The subtle art of the cloud TCO.


While the public cloud has undoubtedly gone mainstream, there are still organisations that haven’t deployed even a single production workload outside of their old data centres.

The most common reason that we hear for this is the total cost of ownership (TCO): “We’ve done a TCO and the cloud just doesn’t stack up for us.” This argument is almost always put forward by an operational IT manager and said with the kind of smile that suggests I won’t get to look at a copy of those numbers.

I don’t need to see the numbers to know that this particular TCO argument is flawed.

It doesn’t matter that the TCO included some costs for good reasons but left other costs out. The specifics simply don’t matter because the argument is wrong, and it is wrong for two very good reasons:

Reason 1: The finance and insurance sectors have some of the fastest cloud adoption rates.

Typically conservative industries, such as the finance insurance sectors, are adopting cloud services at a faster rate — and spending more — than most other sectors. And these are sectors that are experts when it comes to economic analysis and risk analysis.

If there are that many companies that are that good at assessing a return on investment and its risk profile are making the decision to invest in the cloud, the numbers do stack up.

Of course, the objection isn’t that cloud doesn’t work for some people, it’s that, “… it doesn’t stack up for us.”

Reason 2: If a start-up was created today to take business from you, it would be born in the cloud.

If a new competitor appeared in the market today, they would not go out and capitalise an entire data centre of computer hardware. They’d go and buy just the cloud services that they need.

The cost efficiency and business agility that this provides a company is the backbone of the digital disruption that we see all around us. This digital disruption is happening in every sector.

Previously, when New Zealand’s taxation department Inland Revenue made everyone check their own tax return balances, an industry sprang up to make this easy and accessible. But as soon as the department changed to doing this automatically for everyone, this entire industry evaporated virtually overnight.

The takeaway? Even in the public sector monopoly of collecting our taxes, digital disruption is possible by making public services that already exist simpler and easier to access.

If it can happen to Inland Revenue, it could happen to you and when it happens it will happen in the cloud.

There is simply no financial advantage in maintaining data centres anymore.

All that said, if the numbers really stack up, how is it that so many TCO analyses show the exact opposite?

Comparing ‘like-for-like’ is a fiction

A typical TCO comparison with a legacy data centre environment starts with obtaining the current server list and assigns cloud-based virtual machines with the same resource specifications as the current servers. Add in the assumption that software licensing costs will simply transfer across between the environments. Total up the numbers and discover that the cloud infrastructure costs 5-10% more than the costs of the current environment.

The mistake that many organisations make is to see this result and then not take the discussion any further.

So how do we rectify this? The first thing that needs to be done to this model is to ensure that the resource allocations are correctly matched to the workloads. There are good automated tools that can right-size infrastructure and these will typically save anywhere from 10% to 20% of the infrastructure costs of an on-premises environment moving to the cloud.

The next benefit that needs to be included in any cloud TCO is the realisation that resources can be switched off when not in use.

Most businesses have staff working between 8am and 6pm. Ten hours a day for five days a week is only 30% of the timespan of the full week.

Identifying services that are not needed outside of business hours, such as test and development environments, can save 70% of the compute costs for delivering those services. Even where services can’t be completely switched off, scaling them back to minimum requirements during quiet times can add up to considerable savings.

There are also various ways to procure cloud resources with reserved instances and spot pricing models that can also deliver substantial discounts. Even for environments with variable workloads or critical requirements, taking advantage of such offerings for at least part of an environment can save surprising amounts of money.

Another often overlooked benefit of the cloud is that the platform- as-a-service offerings usually have much reduced software licensing costs, especially when it comes to database platforms. This must also be accounted for in any economic comparison of infrastructure costs.

The ‘T’ in TCO stands for ‘Total’

The big assumption that underlies many of the mistaken analyses that we see is the assumption that the cloud environment will be managed in just the same way as the current environment, ergo the costs will be the same.

The truth is that the cloud opens up many opportunities to save money beyond just the cost of the infrastructure itself.

There are many opportunities for automation, saving time and effort. Data protection, regulatory compliance, disaster recovery and business continuity are usually much cheaper, more efficient and easier to implement in the cloud.

The costs of running an environment in-house, from the costs of power, floor space, and the effort required to replace or move the onsite infrastructure are often poorly accounted for, especially in a shorter-term analysis. Any real projection of the total costs of running a cloud environment must account for all of these in order to be complete.

Finally, even when all of these factors have been taken into consideration, they still don’t address the true benefit of adopting cloud services: The real power of the cloud is found in the new capabilities it provides an organisation and the opportunities that these create to become more efficient, more agile and more innovative.

Accounting for these softer benefits in exact dollar terms is impossibly hard, but the advice above will help you create a cost of ownership model that will properly support the business case to migrate to cloud.

What does TCO mean to you and your organisation? Make sure you’re thinking about TCO in the right way.