The ROI of Private Cloud: Key Measurements and Metrics
This blog is part of The ROI of Private Cloud series which discusses key concepts in projecting ROI, as well as the detailed analyses of three organizations looking to move to private cloud.
Moving to a private cloud can enable significant cost savings and benefits, but the cost to get there will require investment. Projecting the ROI of the transformation can help justify the costs and build consensus within IT and the business. However, determining the ROI is more than just a comparison between current and target state hardware and software costs. There are many additional factors that need to be considered which are covered here.
Business As Usual (BAU) Costs
The first step in determining ROI is identifying BAU costs, which are the CAPEX and OPEX for the various components of the current IT environment. This includes the depreciation and maintenance costs of the hardware used in delivering services. It also includes the licensing, depreciation and maintenance costs of the software used to deliver services. Some software examples are server operating systems, utilities, subsystems, and applications. Local and wide area network costs as well as costs for the embedded network components of services need to be considered too.
Additional BAU costs include the cost of in-house IT and development staff that delivers services; the costs for power, cooling, space, physical security, remote hands, and administration of the physical sites that host services; fees paid to outside organizations that assist in supporting services, such as outsourced Help Desk support; and corporate overhead costs.
Target State Costs
Similar to BAU costs, target state costs are the CAPEX and OPEX for components of the target IT environment, including hardware, software, infrastructure, networking, facilities, staff, fees for external services, and overhead. Estimating target state costs requires a good understanding of what the target state will be.
In addition to current and target state costs, the costs to get to the target state are required. Typical transition costs include the additional swing hardware and parallel systems needed to perform transformation activities.
Transition costs also include costs for additional licenses and parallel licenses. For example, the current environment may use SAP ASE (Sybase), and the target environment may use Oracle. New licenses will need to be purchased for the target database and both the current and target databases will need to be running in parallel until the transformation is complete.
Additional costs are the supplemental connectivity needed to effect the change; staff time needed to support the transformation, as well as the organization that needs to be assembled and trained; facilities needed to effect the change; and fees paid for consulting services and supplemental support, including consulting needed to train in-house staff and execute the transition.
A cost that should not be overlooked is opportunity cost. This includes the cost of projects that cannot be performed because of the resources/staffing focused on the transformation, financial investments that cannot be made because of the transformation, and the cost of funds.
Net Savings, NPV, Payback Period
In addition to ROI, there are other metrics that should be evaluated when assessing the business impact of cloud transformation. Two critical metrics are Net Savings and Payback Period.
Net Savings analysis starts with a cost-benefit analysis (CBA) to determine the total cost of ownership (TCO), capabilities and risks for the current state and for the target state. This analysis should address costs at an atomic level, for example, cost per user, cost per VM, cost per vCPU, etc. The TCO is used to calculate IT budget run rates for the current state and the for the target state.
An investment profile based on the transformation roadmap provides the capital and services investments required for the transformation. These costs, along with the target run rate costs, provide the net IT costs for the transformation. Comparing this to the current state run rate yields the Net Savings.
The analysis should also take into account the time value of money by calculating the net present value (NPV) of the investments and savings. This will show the potential investment returns in current dollars. All of the analysis should be multi-year, typically covering a five year investment period.
Payback or breakeven analysis evaluates how much time, usually expressed in years, it takes to recover the total cost of the investment (including both capital and services costs) and therefore, when the real savings from the transformation takes effect.
Simple comparisons between current and future state costs are often the basis of business cases. However, to accurately project the actual material effect, one must understand and include the transition costs and business opportunity over time into the equation.
Learn more about the typical savings that can be achieved and see the detailed ROI analyses for three organizations in The ROI of Private Cloud: Quantifying the Cost Savings and Benefits of Moving to a Private Cloud.