is an essential step during the pre-migration stage, this will help organizations to measure various cost-saving opportunities that Cloud would bring and to calculate the value of success once you start moving to the Cloud. In pay-per-use models, organizations often underestimate the costs connected with cloud migration and usage, these remains as unpredictable costs. 

TCO (Total Cost of Ownership) defines all the direct and indirect costs such as data centre, maintenance and support, application development, network, operations, and BC/DR. A cloud TCO determines the actual costs that have to borne by the organizations after moving to the cloud. The TCO analysis directly compares the on-premise infrastructure cost with the costs that will be incurred when moved to the cloud. It also provides a narrow view of the economic impact of migrating to the cloud.

‘Indirect’ Savings and Business Agility

Direct Saving (Hard Savings) and Indirect saving (Soft Saving) are two types of savings that need to be quantified while evaluating the cloud. Hard savings are nothing but the direct savings that are easily quantifiable such as storage, software, hardware, operational costs, and resource cost. Soft savings are difficult to accurately estimate, in this context, there are ample hidden savings in terms of ability to align new opportunities, enhanced customer satisfaction, reuse of cloud services, and increased developer productivity.

Business agility is one such value add for the organizations which are undefined. Cloud computing and business agility have a direct link, effective risk management, faster revenue growth and long-lasting cost reduction are the key benefits of agility. 

Beyond the ‘Traditional’ CapEx v/s OpEx Debate

In order to evade making any ‘irrational’ decisions, IT leaders not only assess the hard savings and soft savings but also consider the ‘blind spots’. Some of the major blind spots that require consideration to define substantial value for the organizations are; no proper analysis on the Timelines, no or limited knowledge of technologies and lack of full dependency plan. 

Cloud economics is more than a traditional CapEx and OpEx debate. For a captivating cloud migration journey, few factors need to be weighed such as TCO, organizations position within the IT landscape, and other transformation costs such as migration planning and execution, talent re-skilling, application development and lock-in periods.

Mounika Raghavarapu

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