What, exactly, is ROI?

The acronym, ROI, means 'return on investment'. In other words, if I make $1.10 for every $1.00 spent on a project, my return on the $1.00 invested is 10%. Used in the context of cloud computing, this is incorrect.

When we talk about the economic benefit of cloud computing, we assess the difference between the total cost of ownership (TCO) of owning and operating the necessary infrastructure to make our applications available to customers and the TCO of of leasing that same infrastructure on demand. All else being equal, more than likely, the cost of owning and operating will be higher than leasing on demand. This is a cost saving proposition, not a ROI. In this case, we should be looking at the breakeven point--the point in time at which we have paid off the expense and get into the black.

What is usually missing from the evaluation of these cost savings is the sunk cost of application development: either way, those $ are going to be spent and are considered to be an investment. Aha! Now we're talking about investment. If TCO is (assumed) to be lower when leveraging a cloud environment, then it follows that the ROI will be higher.

Consider the following basic scenario:

Note that the OPEX is higher in the lease/on demand scenario. This is because most of the CAPEX that would have been incurred in an ownership scenario become OPEX in a lease/on demand scenario. So, when comparing the ownership and lease/on demand scenarios, the economic benefit, or return on the initial development investment, would be greater in a cloud based scenario. If we had considered an pre-existing application and its displacement to the cloud, then we would have been discussing a cost savings, and not a ROI.