The proper calculation of the Total Cost of Ownership (TCO) is of decisive significance when weighing the costs of cloud services against the costs of on-premises IT.
The term “Total Cost of Ownership” was originally coined in the 1980s by a Gartner specialist when estimating the true costs of implementing IT Infrastructure - at that time primarily workstations. Decades later, the term has its rebirth, namely when calculating the costs of relocating IT to the cloud.
To find out the true costs of a cloud-deployed application or service, we have to take into account a variety of cost items on the debit but also the credit side. On the one hand, we need to take into account the costs of the cloud transformation. On the other hand, we can save costs in different areas or increase productivity which in turn increases our credit positions. All of these factors are included in the cloud TCO and make a TCO calculation fundamental for every truthful business case calculation.
Basically, we divide the cost of each cloud adoption into three categories: Pre-cloud migration costs, cloud migration costs and post-cloud migration costs.
During the preparation for the migration the largest share of the costs arise from employing skilled teams.
Before getting started with the migration, an overview of the application portfolio needs to be created and the cloud requirements are to be determined. This includes a comprehensive assessment of each application in order to evaluate whether migrating to the cloud makes sense from a technical and a business perspective. At this stage the application’s TCO comes into play for the first time. It is recommended to calculate an application’s business case first and define which applications should be in scope for migration and subsequently require a technical deep-dive assessment.
Once the decision to migrate has been made, a migration plan must be drawn up. Dependencies between applications and processes are captured and along those, the applications get divided into groups, so-called migration waves.
All these tasks take time, effort and trained personnel. Regardless of whether the migration is carried out with your own staff or an IT service provider, this phase implies heavy cost that you should take into account when calculating cloud TCO.
The costs of migration strongly depend on the migration strategy that is applied:
Next to the chosen strategy, other factors influence costs of the migration phase: Similar to the pre-migration phase, labor costs make up the largest share of the cost of this phase. It is likely that you even have to hire additional employees or need external know-how. Last but not least, do you require new software solutions to perform the application assessment and the transformation? Take into account all these items when calculating the cloud TCO!
The third share of cloud TCO is made up of post-migration costs: In the first place, there are the operating expenses (OpEx) of cloud services. Prices between providers vary significantly. If your organization’s IT strategy allows a multi-cloud strategy, there is great savings potential here. In case you already use Txture Cloud Transformation, you have learned to benefit from its automatically created cloud architecture proposals across many cloud providers. Also with Txture's Cloud Insider you are offered comprehensive options for a cost comparison and cloud product insights.
Increased bandwidth costs need to be taken into account. Moreover, as was the case on-premises, license costs play a role. Post migration, some costs are rather easy to forecast, other costs can only be roughly estimated. E.g. effort put into managing and maintaining cloud infrastructure or the costs for continuous improvement of the cloud service portfolio. Also, don't forget the costs of new staff required or the need to train existing employees.
In summary, several cost items have to be taken into account for the TCO calculation. There is always a trade-off between upfront investments and long term benefits when using cloud services. It all depends on your current situation, which is best described by a proper business case analysis and a technical assessment of your current application and IT inventory.
Despite upfront investments when moving to the cloud, there are many items we can add to our credit side.
Cloud adoption will reduce the costs for on-premises physical hardware. This includes costs of capital investment for new equipment, the costs of operating it whether you are utilizing it or not, and the costs to maintain the hardware and software stacks on all levels. Energy costs will decrease and existing staff in IT can become focused on innovating, rather than maintaining. For commodity software, you can easily pick commercially available SaaS and get rid of any in-house solutions that are solely business utility, but not a business driver or innovation lever.
A great advantage of the cloud is that you only have to pay for what you need. Scaling and planning resources are much easier and do not require large investments and long lead times anymore. A large part of the costs is also substituted by higher flexibility and productivity.
The benefits of cloud prevail - especially when you start to fully exploit what the cloud offers. The TCO calculation helps to include all factors and simulates what you have to do at least to have a positive balance for your cloud move, both in the short and long term. While doing so, it’s advisable to consider the entire application portfolio in a business case analysis, but also to break down TCO for each application individually. All in all, a cloud move requires investment decisions to be made strategically, but also by a broad involvement of individual application owners.
Txture Cloud Transformation’s core capabilities are the cloud readiness assessment of large application landscapes and the generation of optimal cloud target architecture proposals. Txture's cloud knowledge engine estimates the OpEx for your target cloud architectures and compares it with your current on-premises costs. This enables you to do a cloud business case analysis for individual applications or your entire application portfolio.
Txture's Cloud Insider has been designed to compare prices between different products and cloud service providers, helping you to select the right products to create high-quality bills of materials and solution architectures.
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