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Determining cloud TCO vs. in-house IT costs

If you think cloud TCO is measured solely by a reduction in up-front costs, you're oversimplifying the equation. Learn how to measure the true value of cloud services in this tip.

This is the third tip in a series on determining data center ROI and TCO. Check out the first two tips on calculating the value of energy-efficient power and cooling and the true costs of your server OS.

IT decision makers are looking to reduce capital expenditures by moving IT services to cloud-based solutions. However, especially because cloud hosting services incur ongoing operational expenses, true cloud TCO is determined by more than just a reduction in capital expenditure.

The benefits of cloud services
Assigning value to cloud services can be a complex process because there are a number of options available, with many factors that determine whether they are viable or not for your particular business needs. Some cloud options make a lot of sense for busy enterprises, while others may not deliver measurable value. That said, there are still metrics and considerations that can help determine cloud TCO versus a traditional in-house option.

The clear advantages of cloud hosting services include the following:

  • Service on demand and the ability to scale up or down as needed, instantly.
  • Access to services and applications from almost any end point.
  • Infrastructure abstraction: Applications are not locked into devices or locations.
  • Virtually infinite performance and capacity, regardless of scale.
  • Consistent service-level characteristics, regardless of client load.
  • Pay-as-you-go usage model: You pay for only what you use, without any up-front investment costs.

Each of these elements offers a measurable value when compared with traditional data center-based solutions. The ability to scale, the reduction of up-front costs and the pay-as-you-go model reduce TCO significantly and offer a fast return on investment, simply because the initial investment is minimal.

Important factors to consider
The financial advantages offered by cloud hosting services can be quite enticing to those looking to reducing data center expenses. However, there are other factors to consider before making the leap to a hosted service, some of which have legal and business operation implications. Before adopting cloud-based services, you will need to consider the impact on the following factors:

  • Intellectual property: What is being done to protect the data?
  • Access to data: What guarantees are in place to maintain access to data?
  • Compliance: What security initiatives and enforcement policies are in place to protect the data and meet the legal needs created by compliance?
  • E-discovery: How is data archived and accessed for e-discovery requests?
  • Location: Is the virtual data center/cloud hosting service located in a foreign country?
  • Disaster recovery: Which technologies are in place to provide business continuity and backup/recovery needs?
  • Service-level agreements (SLAs): Are there guarantees that the cloud provider will meet required levels of service?
  • Scalability: What are the costs and determining factors associated with scaling the cloud hosting service to meet future business needs?

Each of those elements has an associated cost. In some cases, these concerns are covered by the basic services bundle. Other times there may be additional fees to address these factors or enhance a cloud service’s SLA to meet your business requirements. However, some of those elements may be deal breakers. For example, if the cloud services provider cannot offer the security required by a compliance regulation, that provider is no longer a viable option.

Nevertheless, properly determining the value of a cloud hosting service requires an understanding of how to compare the costs of traditional data center services with cloud-based alternatives. The costs associated with traditional systems can be determined by accounting for particular costs and applying System Design Life Cycle concepts to the solution in question. Whereas cloud service costs are based on monthly flat fees, determining the cost of in-house solutions requires more research. For example, the following costs will need to be gathered:

  • Cost of hardware for the solution (HW)
  • Cost of software for the solution (SW)
  • Cost of staffing for the solution (SS)
  • Cost of support for the solution (SU)
  • Ancillary costs, such as electrical and facilities (FA)

Weighted costs will need to be calculated for some of those elements -- for example, if a solution only uses 15% of storage, CPU cycles or floor space, that will impact the weighted costs. In addition, the total lifecycle (in years) of the solution (usable time before replacement/retirement) will be required to complete a cost assessment. For example, weighted costs of a payroll system may be calculated based on the above criteria using (HW+SW+SS+SU+FA)/LifeCycle to calculate an annual cost of the solution in question. That number can be compared directly with the annual cost of a cloud hosting service, helping to determine basic value.

However, there are some less concrete factors that must be considered to determine the true value of either option. For example, a cloud hosting service may fare better in supporting remote or mobile users, while security and data control may give a traditional solution an edge. Other considerations, including performance, ease of use, end-user productivity and team building, affect how well a particular strategy fits into the business process and can tip the scale in either direction. It comes down to how the deployment is executed and what the required services are as well as how company policies affect the viability of each solution.

What did you think of this feature? Write to's Matt Stansberry about your data center concerns at

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