Invariably, when I sit down with a small business decision maker and propose our cloud computing model, Apps on Tap, the conversation always comes around to cost. After all, these people would not be running a successful business today without keeping an eye on the bottom line. After I listen to their individual situation and ‘pain points’ I typically make a bold statement, “The cost of our cloud computing model is equal to or less than what you pay now”! This gets their attention immediately and they want to learn more about this transformative way to deliver and consume IT-as-a-Service. To date, I convince about 70% to move to the cloud and the adoption rate has been increasing steadily over the last ten years.
Cost of Ownership (or Total Cost of Ownership, TCO) analysis is meant to uncover all the lifetime costs that follow from owning certain kinds of assets. Ownership of an asset includes purchase costs, of course, but ownership also includes costs for installing, deploying, operating, upgrading, and maintaining the same assets. For many kinds of acquisitions, TCO analysis finds a very large difference between purchase price and total long term cost. 1
Those who purchase or manage computing systems have had a high interest in TCO since the 1980s, when the potentially large difference between IT hardware prices and their cost of ownership started drawing the attention of the IT consulting community and IT vendor marketers. Competitors of IBM, for instance, used TCO analysis to argue that an IBM computing environment was an overly expensive ownership proposition. The four or five year cost of ownership for major hardware and software systems—from any vendor— can be five to ten times the hardware and software purchase price. The same argument holds true for many of the on-premise IT environments of small businesses we see today. Unless you clearly know what it costs to continually support and maintain these IT architectures, you really don’t know your TCO. 1
By taking prospects through a TCO analysis that shows them the ‘tangible’ costs of their current on-premise IT spend, you get fewer objections than you do with Return on Investment (ROI) calculations which can be easily manipulated to suit the user’s purposes and mean very little to most business owners. If you can deliver on the ‘Promise of the Cloud’ at the same or similar cost to what they are paying now, you will have their attention.
The following tables are actual TCO models (existing clients) of companies of varying size. It’s clear from the comparisons that regardless of the size of the company you can usually make a strong ‘cost’ argument to move to an IT-as-a-Service model utilizing the cloud.
Other points to consider:
TCO can bring out so-called “hidden” costs of on-premise IT ownership.
In these examples, not only are costs for IT infrastructure and system software included but the cost to support that infrastructure is also included.
Some companies have in-house IT support, some have outsourced IT support and some have a combination.
When deciding whether or not to acquire a new solution, it is easy to become distracted by hardware and software costs alone, but in fact the “support” costs amount to over 50% of the TCO. How well the people who support your IT are trained, employed, and managed will be far more important in determining actual cost of ownership than other factors, such as the choice of a HW or SW vendor.
What about the Controller who spends a significant amount of time each month dealing with IT issues instead of strategic business objectives? Does this distract them from their job and cost the company money?
TCO can identify how much you spend on capital expenditures (CAPEX) versus operating expenditures (OPEX).
This is important because one of the benefits of the cloud is that it reduces your CAPEX dramatically. In these examples, CAPEX is reduced between 85%-90%. As a business owner, you can put this money to use elsewhere in the business and get immediate results.
TCO analysis is blind to business benefits (except cost savings).
It is important to note that a TCO analysis is not a complete cost benefit analysis. TCO pays no attention to many kinds of business benefits that result from implementing cloud computing such as eliminating risk, improving business continuity, faster time to market, faster remote access, or the ability to redeploy strategic personnel where they can have an even greater impact on the business. When TCO is the primary focus in decision making, it is assumed that such benefits are more or less the same for all decision options, and that management choices differ only in cost. This is not necessarily true where cloud computing is concerned.
What are the business implications of cloud computing? If the cloud’s only impact was on companies’ IT budgets, the implications would be minor, but as we have seen, this is not the case. How would you feel if your main competitors started pulling away from you simply by changing their computing infrastructure? And how much worse would it be if this change created other benefits that are not yet obvious?
If cost is the determining factor in how you make decisions, sit down and do a TCO of your current IT infrastructure and then find an IT-as-a-Service company to compare it to. You may be surprised by what you find out.
1 Marty Schmidt,Total Cost of Ownership TCO Explained, http://www.business-case-analysis.com/total-cost-of-ownership.html