A random white paper I read used the words, "...increase infrastructure ROI..." when discussing virtualization of servers. These words are not typically used in the context of cloud based services because everyone is so preoccupied with the benefits of using the public cloud.
In public cloud parlance, ROI us usually used in a comparison of the costs to buy infrastructure vs. the cost of using resources on demand in the cloud. In private cloud vocab, ROI means just that: return on investment. So, how does an organization "increase" the ROI for capital assets? By virtualizing and adopting cloud best practices for automated provisioning and deprovisioning-in other words, creating a private cloud. If usage of the asset is increased, then the return on the initial investment can be increased as well.
Showing posts with label ROI. Show all posts
Showing posts with label ROI. Show all posts
Aug 12, 2010
Jun 9, 2010
More on ROI and the Economics of Cloud Based Services
InformationWeek::Analytics issued a report earlier this month entitled, "Cloud ROI: Calculating Costs, Benefits, Returns," which compares the costs of acquiring hardware and the costs of utilizing cloud based services and the associated ROI. While the basic analysis of the costs makes sense, the comparison is flawed: the difference between the two is cost savings, not ROI.
The spreadsheet attached to the report is fairly straightforward. All costs involved in the acquisition of capital assets vs. leased assets (i.e., on demand) and the related costs are listed and compared. A present value calculation is performed to show the total cost of ownership over a number of years. It is evident that cloud based services are cheaper than acquiring capital assets for the same purpose. This forms the basis for the ROI calculation but the report never actually calculates the ROI; it gives the reader just enough information to be misinformed...
To make the numbers make more sense, the report needs to add a revenue stream. That revenue stream would allow the reader to find the breakeven point. And, if there was enough time, the report could go further and examine the impact of asset lifecycle and the replacement of capital assets versus using leased assets over time. In this case we would see the economic value of using assets on demand instead of acquiring them.
The one statement, from Lew Moorman, Chief Strategy Officer of Rackspace, with which I agree is that organizations need to evaluate how to make cloud based services fit into their IT service catalog rather than whether they can save money by migrating everything into the cloud. The latter discussion is probably not going to be very productive since not all services can be or should be moved into the cloud though, financially, it might make perfect sense. IT and Finance often butt heads.
In previous posts (here and here) I discussed ROI of Cloud Based Services and how it is often confused for cost savings, touching briefly on the concept of breakeven.
The spreadsheet attached to the report is fairly straightforward. All costs involved in the acquisition of capital assets vs. leased assets (i.e., on demand) and the related costs are listed and compared. A present value calculation is performed to show the total cost of ownership over a number of years. It is evident that cloud based services are cheaper than acquiring capital assets for the same purpose. This forms the basis for the ROI calculation but the report never actually calculates the ROI; it gives the reader just enough information to be misinformed...
To make the numbers make more sense, the report needs to add a revenue stream. That revenue stream would allow the reader to find the breakeven point. And, if there was enough time, the report could go further and examine the impact of asset lifecycle and the replacement of capital assets versus using leased assets over time. In this case we would see the economic value of using assets on demand instead of acquiring them.
The one statement, from Lew Moorman, Chief Strategy Officer of Rackspace, with which I agree is that organizations need to evaluate how to make cloud based services fit into their IT service catalog rather than whether they can save money by migrating everything into the cloud. The latter discussion is probably not going to be very productive since not all services can be or should be moved into the cloud though, financially, it might make perfect sense. IT and Finance often butt heads.
In previous posts (here and here) I discussed ROI of Cloud Based Services and how it is often confused for cost savings, touching briefly on the concept of breakeven.
May 17, 2010
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.
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:
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