One fact that is often touted for going to cloud is that it will decrease cost. This is rarely true in the beginning of an enterprise cloud journey.

Let’s star with what is true: Going to cloud will change cost. You will instead of having Capital expenditure (CapEx) have Operational expenditure (OpEx) since you are not buying equipment but services.

Traditional IT procurement doesn’t work in cloud

In a traditional IT environment, you buy equipment and write it off between 3-5 years. After that, the equipment is free. This doesn’t happen when you buy your IT as a service in the cloud, since you will keep paying for your usage.

What this means for you as an enterprise is that you should not utilize procurement for the cloud the same way as for your own data center, since the end goal is different.

But, you say, how can the end goal be different if the two provide the same thing? This is where I want to challange you to look outside of only compute, data and storage. Most vendors will tell you that they can do a massive data center exit and a fast migration to their cloud - and even help you. What they won’t help you with is the rebuild of the applications and systems. This is something that you will have to figure out yourself and in the meantime the cost will go straight out of the roof since you are utilizing the cloud just the same way as a data center.

Traditional IT procurement doesn’t work in cloud because you will look at the wrong values and comparing a data center cost to a managed service cost without, ignoring the benefits that you will get out of the cloud provider. You are comparing disks and compute when you instead should look into how to make your applications work in managed services where disks and compute is irrelevant. Where an application doesn’t rely on a server but a service which can deploy an application package. Where you do not manage your databases, but get georedundancy with the click of a button by utilizing the managed databases.

The Cost Paradox of Cloud

Until you have full understanding how you can utilize the services of the cloud provider with confidence, you will pay more.

One simple example is utilization of compute. Most enterprises have hardware utilization rates significantly below 20%. This is because of the excess capacity required to handle peak demand. Many companies carry up to 5 times the required hardware, and that is ignoring networking, the hardware location, redundancy and even the personnel. If your computing demand is uneven, you might see a utilization rates that usually are below 10% mean. As a result, enterprises are spending much more on compute and storage than is required.

What the cloud provides is a way to quantify scale that follows the scale of the business. Think of the business value as the value of scale which follows utilization so you do not pay for more than what you use. Moving from 20% to near 100% utilization provides significant cost advantages, that is clear. But to be able to have near 100% utilization you will at one point in time pay more for the the cloud usage than you did for the hardware in the data center.

Return of investment

Looking at Return Of Investment of going to cloud, you will need to look at the endavour as an investment. The wrong type of cloud ROI calculations are focusing around IT cost savings and how they affect the bottom line. I recommend that you should instead focus on the value that is returned to the organization.

A holistic ROI calculation will account not only for utilization of the classical “hardware” services, but also the increased scaleability, agility and speed that the company can utilize the cloud provided services with. A simple example is how fast a service can be built and torn down - in cloud we’re talking about minutes instead of months waiting for hardware and setting things up.

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