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TCO vs ROI for Cloud Computing

Published in cloud-computing by max.favilli, 04/11/2010 0

Part I – The example for my 5 years old reader

Let’s say you need a new hard drive for your computer which cost 100€, of which you plan to use 50% of the capacity for one year. Your neighbor is on the same situation. And someone offer to both the same capacity as a cloud service for 60€ for one year.

cloud-servicesEach one of you save 30€, the supplier has enough margin (20€) to cover the cost of managing the service. Everyone is happy.

Is the TCO of the cloud solution lower than the TCO of the in-house solution? No. It’s higher. May look apparently lower till you use 100% of the capacity and the service is terminated or the running cost increased to match the average usage of the service.

Now let’s say after a while you discover you need to double the space, and you need to do it quickly, very quickly. If you had previously chosen the in-house solution you need to go out, look for an additional hard drive, compare prices, buy it and install it.

If you had chosen the cloud solution, you call your supplier and you ask him to double the space for an additional 60€.

Is the ROI of the cloud solution higher than the ROI of the in-house solution? Yep, it is.

Part II – The big enterprise

The big enterprise never use 100% capacity of it’s hardware. That’s true,  and in fact the big enterprise has given up owning infrastructure and opted for outsourcing ten or twenty years ago.

Cloud computing is a running cost not a fixed one; yes, always, while traditional outsourcing suppliers have exit fee and 12 months contract part of their business model.

ROI depends on the model you calculate it with. Yes and you can invent what ever model you want and keep the ROI curve always lower than the TCO increase if you want, I am fine with it. The point is with cloud you have higher TCO, but also higher ROI, if in your model the increase in ROI is higher than the increase in TCO go with the cloud, if not stay with your existing solution.

Conclusion

Cloud mean higher TCO, not lower, and higher ROI. If you are going to have a trade off or not I don’t know, do your homework, try some models, do some analysis and find out.

But please all of you out there, stop thinking cloud means lower TCO, it’s not true. It means you can usually do more, often faster and probably better, but not cheaper.

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