December 14, 2016

Cloud A-Z Part 2: Cloud computing’s economic value

One of the most commonly touted benefits of transitioning to Cloud-based IT is the ability to move related costs from capital expenditures to operating expenses. This shift eases the budget process, smoothes out cash flows, and minimizes upfront investments among other positive results. However, there are additional significant economic reasons to shift to the Cloud. In this article, I’ll discuss lowering the opportunity cost of running technology, lowering the TCO of technology, and shifting from tactical IT to business strategy, as well as the previously mentioned capex to opex benefit.

Lowering the Opportunity Cost of Running Technology

For those of you who aren’t financiers, the opportunity cost is the value of an alternative that must be given up in order to pursue or achieve something else. In the world of IT, this can be explained in this way: In IT, according to Gartner, 80% of IT time and expenditures can be attributed to maintaining the IT infrastructure, i.e., keeping everything running. These don’t create any value for the business other than to maintain status quo. That means only 20% of IT’s time is spent on supporting the business objectives and creating value. Were IT to shift to the Cloud, we could potentially flip those numbers so the organization becomes 80% efficient, focusing that time on growing the business. The opportunity cost of not shifting to the Cloud would be the revenue and other benefits lost by continuing to focus 80% of effort on status quo.

Lowering the Total Cost of Ownership (TCO) of Technology

When it comes to TCO, comparing the cost of Cloud to the cost of on-prem can be difficult because assessing the on-prem costs can be tricky and often certain factors are left out. With Cloud, assessing the cost is straight-forward because of transparent pricing structures: cost is based on usage metrics and is usually constant per unit of time. In-house is a different story. Often in-house costs don’t take into account the “hidden” costs associated with the technology such as manpower, storage, floor space, power, and impacts to other departments such as A/P and procurement. Once you’ve made the calculations that include all these hidden costs, you still come out ahead with Cloud because all these hidden costs go away. Additional value is gained in the ability of IT to focus on the core business instead of these maintenance items.

Shifting Focus to Core Business Activities

I’ve mentioned this benefit multiple times previously as an outcome of lowering both opportunity cost and TCO. Though it can difficult to assign a specific value to focusing on the core business, nonetheless, it is there. Rackspace considers this focus analogous to specialization of labor. They refer back to 18th century economist Adam Smith who estimated that productivity increases somewhere between 240 and 4800 fold in organizations that practice specialization of labor.

Moving IT Costs from CapEx to OpEx

As was previously mentioned, on-prem IT costs are traditionally categorized as capital expenditures; while shifting to the Cloud converts those costs into a recurring monthly operational expense. So why is this better? For the same reason many organizations lease cars rather than purchasing them: they can terminate the cost when the vehicle is no longer needed. When you purchase the hardware and software for an on-premise deployment, you have that equipment and are fully committed to it, financially, whether you are using it to its fullest capacity or not. When you shift to the Cloud, the pay-as-you-go model comes into play, and when you no longer need the resources, you can terminate the cost. If you are no longer require the same capacity, you can scale back and pay less. Additionally, acquiring the capital for a large purchase can be difficult, whether you need to go through the budget approval process or simply need to find the cash. Whatever the limitation on capital expenditures, moving to an opex model overcomes it. Rackspace shares this comparison from O’Reilly Media:

Although there are multiple reasons to shift to the Cloud, the economies of Cloud is an important one and should be thoroughly considered in the decision-making process. Were you to base your decision on only the economics, the question shifts from, “Can I afford to migrate to the Cloud?” to “Can I afford not to migrate to the Cloud?” However, as with any business decision, though economics is an important factor, it shouldn’t be the only one. Look for upcoming articles in this series that delve further into shifting to the cCloud.

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 Did You Miss Any of Our Other Articles in the A-Z Series?

Abstracted from Rackspace’s “Cloudonomics: The Economics of Cloud Computing”.