How to understand the ROI, cost savings and lower total cost of ownership that come from cloud computing Featured

3:24pm EDT February 22, 2011
Mark Swanson, CEO, Telovations Inc. Mark Swanson, CEO, Telovations Inc.

There’s no doubt that cloud computing has received a great deal of interest from companies both large and small over the last couple years.

Gartner Inc. estimates that cloud services revenue grew 17 percent in 2010 to $68 billion. The promises of ROI, cost savings and lower total cost of ownership are some of the major contributors to this trend.

Despite this fact, there are many companies that still aren’t seeing the cost savings. A CIO of a major health care company recently had this to say about moving to a cloud based PBX: “I did look at the cloud solution very carefully and it was just too expensive.”

Smart Business spoke with Mark Swanson, the CEO of cloud communications provider, Telovations Inc., headquartered in Tampa, Fla., to get a better handle on cloud financials.

If you put your financial hat on, how should one look at the cloud?

The easiest way to think about cloud computing is that your technology infrastructure — the servers and software you purchase, run and maintain — is on the Web. Unlike traditional software, which is deployed on-premise, cloud applications are designed for Web deployment — that is they are multi-tenant and users share processing applications managed by the vendor. From a financial perspective the cloud has three basic attributes:

  • Little or no upfront costs. Instead of paying license, hardware and/or installation fees, users pay as they go. There’s little upfront capital cost as companies pay per user, usually by a monthly fee. From a financial perspective, you can take advantage of scale, which means the cost per user is less, especially over shorter time horizons like less than five years. In addition, these systems require skilled technicians to deploy and maintain, so perhaps the biggest thing you realize is that the upfront costs include the cost of hardware and IT employees that no longer need to be in-house.
  • No hardware or maintenance costs. In the cloud, the vendor takes responsibility for maintaining the software and servers. However, if you just evaluate the ROI of switching from on-premise to cloud products by comparing what they are spending now to what they will be spending if they switch, it’s not really comparing apples to apples. In an on-premise environment, the customer pays for the hardware, storage space and IT personnel to maintain the system, in addition to the software. In a cloud environment, the vendor fronts those costs, so a larger percentage of the total cost of ownership by the customer shifts away from hardware and people and toward software.
  • Quick implementation process. Many seasoned IT professionals have heard the nightmare stories about over budget/over time failed implementation projects where you are spending money but getting zero benefit. With the cloud, most applications can be up and running in a few minutes because there is no software to install. The implementation process also is easier for companies with multiple locations or remote workers as everyone can have access to the same version of the application simultaneously.

After you pick an adequate time horizon, a Net Present Value (NPV) calculation can be quantified pretty easily. But it’s really the intangibles that make or break the calculation.

What do you think is an adequate time horizon to evaluate?

I suggest analyzing whether to make the switch as a three-year amortization of upfront costs for an on-premise application including servers, software licenses and installation, plus estimated maintenance and support costs, and comparing that to the cost of subscribing to the cloud version of the product for three years. Some might think that three years is too short, but according to many studies three to four years makes sense for several reasons. What you have to consider are unplanned events: you get acquired, technology obsolescence, you grow too fast, and the big one, how long apps take to test. Gartner also reports that testing consumes 25 to 50 percent of the average application life cycle. That’s a year right there!

What are the intangibles that sway the calculation?

This is where you get into what I call ‘BeanCounteritis.’ Many financial people get wrapped around the axle about the hard cost comparison with premise based systems. The real savings and return lie in the soft costs surrounding cloud based applications, including:

  • Office space. Create ways to work remotely, which enables savings on office space through hoteling or home offices.
  • Reduced support costs. Rather than having to employ in-house experts for product support, the vendor typically provides support directly for the customer.
  • Reallocation of resources. IT staff can focus on more strategic projects, rather than system upgrades and maintenance.
  • Easier and more regular upgrades. Vendors regularly upgrade products. In the cloud, those enhancements are made automatically in the background without disrupting work.
  • Disaster recovery and backup capabilities. One of the costs incurred by customers who keep their data on-premise is backing it up, typically via tape or a third-party backup provider. This is another area covered by the vendor in a cloud environment.
  • Credits from SLAs. Downtime is never good and it is particularly bad for cloud vendors. They spend extra money to make sure it does not happen. And if it does you get a nice credit. You won’t get this from your IT staff.

Any other symptoms of ‘BeanCounteritis’?

Perhaps the biggest threat of ‘BeanCounteritis’ is not considering risk. Often companies become so gun shy about pulling the trigger on large capital expenses that they let others get a leg up on them. The cloud ultimately is a way you can count your beans and eat them too. The cloud makes it easy to change direction without incurring the capital costs and significantly reduces the cost of failure. That’s the great thing about cloud apps.

MARK SWANSON is the CEO of Telovations Inc. Reach him at mswanson@telovations.com.