True cloud value goes beyond basic ROI

Finding the true value of a cloud project isn't as simple as CapEx vs. OpEx -- instead, you must look at your business’ particular problems.

Those charged with calculating the true value of cloud computing often refer to the old CapEx versus OpEx model.

If we adopt public cloud and avoid purchasing hardware and software, that will save use money, right? It's not that simple.

So, what's an IT leader to do to establish cloud value for your organization? There are no rules or solid models that you should use every time. As always, it's a matter of understanding your business and the impact that any new technology can have upon it. Cloud computing is no different.

The old way of defining the value of cloud computing through cost efficiencies and the ability to avoid capital expenses is falling out of favor. The reasoning becomes more apparent as we gather data points about the value of a public cloud computing model. Our old way of defining cloud value gives no consideration to several key issues: 

  • Existing investments made in IT infrastructure, including hardware, software and data center space
  • The need to change staff and add skill sets
  • The value of agility and time-to-market, as applied to the business in the next 24 months
  • The new costs of improving security and governance

The ability to determine the return on investment (ROI) of cloud computing is not a simple modeling exercise. Understanding and calculating the business values of cloud computing -- public, private or hybrid -- requires a complex and dynamic analysis that is unique to the problem domain you're trying to address.

Updated best practices for finding cloud value

The value of cloud computing depends directly upon the type of business, as well as the core business processes and specific problems you're looking to solve. Additionally, you need to determine how much value you actually gain from the increased agility and time-to-market, which are core benefits of cloud-based platforms.

The value of cloud computing depends directly upon the type of business, the core business processes and the specific problems you're looking to solve.

Here's where the problem gets more complex. You can't take generic models and tools, apply them to your enterprise IT model and hope it gives you the right answer. If you can't take the time to figure out what makes your business different, you're not likely to figure out the true ROI you will obtain from the use of cloud-based resources.

Returning to our list above, these are good guidelines to inverse, as they will get you to the right set of numbers.

First, consider existing investments made in IT infrastructure. Understand the difference between hardware and software, into which you've already sunk costs. These resources are not likely to be cost-effective to replace -- versus hardware and software that is no longer providing value. Therefore, it would be beneficial to outsource these resources to the cloud. What should be replaced and how much can be saved?

Second, consider the staff changes and skill sets, and project the changes cloud-based resources will have on your staff. This allows you to see the changes that need to occur in terms of talent -- including replacing or removing some staff positions -- as well as updating your existing staff with cloud skills. How much will this cost and how disruptive will it be?

Third, consider the value of agility and time-to-market as a value attribute to your business -- this is typically where the ROI can be found. However, the value of agility and compressing time-to-market is wholly dependent upon the type of organization you are and the weight your organization puts on it. For instance, if you're a high-tech company, then time-to-market and agility advantages are typically prioritized. If you're a paper plant that has not changed the product or business processes in 20 years, then neither likely holds much worth.

Finally, consider the costs of improving security and governance. These are typically not addressed until the cloud is deployed, and thus have a tendency to erode or remove the value altogether. Cloud-based platforms typically require updated security approaches and technologies, which cost a lot of money. What's more, governance should be automated when using cloud, which is expensive. These costs can be as much as 30% to 40% of the final cloud resource deployment costs and certainly drive more training and staff costs.

About the author:
David "Dave" S. Linthicum is senior vice president of Cloud Technology Partners and an internationally recognized cloud industry expert and thought leader. He is the author or co-author of 13 books on computing, including the best-selling Enterprise Application Integration. Linthicum keynotes at many leading technology conferences on cloud computing, SOA, enterprise application integration and enterprise architecture.

His latest book is Cloud Computing and SOA Convergence in Your Enterprise: A Step-by-Step Guide. His industry experience includes tenures as chief technology officer and CEO of several successful software companies and upper-level management positions in Fortune 100 companies. In addition, he was an associate professor of computer science for eight years and continues to lecture at major technical colleges and universities, including the University of Virginia, Arizona State University and the University of Wisconsin.

This was first published in June 2014

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