Demystifying RoI from the Cloud

Any technology investment needs a business case. Return on investment (RoI) is the most popular method of creating a business case. According to an Open Group survey, A majority of cloud service providers and consumers believe cloud computing is easy to evaluate and justify. However most do not have the means yet to measure any potential RoI. Only 35% of respondents say their organizations currently have an RoI mechanism in place.

The article will dwell on 2 themes of RoI: Cost reduction (lowering the TCO) and new business opportunities.

  • Operating Costs of Current IT Assets: While the capital expenditure of current IT assets is easy to ascertain for SaaS vendors or their enterprise customers, it is not the same for operating expenses. While any expenditure tracked in financial books, eg, annual maintenance contracts is easy to consider, allocated expenses like power, facilities, allocated share of personnel, maintenance and enhancements in case of custom applications, etc, are often either missed out or misrepresented. One needs to ensure proper inclusion of these in the RoI calculations.
  • Workload Patterns are Critical: Not all applications are meant for migrating to cloud. Predictable or unpredictable load bursts and intermittently in use work loads are ideal candidates to be benefited from pay-as-you-go model of cloud. A realistic assessment of these peak load and intermittent load durations is critical in arriving at the true RoI of migrating to cloud.
  • Elastic Scaling has Associated Costs: Elastic scaling is the cornerstone of pay-as-you-go model. However most cloud providers lack the features to execute this completely. Hence customers have to build or buy these features at an additional cost. This investment should be a part of the RoI calculations.
  • Opex vs Capex: One of the major advantages of cloud for enterprises is said to be replacing capex with opex. While it is certainly advantageous for small and medium companies with limited funds, large companies with investible funds may look at it differently. With constant loads, the capex may turn out to be cheaper in certain cases. The key here is the period for which the opex should be compared with the capex. The rule of thumb is to compare it for the active life of the asset before it needs replacement or it would distort the RoI.

  • Lower Maintenance Costs: For software makers, certifying a product against a plethora of platforms is always tedious. As a product matures maintaining older versions becomes increasingly expensive. In the cloud model, as one always maintains only the current version on a single platform, this cost comes down drastically. Though it is not easy to calculate, ignoring this factor could distort the whole picture.
  • Entry into New Markets and Increased Market Share in Current Markets: For SaaS providers cloud is a double whammy. It provides all the benefits of a lowered TCO for themselves. At the same time, a lowered TCO for customers means capturing the long tail of the SMB market that was hitherto nonexistent for them. This additional revenue and profit weighs in heavily in the RoI calculation and as such cannot be ignored. Rapid provisioning for POCs also reduces the sales cycle, even for on-premise. All these extra revenues must be factored into benefits in the RoI calculations.
  • Improved Valuation: As the capex gets converted to opex many financial ratios of the company improve, eg, return on assets (RoA). This has a direct impact on the valuation of the company and improved shareholder value. This needs to be factored into RoI calculation in an appropriate manner.
  • QoS Improvement: From a business perspective, quality of service (QoS) delivered to end customers is the key to business operating success. Improved QoS results in better customer stickiness. This is in contrast with a conventional license plus maintenance model where maintenance renewal rates are under pressure and each upgrade is a potential replacement threat. Thus a comparison of churn is an important factor too.
  • Initial vs Final RoI: Cloud costs could be optimized by a factor of 16x. This is achieved as one moves up the cloud maturity model and adopts higher levels of multi-tenancy and automated cloud management. Thus the cloud roadmap is an important factor in RoI calculations.

Lastly, just looking at cloud computing from a technical infrastructure point of view is potentially missing the wider picture of the impact of technology on the business. Factors like brand value, corporate image, customer satisfaction, etc, could be as important as the RoI in order to make a decision. n

Leave a Reply

Your email address will not be published. Required fields are marked *