What is the business value of Cloud? How do I justify Cloud? What’s the ROI? I don’t know how often I’ve received these questions. So, today I want to take a moment to put my thoughts together and answer these particular questions. I’ll work with very simple examples that everybody is familiar with. Don’t worry, I already hear the purists telling me that I will not be comparing apples and apples. They are right, but I’ll be close enough to bring my points around.
Private versus Public Cloud
Private and public clouds have two extremely different business models. The private cloud business model is close to what IT departments are used to. You buy hardware and software and then amortize it over a number of years. Cloud adds functionality, but at the same time it adds cost to the system.
A little over a year ago, I wrote a blog entry titled “Cloud ROI, 5 Areas of Returns” addressing how you can justify this extra investment in private cloud. Today I’d like to focus more on the public cloud side of things, at least for the ROI question. The other points I’ll make, are applicable to both.
To illustrate the point I want to make, I’ll use Amazon as an example. I chose Amazon because pricing is equivalent for most public cloud services.
According to the Amazon pricelist, a small windows server costs $0.115 per hour. Cheap isn’t it? Although I have to warn you, there are often additional costs associated with accessing and using such a small windows server. Public Cloud pricing is often like budget airlines, the final price you pay does not bear any resemblance with the advertised one. But let’s not think about that for the moment.
A small windows server costs $1007.4 per year. How do I come to that number? I multiplied $0.115 by 24 hours a day and 365 days a year. For that price I can easily get a small desktop computer providing similar capabilities, can’t I?
Cloud and Storage
Let’s look at storage. One Terabyte of simple storage costs $0.093 per GB per month for reduced redundancy storage. That’s actually $1116 per year per terabyte. A 1TB hard drive typically costs around $100. So, I could buy a couple and build redundancy at a lower cost, couldn’t I?
Yes, I am being provocative here. But I want to point out one thing. If you have an urgent need for compute or storage capacity for a short period of time, there is no better place than public cloud (as long as the data you store is not location sensitive). A converged cloud model where public cloud complements your private cloud in case of excess demand for example is a perfectly viable alternative. If you are looking at replacing your internal IT with public cloud, you will need to take other costs or aspects into account before being able to justify your choice.
Obviously, if you are a start-up, looking to avoid having to hire an IT specialist, you are in a different situation than an established enterprise with a mature IT department.
The Cloud ROI question is not an easy one to answer because it depends on the duration of your needs and your current situation. Make sure you take the time to model all your costs and your savings to avoid any bad surprises.
Don’t feel downhearted with this news. There are more elements that justify cloud. Let me take a moment to discuss those.
The value of agility
The one place where cloud—both private and public—makes all the difference is business agility. Business agility is the ability for business to adapt rapidly and cost efficiently in response to changes in the business environment (Wikipedia).
Let me give you a couple examples to illustrate where cloud computing can help:
- Your company is sponsoring an event and you’re informed with short notice that you can link the event site with a merchandising site where you can resell some of your products. Can you set-up the appropriate environment and link it with a payment system in a matter of days? What is the additional business you can collect if you take advantage of this opportunity? How much additional profit can you make?
- Your existing online environment occasionally is unable to handle the traffic on the site. You notice viewers abandon transactions because of unresponsiveness of the site. What if you could turn-on additional infrastructure in a matter of minutes? How much extra business would you collect? Imagine the increase in profit…
- Something went wrong and you realize you have to recall a product. You quickly set-up a service to guide your customers through the recall procedure. This service simplifies the recall process for them. Will this pleasant user experience affect the future buying behaviors of your customers? Will this generate additional business?
- A natural disaster strikes a geographical area where some of your suppliers are located. You realize there will be a shortage of specific components needed in your products. In the face of this tragedy you will have to handle your available stock and your remaining supplies very carefully. You quickly set-up an environment where your subsidiaries, your business units and your suppliers can collaborate to optimize the use of the available components. How can this help you maximize your business in such difficult situation?
- One of your factories has a serious problem and is polluting the environment. You will have to fund the cleaning of the spill, and it’s advantageous to quickly stop the leak. You need all the information you can find to do that. Can you quickly establish an environment where you can search through unstructured data to find a solution? How much will you save by minimizing the spill quickly?
These are five examples where speed is of the essence. Speed allows you to gain more business and increase profit. It can also help you reduce cost. That’s the principle of business agility. But financially quantifying the benefit is not easy.
What does “agility” really mean?
In a blog entry titled “Calculate return on agility to find cloud’s real value”, David Linthicum points out that, “The trouble is that business agility -- what we're really talking about here -- is one of those MBA terms that businesses neither understand nor have a clue as how to define in their own contexts. Those who don't bother to figure this out are doomed to not understanding why they should, or should not, move to cloud computing.”
If you’re interested in digging deeper and understanding ways to measure business agility, I found “On the Measurement of Enterprise Agility” by Nikos Tsourveloudis and Kimon Valavanis. It describes in detail—including the mathematical formulas—how you can measure agility. Although not specifically related to cloud, you can still use this method.
Most companies won’t go that far. But, by using a couple scenarios and a good spreadsheet, you can make reasonable calculations on how increased agility improves the bottom line. And that is the most important, isn’t it?
Cloud can also support innovation which in turn creates new business lines and adds value to the bottom line. But that’s an additional aspect, so I’ll keep that for the next blog entry if you don’t mind.
How do you measure the ROI of your cloud activities? I want to hear from you and hear what works in your environment.