In Cloud economics, apart from the CapEx and OpEx, there are a plethora of things which are important. To provide an agile, flexible and auto-scaling cloud infrastructure, ROI(Return on Investment) and TCO(Total Cost of Ownership) plays an important role. Each cloud providers and businessman must know about it. So, in this article, we will discuss what are ROI and TCO in the cloud and how they are important from the cloud economics point of view?
What is the ROI(Return on Investment) in Cloud Economics?
Most of the business today run the “Return on Investment” or say, ROI model. The industrial revolution forced the world to change in four major ways they are:
- Faster Production
- Inspired innovation by removing resource constraint
- Safer transportation
- Punished lethargy and rewarded the agility
There is some truth about cloud economics:
- Replicating what you have in your data center will yield in nominal savings.
- A typical data center server utilization is under 15%. However, deploying it on the cloud results in more than 75% server utilization.
- Investing in full-stack automation is not cheap however it is worth it.
- Understanding organizational transformation is necessary.
Therefore, we calculate the ROI and TCO which substantially helps the business in various areas such as:
- Defining the objectives.
- Outlining the success criteria and probability.
- Identifying the quantitative and qualitative benefits by accessing the current and future state.
Some quantitative benefits include infrastructure cost, support cost, licensing, run cost, mean time to recovery, and release frequency. While some qualitative benefits can be agility, operational efficiency, adaptability, consistency, and ease of use.
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So, we can define “Return on Investment (ROI)” as follows:
Financial gain from an investment in cloud / The cost of that investment
Cloud ROI must be profit providing and return the value to the company. In ROI, we often consider IT cost savings which is only one side of the coin. In addition to this, the cloud ROI should be more related to the value that an organization gains.
There are many factors that are overlooked while calculating the ROI and TCO which can be listed as follows.
- value of agility
- Cost to retire selected application, data centers or infrastructure
- Accelerated time to market
- Developer productivity
- Changes required to maintain service level
- Software cost
- Organizational transformation costs, etc
What is the Total Cost of Ownership (TCO)?
In simple words, the TCO is the sum of all direct and indirect costs in an IT business. In other words, cloud TCO defines what will be spent on technology after its adoption. Some factors on which calculation of TCO depends are as follows.
- Application development cost
- Maintenance and support cost
- Operations, data center cost
- Network, and staff cost
Generally, a TCO calculation compares the costs of the on-premise infrastructure from the costs of the cloud. Calculating TCO and doing its analyses are much simpler than ROI analyses. However, both of the calculation models only provide a narrow view of the total financial impact if you are moving to the cloud.
I hope now you know what are ROI and TCO models and why they are important form the cloud economics point of view. In general, TCO tells us the spending and savings, whereas the ROI determines what value is generated form our expenditure. As a stakeholder or businessman, it is critical that you understand both and their differences. This will immensely increase your profit if you opt for cloud-based business.