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Cost Surprises Hidden by Clouds

When it comes to IT costs, nothing is ever simple, and the public cloud model is no exception. That's why CFOs need to get smart and get involved.
Rob Livingstone, CFO.com | US
December 5, 2011

One of the value propositions ballyhooed by vendors for moving from on-premise computing to the public cloud is that the latter will reduce your IT costs.  This may or may not be the case.

In Why the Cloud Can Be Like a Subprime Mortgage, I touched on the lure of the low-entry cost of public cloud computing. With many businesses focusing sharply on managing short-term costs, multiyear total cost of ownership considerations are not always top of mind. But in certain instances, even after a relatively short time period the cumulative cost of paying for a public cloud subscription may well exceed the cost of a conventional capitalize-and-depreciate perpetual-license purchase. For that reason, it behooves CFOs to perform a high-level comparative cost analysis between on-premise computing and the public cloud. This begins by opening up your old accounting textbook and looking up the rent vs. buy calculation.

But CFOs need to make sure their analysis does not stop there. Unfortunately, it's not as simple as that.

If you are a CFO in an organization considering moving some compute or storage functions to a public cloud, you need to look at the costs of retiring your on-premise IT systems and infrastructure and the costs of migrating your existing data and business logic to the cloud. You won't find that in your textbook. To do a complete job, you'll have to go over all your IT licenses and contracts and get down and dirty with the numbers across your whole enterprise.

Cost Surprises
Cost considerations you might not think about at first blush could include hardware and software asset
write-offs from your balance sheet, as well as any early termination penalties and payouts for your current hardware and software maintenance contracts. In addition, if you have any managed or outsourced services that need to be terminated or altered outside the terms of the contract, these could also add costs to the calculation. And don't forget to include the costs of managing IT staff outplacement, not to mention the expense of retraining your remaining IT staff as their responsibilities change in the cloud, as well as training your new, cloud-skilled IT hires. Then there are the associated costs of updating IT operational and support system administration, as well as your IT help desk and any related services if those are of importance to your business: if, say, you compete on customer service.  

In addition to these transition costs, all project-related costs must also to be included in the business case. If the time it takes to migrate the data, test new system interfaces, and complete user training is substantial, this has the effect of adding cost-on-cost, as you will continue to pay for the upkeep and operation of the system you're sunsetting even as you're paying the cloud-subscription charge from day one of the project.  For anything other than the most straightforward migration, transitioning enterprise applications to the cloud can be a complex and lengthy process no matter what your vendor tells you. Remember: it's not his business; it's yours.

This is why CFOs should play an active role in testing any assertion that public cloud computing will be cheaper than what they already have.

What about Economies of Scale?
In larger organizations, the economy-of-scale argument in favor of cloud computing may not always apply as your on-premise data center and your IT infrastructure may in fact be larger than the cloud providers'. You may very well have higher and better security standards, and you probably have more rigorous governance processes. This, combined with the granularity of control available by having your IT on-premise — the ability, in other words, to configure and change your systems as needed to suit your own volatile business needs — further complicates the like-for-like comparison, especially as it's hard to place a dollar value on that control.  Something you can put a price on —  the number and duration of recent outages at global providers such as BlackBerry, Office365, and Amazon — also shoot a few holes in the proposition that the public cloud by definition is less expensive and more reliable than on-premise.

The message for CFOs is twofold. First, factor in all the costs of your move to the public cloud, both tactical and (as far as feasible) strategic. Second, don't close your mind to the benefits of hybrid or private clouds even though they may appear more costly in the short term. And don't rule out the public cloud. In some cases, for some businesses, for some purposes, it may make perfect sense.

Do the math. It's what CFOs do. You may be pleasantly surprised.

 Rob Livingstone, an experienced CIO, is the author of the book Navigating through the Cloud: A Plain English Guide to Surviving the Risks, Costs and Governance Pitfalls of Cloud Computing. Visit Rob at www.navigatingthroughthecloud.com or e-mail him at mailto:rob@roblivingstone.com.




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