Cloud Computing: How to Determine Its Return on Investment

It is undeniable that cloud computing has become increasingly important to businesses in a variety of sectors in the modern world. This is particularly relevant at present, given the impact of the pandemic on the corporate landscape, which has necessitated a greater emphasis on responsiveness and agility through the adoption of cloud computing.

Many businesses are only now recognising the potential of cloud computing, which has the capacity to revolutionise processes and workflows while boosting security, mobility, collaboration and cost efficiencies. Despite the clear benefits, some corporate leaders remain sceptical about adoption, primarily due to concerns around return on investment.

The rationale behind this is that the return on investment for cloud computing is not always straightforward. Doing a cost-benefit analysis of migrating to the cloud requires taking into account a broad range of factors. Therefore, I will outline some of the most important considerations to bear in mind when assessing the return on investment for cloud computing.

Recognizing the Importance of Total Cost of Ownership (TCO)

Identifying the expenses associated with your current server architecture is key to gauging the potential return on investment of cloud computing. Total Cost of Ownership (TCO) should be taken into account, considering both direct and indirect costs associated with maintaining your infrastructure.

Understanding the Total Cost of Ownership (TCO) can help you to identify the costs that you could save by migrating to the cloud. Having a clear picture of your current on-premises server infrastructure expenses can help to give you an idea of the potential cost of transitioning to the cloud and the cost savings that can be achieved in the long-term.

To determine your total cost of ownership, you’ll want to include in a number of factors, including:

  • Servers.

    It is important to note that there will be occasions when server maintenance is necessary, and this will incur a cost. Furthermore, servers usually have a lifespan of three to five years, after which time they will need to be replaced, resulting in an increase in Total Cost of Ownership (TCO).
  • Assisting with repairs and upkeep.

    The total cost of ownership (TCO) should be taken into consideration when assessing the cost of maintaining the server infrastructure, including server racks and environmental controls. Purchasing, maintaining and replacing the hardware, components and assets that make up the ecosystem will add to the TCO.
  • The process of obtaining a licence to use software.

    The Total Cost of Ownership (TCO) can rise further when factoring in the cost of solutions used to manage your server infrastructure. Consider the cost of any software that may be necessary for this purpose, and remember to include the cost of any custom solutions, even if they were developed in-house.
  • Addition personnel.

    In order to ensure the optimal functioning of your server infrastructure, it may be necessary to hire additional personnel, either on a temporary or permanent basis. Such expenditures should not be overlooked, especially when taking into consideration the cost savings associated with cloud computing, when compared to on-premises hardware.
  • Costs associated with the production and use of energy.

    It is necessary to have a considerable amount of energy to maintain servers when they are being used to their full capacity. Therefore, the cost of this additional energy should be taken into account when calculating the total cost of ownership.
  • Room, in the literal sense.

    Maintaining on-site servers requires physical space, which incurs a cost. Consequently, the cost of housing servers must be included in the Total Cost of Ownership (TCO) even if the premises are owned.
  • Taking care of assets.

    The IT department will require additional time in order to adequately monitor the server infrastructure, should it be of a larger scale. As such, the Total Cost of Ownership (TCO) should take into account the additional effort which will be required for asset management.

It is clear that setting up and maintaining a private network necessitates a considerable financial outlay for hardware and software. The total cost of ownership can also include rent/lease payments, utility bills, and repairs. By carrying out a comprehensive cost analysis, you will be able to determine the financial benefit of migrating to the cloud in comparison to keeping the infrastructure on-premise. Make use of this information to gain an understanding of the profitability of cloud computing.

How to Figure Out Your ROI (ROI)

Once you have established your total cost of ownership (TCO), the next step should be to calculate the cost of transitioning to the cloud. Establishing your return on investment requires an understanding of the amount you are investing and the savings you are likely to make by making the switch.

Cloud computing expenditure can be notoriously hard to predict due to the various expenses associated with using cloud services. In my opinion, there are four main costs associated with transitioning from an on-premises server architecture to the cloud:

  • Telecommuting and other tasks performed on the cloud.

    One of the main drawbacks to consider when moving to cloud computing is the cost of necessary subscriptions. It is essential to select the pricing strategy that best suits your needs, whether it is a flat fee, a fee per user, or a fee per action.
  • Those available inside the organisation.

    You’ll have to pay for the time and effort spent migrating by your IT team and any other employees.
  • The process of obtaining a licence to use software.

    When transitioning to the cloud, it may be necessary to purchase new software licenses or relinquish the rights to any licenses held but not being used.
  • Added ability or skill.

    If you have the necessary skills to carry out the cloud migration internally, it may be beneficial to consider enlisting the help of cloud professionals to ensure the process is completed without any disruption.

It is important to be aware of the potential costs associated with transitioning to a new cloud provider. Aside from the more obvious expenses, there may be additional charges for upgrading other elements of your digital infrastructure to be compatible with the new provider. It is therefore essential to be fully informed of the costs involved throughout the entire process, and to be vigilant for any unexpected fees.

Once you have gathered the data, you can compare the total cost of ownership with the cost of migrating to the cloud. If the cloud migration is more cost-efficient than maintaining your existing infrastructure, then you should consider making the transition. You should also calculate the return on investment, which can be done using the following formula.

Return on investment = (profit from investment minus initial investment) / initial investment.

By subtracting the cost of cloud computing from the total cost of ownership, it is possible to estimate the return on investment. For example, if the annual expenditure on an on-premises infrastructure is $50,000 and migrating to the cloud would cost $30,000, the net profit would be $20,000.

It appears that the return on investment for moving to the cloud is negative (-0.3), however this is based on a single year’s total cost of ownership ($50,000). Therefore, it is not safe to conclude that the move should not be made.

It can be discouraging when introducing cutting-edge innovations; however, the return on investment (ROI) typically increases after the first year. For example, if you were to sign up for a cloud computing service for a three-year period, the ROI would be particularly beneficial.

(60,000 – 30,000) / 30,000 = 1

Factoring in a three-year period instead of just one can result in a three-fold increase in profits. There is a marked improvement in return on investment as anticipated. It has been observed that a longer commitment to cloud computing comes with a more significant return on investment. Migration costs are a one-off expenditure, but the associated long-term benefits make this a worthwhile investment.

Perhaps It Is Time to Contemplate a Switch to the Cloud

Despite any reservations you may have regarding the large financial outlay, you can accurately calculate your expected return on investment. By doing so, you can begin the transition to the cloud immediately, taking full advantage of its many benefits and ensuring that you receive the return on investment you anticipate.

It is important to bear in mind that savings and earnings may not remain constant over the course of the year. This Return on Investment (ROI) could be subject to alteration due to the growth of your company and variations in the pricing provided by your cloud provider. Fortunately, this formula can be used to calculate an approximate ROI, allowing you to take advantage of the potential benefits of cloud technology as you develop your strategy.

Related Articles: Getting Started with Cloud Computing and What to Expect Next

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