Total Cost of Ownership (TCO): What Organizations Need To Know
When migrating to the cloud, determining the total cost of ownership (TCO) is an essential first step as it can help quantify the actual advantages over an on-premise setup. Understand cloud TCO to justify your cloud deployment.
Over 60% of organizations today use the cloud, and many more are looking to embrace it in the near future. One of the critical aspects that enterprises take into account when migrating is the cost factor. For 82% of cloud users, managing cloud computing spending is a focus area, and cloud cost optimization is a significant priority. The cloud also presents the prospect of freeing businesses from the tedium of managing on-premise infrastructure.
Understanding the price offered by cloud providers or the cost of managing workloads is insufficient to estimate the actual cloud cost. To accurately capture every single cost component, you must analyze the cloud’s total cost of ownership (TCO).
A comprehensive idea of cloud TCO (total cost of ownership) will help you arrive at the right cloud budget and understand the cloud’s ROI. However, TCO calculation can be daunting unless carried out methodically. To help you, here is a thorough discussion on cloud TCO and some best practices to follow.
What is the Cloud TCO?
Cloud TCO is the sum of all the costs associated with adopting, operating and provisioning the cloud. It is purely the complexity of your operations that will decide the exact cloud TCO. Typically, you begin by estimating the cost of migrating from on-premise to the cloud before progressively moving to other factors like rack rate, compute, networking, and data transfer.
Overall, the cloud TCO gives you an idea of the various costs incurred in hosting, running, integrating, and managing your workloads in the cloud. Different elements will decide how much the cloud will cost you; however, there will be some common characteristics. Below, we drill down into the various cloud cost components that go into determining the TCO.
What Does the Cloud TCO Include?
While trying to estimate cloud TCO, enterprises compare the cost of running workloads on the cloud against the on-premise scenario. However, the cost models in both cases are different as cloud costs are based on subscription and payment models, unlike on-premise infrastructure, where the physical infrastructure dominates the cost.
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Here, we discuss the major cost drivers in cloud computing.
Migration
Moving workloads from on-premise to the cloud is the most significant step in cloud adoption. Applications may have to be modified, and a tremendous amount of data transfer initiated to function successfully on the cloud. As per Gartner, five migration strategies — Rehost, Refactor, Revise, Rebuild, Replace — can be leveraged for a successful migration. Based on the need, enterprises can choose a suitable migration option. Each approach’s cost implications will differ, so you will have to understand the cost of the selected approach.
Infrastructure Resources
Infrastructure costs will be driven by data storage, network, compute instance, and SaaS usage, as well as maintenance and upgradation activities revolving around adjusting cloud services, shutting down development/test instances, evaluating computing capacity, and upgrading applications. A stable infrastructure will also deploy a disaster recovery system to recover from unexpected damage to the cloud infrastructure.
Hiring and Training Personnel
Cloud operations require a range of technology professionals, from cloud developers to administrators and network engineers, each of whom will add to the payroll. Likewise, staff will need to be equipped with various types of skills. For instance, the training contributing to cloud TCO will revolve around cloud security, DevOps, and programming to manage cloud-native applications.
Other Cost Elements to Consider
Your cloud model will also account for many intangible activities like the cost of managing potential risks to the cloud. Similarly, any violation of regulations can lead to legal costs. Data transit between cloud services will incur further expenses. Often, the cost can depend upon the nature of your business and the functions the cloud is expected to support. So, cloud TCO follows a dynamic model with fixed and variable components.
Best Practices to Calculate TCO
A firm understanding of cloud TCO is a must when migrating to the cloud. Here are some best practices that can help you get an accurate picture of your TCO, so you can prepare an adequate budget without being caught unaware.
- Develop a fair understanding of the financial model
The financials of cloud models work differently compared to on-premise models, as they are based on a consumption basis against utilization rates. You must begin by selecting a resource unit like storage or servers. Next, determine your workload’s average resource size and forecasted growth rate. Having a fair idea of memory usage will help you develop a good initial understanding of your cloud TCO model.
- Drill down progressively into the cost model
It is always a great idea to progressively dissect the cost elements so you can calculate the optimum utilization capacity. Ideally, the utilization capacity should be 90% of the resources’ maximum capacity. Capacity utilization metrics will allow you to understand the per-month usage, which will help you project usage costs. Once you have determined these major cost components, you can proceed to understand other fees.
- Go for cost categorization
One of the best ways to understand every single cost component in cloud TCO is to categorize your costs. For instance, you can divide expenses into the product, management, and operations categories. Product costs will revolve around managing servers and workloads; management costs will pertain to support and administration services, while automation, development, and training will fall under the operations category.
- Have value drivers for your cloud
Cloud migration may not be successful without strong value drivers. Some factors could be utilized, the duration you want your virtual machines to run, the expected security measures, and desired storage consumption. Your payment model should support your value drivers and justify your spending.
Optimize your Cloud TCO with Indium’s expertise
Today, organizations contend with the question of what their AWS or Azure TCO is likely to be. The cost of adoption will vary depending on the cloud service provider (CSP) you choose and the nature of the cloud (public, private or hybrid).
While the cloud has immense saving potential, the cost can quickly spiral out of control if you fail to monitor and closely watch the cost. Indium helps you to address complexities and challenges concerning cloud adoption, and it significantly lowers your cloud TCO. Understanding that even minute differences in TCO are enough to make a large-scale impact on your bottom line, we align cloud services to optimize your implementation expenses. Thus, with our cloud expertise at your disposal, you can derive maximum ROI from the cloud.
Special thanks to Tremis Skeete, Executive Editor at Product Coalition for the valuable input which contributed to the editing of this article.
