By now, everyone has looked at Neal Sample's presentation from Cloud Connect 2011 (arguably the most important keynote as far as I am concerned) of how eBay makes use of the public cloud. I dare say, that they have shown significant and very real cost savings.
Up until early March, the best we could do was theorize and sort of guesstimate at how much could be saved on costs by making use of a cloud based architecture; how much were servers costing, what was their utilization, how many person hours were spent managing them, etc. vs. spinning up AWS instances and shunting excess or unplanned workload into the public cloud. Many vendors offer their own version of cost/benefit calculators and "financial checklists" but they mostly miss the point: consumers of cloud based services need to be honest with themselves about how they consume IT assets and services before they can really estimate their cost savings. eBay did that. They looked at the whole enchilada, discovered where their efficiencies or inefficiencies lie and showed huge cost savings.
I have no doubt that eBay's model has inspired at least a few organizations to look at their utilization. The trick is for them to decide what is right for the organization. eBay's model certainly isn't a one-size-fits-all. It is up to individual organizations to understand their asset utilization profile, their tolerance to risk, and to see how cloud based services fit into their governance model before making such a leap, however compelling it may be.
Showing posts with label cost savings. Show all posts
Showing posts with label cost savings. Show all posts
Aug 12, 2010
ROI Can be Higher in a Private Cloud
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.
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.
Jun 14, 2010
City of San Diego Reported to Outsource IT Services
GovTech reported that the City of San Diego is ready to outsource some IT services including help desk functions, laptop, desktop, and database server management.
Within the article, the City reportedly consolidated five email systems into one. Oddly, there is no mention of migrating any services into the cloud as various city and state governments have already. It would seem that migrating to a SaaS model, such as Google Apps, would generate a cost savings by simply reducing removing license fees/maintenance contracts and person-hours required to maintain on-premises servers and productivity apps on upwards of 10,000 desktops and laptops.
That said, the article doesn't mention whether the City's licenses are up for renewal nor the asset lifecycle. So, it is entirely possible that such a migration is being considered. We may yet see an announcement to that effect in the near future.
Within the article, the City reportedly consolidated five email systems into one. Oddly, there is no mention of migrating any services into the cloud as various city and state governments have already. It would seem that migrating to a SaaS model, such as Google Apps, would generate a cost savings by simply reducing removing license fees/maintenance contracts and person-hours required to maintain on-premises servers and productivity apps on upwards of 10,000 desktops and laptops.
That said, the article doesn't mention whether the City's licenses are up for renewal nor the asset lifecycle. So, it is entirely possible that such a migration is being considered. We may yet see an announcement to that effect in the near future.
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 19, 2010
More on Cost Savings and ROI
I recently came across the following Google ad on a UK web site.
(The ad, admittedly, was much more fun to watch on the site, with spinning dials and all...)
It was also a link to a calculator to estimate the cost savings that an organization could realize by migrating their users from the traditional MS Office suite (Outlook, Word, Excel, PowerPoint, etc.) to Google Apps provided over the web (Gmail, Docs, Spreadsheet, Presentation, etc.). (This link brings you to the international version of the calculator.) The site allows visitors to calculate their potential savings on a 3 year engagement based on the number of users served, the hourly cost of the IT manager's time, and some basic assumptions on hardware and license costs. By itself, this is a compelling argument to switch to SaaS.
The interesting thing about this ad, is that Google called it the 'cost savings' and not the 'ROI' of switching to Google Apps. The calculator does the calculations and then shows the costs of both MS and Google scenarios and the difference in TCO between the two. If one is lower than the other, there is a cost savings for switching to the solution with the lower TCO.
Kudos to Google for getting it right!
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:
Subscribe to:
Posts (Atom)