Calculating the true cost of cloud

Undoubtedly cloud computing is the way of the future, and provides organisations of every type and size with benefits. But how many businesses have really considered the true cost associated with doing business in the cloud?
Read time 13min 50sec
Darren Bak, Synthesis Technologies.
Darren Bak, Synthesis Technologies.

There is no question that cloud computing is the way of the future, and that having access to the cloud can benefit organisations of every type and size. But how many businesses have really considered the true costs associated with doing business in the cloud? And with uncertain economic times and a slew of different cloud and on-prem options available, it has become critical for organisations embarking on a cloud journey, to thoroughly examine the total cost of ownership of cloud versus their existing infrastructure before making a move.

The public cloud isn’t the silver bullet that everyone is saying it is, says Joshua Grunewald, cloud hosting manager at Saicom. “It has a purpose for specific systems or applications, which are very specific to any particular business. It may be a 95% fit for one business, 5% fit for another, or a 50/50. IT leaders need to know what they need and how to make use of what's available.”

When it comes to auditing your current costs, it is about making sure that you have factored absolutely everything in - from infrastructure to shared costs and day-to-day operational costs, he adds. “A lot of people forget the support contracts and agreements that you have to renew on an annual basis. This is generally a capex cost and will have to be depreciated over a certain period of time. This means there's opportunity costs lost. “A good checklist would include hardware, support and maintenance agreements, software and licensing, staff resources to manage the infrastructure (including shared resource time from other teams). “It would also include overheads such as power, cooling, security, fire suppression and environment control, and any associated support contracts.”

“The easiest way to conduct an audit is to use a software tool, of which there are a variety of different tools on the market to choose from,” says Barry Kemp, head of IaaS at Vox. “ A key aspect is to have all the right information from the business to input into the tool, for example the costs of electricity consumption, HR in terms of the IT team, rent, the hardware currently being used by the business, and where it is in its depreciation cycle to be able to build a holistic picture of the business’ infrastructure cost.”

Laggard organisations are now forced to go to cloud as the threat of disruption becomes a reality.

Darren Bak

Darren Bak, head solutionist at Synthesis technologies says most organisations do not have an up to date inventory management data store and therefore the best approach to data collection is an automated approach. “TSO Logic (now part of AWS) can automatically gather the infrastructure information and generate a business case for you. However, gathering infrastructure costs alone does not give you a full picture. Application, people, third party, and migration costs all need to be gathered in order to produce a well round cloud business case.”

“It is surprising how many businesses under-estimate their costs for owned infrastructure,” says Andrew Cruise, MD of Routed. “The main reasons are firstly their inability to apportion shared costs correctly, and secondly their inability to value risk and business agility. It is trivial to cost infrastructure initially by looking at the capital expense of purchasing or financing the hardware and often software. These are usually individual line items in an income statement or ledgers on a balance sheet, easy to audit and ascertain.

But digging deeper, these costs are augmented by costs of the server room estate, power, cooling, security, and operating expenses such as human resources. Often these items are bulk line items in a business' income statement, such as power, cooling, rent. Or for human capital, invariably the resources have multiple responsibilities including infrastructure administration and management and it’s difficult to separate out the infrastructure costs. To audit these costs, businesses need to identify all contributing costs to the infrastructure and separate out the shared costs in a reasonable manner.

Alternately, it’s possible that some costs are just not borne by the business, which in this case increases the operational risk, such as lack of security, or understaffing. This too is difficult to value.”

The public cloud isn’t the silver bullet that everyone is saying it is. It has a purpose for specific systems or applications, which are very specific to any particular business.


Once you have your infrastructure cost it is fairly easy to determine the total cost of ownership, which will include HR costs, says Kemp. "Free software tools such as an Azure tool can be used and there are some paid ones that do a deeper dive into what the company’s current hardware looks like. Once again it is important to have the right data to put into the model to receive an accurate set of outputs.”

For Grunewald it isn’t so simple. “If you browse the internet for five minutes around TCO, you will come across multiple articles talking about calculating total cost of ownership in many different ways. Is there really one correct way or all encompassing way to calculate this? I don’t believe there is. What will work for one business will possibly not work for another. Calculating the total cost of ownership is really about assessing the long term value of IT investments within an organisation, and infrastructure, whether on premise, or in the cloud, is no different.”

An effective cloud business case is made up of migration costs, TCO, cost optimisations and value benefits, says Bak. Analysing the intangible benefits will provide a more rounded business case to justify a cloud migration and create urgency to get ready for cloud. The majority of a cloud business cases focus on cost savings, however, this is not the most compelling benefit. “Business agility, productivity and resilience are far more so, however, they are intangible and therefore complex to calculate, and are often just ignored. Business strategy and objectives should drive any cloud strategy. Cloud adoption tends to be far more successful when executive sponsors see cloud as an enabler of business agility, productivity and resilience; not just cost savings.”

The majority of a cloud business cases focus on cost savings, however, this is not the most compelling benefit.

Darren Bak

Speaking of the hyperscale cloud providers, Cruise says there are plenty of online calculators available to assist with assessing the costs of running infrastructure in their respective clouds. “However, traditional IT workloads are often not suitable to these hyperscale clouds as they demand high resource usage such as storage IOPS and network data transfers. Its non-trivial to measure these on-premise and then input these into calculators to determine the overall cost. Migration costs need to be taken into account and tend to be grossly underestimated. Many businesses make a sweeping decision to migrate to hyperscale cloud without assessing how much time it will take to convert their workloads into native virtualisation format, let alone think about rearchitecting the applications in a cloud native fashion.”

Then there's the question of shadow IT, and how to get handle on its true cost. According to Cruise, shadow or stealth IT usually refers to departments utilising hyperscale cloud providers (AWS, Azure, GCP) without central management.“Costing this is relatively simple. For these services there must be invoices, which need to be discovered and aggregated. Of course, it’s the discovery that is tricky, it’s not called stealth IT for nothing. However, if a cloud migration is formally undertaken, the need for shadow IT recedes and all of these costs should be folded into the whole project.”

“Cost savings forecasted in a business case are not always realised in reality mainly due to development teams not having a culture of cost transparency and accountability,” adds Bak. “The shift when migrating to cloud means application teams are now responsible for their spend and have the control and ability to optimise on costs. The culture shift is not a priority in most organisations and this leads to “bill shock” at the end of the month. The unintended consequence is that developers have free reign to use whatever cloud service they want without consideration of cost and most importantly how the design of the solution impacts cost.”

“In a world where services are quite easy to consume, costing shadow IT can be very difficult unless one has the right processes in place. There are a few ways that this can be controlled, all of which should be employed to successfully get a handle on shadow IT,” comments Grunewald. “IT should be sitting with each department of the business and discussing their needs - understanding how to deliver services to each part of the business and successfully doing this will go along way into controlling shadow IT. Educating the business on how resources or services are consumed is also key to empowering the business, which will deter from trying to find alternatives and introduce unknowns and risks into the IT environment.”

Quantifying is tricky, but not impossible. Less understood is the cost of “stickiness", or being captive in any one particular cloud.

Andrew Cruise

Kemp believes shadow IT is another problem that can also be solved with software. “Most of the cloud vendors have some sort of cost management ability built in that can show businesses if they have unused resources in the cloud or have spun up a virtual machine (VM) and that it is sitting idle. Robust governance policies are very important. These policies provide guidelines in terms of who has permission to spin up VMs or turn on services, and combined with an approval process ensure the business has a handle on its cloud costs. In the days of capex, the IT team would have to motivate for a hardware expense, which meant they had to do an analysis as to whether they really needed that particular piece of kit. With cloud, because it is so easy, IT teams may spin up a server and give it very little thought, which leads to a bill shock at the end of the month. The IT director is aware of the extra server, but doesn’t necessarily conduct the analysis to find out if it is the right option and whether there is a better, more cost-effective way.”

Over and above shadow IT, there are other hidden costs, which are hard to uncover and quantify, says Kemp. “It is usually the small things that add up to big costs. An example is storage - in Azure it is charged according to the amount of storage a business takes, but it is also charged according to the number of transactions and it is very difficult to work out how many transactions there will be beforehand. Cloud providers also charge for data coming out of their cloud, which makes it difficult to budget as it depends on the application being used. Some applications may only push data into the cloud once, while others may need to send it out multiple times and then the business has to budget for the extra bandwidth cost.”

Month end bill shock from the hyperscale cloud providers has been well documented so many of the hidden costs are now known, adds Cruise. “However, quantifying is tricky, but not impossible. Less understood is the cost of "stickiness" - being captive in any one particular cloud. The hyperscale cloud providers differentiate by offering specialist functions and services, which businesses begin to rely on and can hold them hostage in the long run. Businesses should bear in mind that there are alternatives when it comes to infrastructure.”

If you take like-for-like and move what you have on-prem into the cloud it is generally going to be more expensive, adds Kemp. “An assessment of the on-prem infrastructure is crucial so that the servers can be resized for the cloud. Most of the assessment tools would recommend that a smaller sized VM can be moved into the cloud, which means the business ends up saving money. With cloud the business can budget for what it needs tomorrow and if it needs more resources later in the week it can just increase its requirements. The cloud requires a different mindset and although you budget for a year in advance you definitely don’t have to budget three years in advance on your spending. Another aspect to consider is managing costs across the different clouds. With more multinational datacentres set to arrive this year costs management across different clouds can be a challenge.”

For Bak, the most challenging aspect of cloud adoption in terms of hidden costs is, unsurprisingly, non-technical in nature. “Upskilling your current IT teams on the new technology, creating new job roles and families, driving the change in culture and communicating this across the organisation is often underestimated and realised too late. From a technical perspective, your networking costs can become expensive however this can be mitigated by having experienced solution architects and cloud engineers with a deep and broad understanding of all the cloud services, how they work and in particular the cost metrics associated. Another hidden cost is the guardrails enabled to secure your AWS Account like AWS Config for asset management, Amazon Guard Duty for threat detection, KMS for managing encryption keys, AWS CloudTrail for monitoring and alerting and VPC Flow Logs for monitoring network traffic. These costs are often overlooked when designing applications in Cloud and therefore not contained in the estimate costs.”

So do the costs of cloud outweigh the benefits of keeping everything on-prem? “Definitely,” says Kemp. “Simply put, there is less that the business has to worry about such as load shedding that is a massive challenge for companies as well as connectivity. Headaches such as these go out the window. However, companies have to guard against thinking that they will save on their HR costs when they take their servers off-site. Moving to the cloud means that the business still requires people to run those services even though they are delivering more high-value tasks.”

“Not always,” says Grunewald. “A company needs to properly consider what their needs are and deploy their environments accordingly. This is why, with a greater knowledge of what is out there, many companies are employing a hybrid or multi-cloud strategies Companies can deploy into the hyperscalers, only what needs to be in public cloud, keeping everything else on-prem or in a private cloud.”

Most cultural changes such as Agile, DevOps and similar are impractical and realistically not achievable without cloud, says Bak. “Similarly cloud is the enabler for initiatives such as digital transformation, AI and big data. Without cloud all these initiatives are slow, expensive and hinder innovative thinking. Time to market in a highly competitive sectors isthe difference between customer attrition and true increases in market capitalisation. And while the cost of implementing cloud has meant that CIO’s prefer to stick with the status quo, laggard organisations are now forced to go to cloud as the threat of disruption becomes a reality especially in the fintech space where start-ups are far more agile and productive.”

In the beginning of your journey, you need to answer the core reasons for going to cloud, ends Bak. “The easiest way to stimulate conversation with technical executives is by asking this simple question: What would happen if you did nothing? For financial areas, use the term opportunity costs; for marketing, sales and business areas call them intangible benefits. These mutually agreed reasons should drive all decisions about technology, process, tools and priority.”

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