In-Depth
Calculating the True Costs of Cloud Computing
Understanding what you are paying for helps you uncover hidden costs and measure ROI.
By Louis Takacs, Vice President of Product Development, ComSci
Many organizations have embraced cloud computing and virtualization technologies because of the cost savings offered and the speed and agility at which services can be procured. As more organizations move towards cloud computing, they need to ask: Do we understand the true total cost of ownership of a cloud solution?
The advantages of cloud computing are well-documented: On-demand delivery and subscription pricing models that translate into lower up-front investment; reduced risk and faster time-to-value; vendor-managed maintenance and upgrades; and, scalability.
As software and services move out to the cloud, many business managers need to consider the additional investments and hidden costs that go hand-in-hand with commoditized cloud services. For example, a business unit in need of a specialized application platform (for instance, an ERP application) isn’t just paying for the software. Managers need to factor in help desk support, security, and virus protection -- all the other elements that comprise the total end-to-end cost of the solution.
Because cloud computing services are based on consumption, it’s also important to understand how services and applications are being used by individual business units and provide transparency into those associated costs back to line managers. This ensures organizations are not paying for a solution they are not using or underutilizing. Providing insight into true total costs based on utilization creates and sustains a culture that understands the consequences of its consumption, allowing organizations to effectively control costs, measure cost savings, uncover additional savings opportunities, and gain efficiencies in accounting and planning.
Getting a Complete Picture
Although the cloud allows users to scale without limitations, total-cost tracking and transparency in reporting back to business units are required for sustained, meaningful savings. However, many organizations don’t have the processes, procedures, and tools to gain insight into internal assets and vendor resources for effective IT financial management in the cloud because this information is typically housed in disparate systems, tracked with manual process, or in a financial system that doesn’t provide details for transparency. With a financial management tool in place to aggregate the granular details of consumption, organizations can provide an itemized invoice from your CIO to internal customers, enabling them to better understand cloud services and achieve better IT financial management.
More Data for Wiser Decisions
A financial management solution can help shed light on the direct and indirect costs associated with a cloud solution. This enables organizations to determine if a cloud solution provides similar or better value as one provided internally. Knowing what goes into a service, as well as what needs to be provided internally, is a critical consideration -- and nearly impossible to determine without a sophisticated approach to IT financial management.
Not understanding total cost may also encourage managers to ”go rogue” and purchase services from a vendor that has not been pre-approved by the purchasing department. For instance, the organization might chargeback $100 for storage, but the business manager learns that Amazon offers storage in the cloud for $50. Thinking it’s a better deal, the manager makes the unauthorized purchase, only to discover there’s no cost savings because they’re either a) still being assessed by the internal group for storage fees or b) still required to pay other internal IT costs to support the solution, negating any savings. By using an IT financial management solution organizations gain a complete picture of direct and indirect costs, enabling quick assessment of the total cost of a cloud solution.
Other hidden costs that need to be considered when moving to the cloud are the time and expense required to re-architect applications or solutions so they integrate with the cloud service, as well as the cost of reworking the associated user manuals and documentation. Enterprises also need to consider security, risk mitigation, and performance metrics to ensure the cloud service delivers value that is in line with business demands and meets agreed-upon service-level agreements.
With a sophisticated IT financial management system in place, the IT organization gains detailed insight into the direct and indirect computing costs, helping users understand the value of what they are paying for. For example, when evaluating different service levels the cloud provider can deliver, your organization also needs to determine the level of service you can support internally and what you need to pay for. Although the vendor may provide 24x7 service with no downtime, the cost may be prohibitive. An IT financial management solution that offers a detailed breakdown of utilization and capacity supports decisions such as appropriate service level support.
An IT financial management solution provides greater control and cloud coverage through detailed insight into all the direct and indirect costs, helping managers understand what goes into a price. For example, rather than just a line item that says “PC and connection, $450 per month,” include visibility into the IT cost categories such as PC acquisition costs, capacity planning, security, and help desk support. By providing transparency, managers understand they are buying the entire suite of services, not just the hardware and software.
How to Calculate Costs
Organizations that utilize true IT financial management tools and processes can gain ready access to cost information via an IT services rate sheet. Publishing a consumption invoice with services and their associated pricing can make it easier for internal customers to evaluate, track, and audit their cloud consumption and expenses. The invoice should break down prices in detail so internal departments understand exactly what they are getting. Having a process for identifying IT services consumed based on the product list provides visibility into total cost of ownership of services and applications. Then, by understanding the complete cost structure, businesses can look for areas of cost management or cost containment.
For example, an organization may partner with a cloud provider to outsource their e-mail. Costs may be initially reduced, but the organization may find over time that they are paying for e-mail boxes that are no longer used either due to workforce reductions or merger activity. With access to information in a single system, organizations can gain visibility into consumption utilization and determine what cloud services are being used and make appropriate adjustments.
The CIO invoice needs to have enough detail so business users understand how they are consuming technology and then make appropriate behavior changes. The greater level of detail the better, but to effectively change the organization culture, it is imperative to have strong change management processes in place.
To ease the transition to a more informed IT consumption culture, organizations should consider implementing a shadow bill. This “mock” invoice is beneficial because it illustrates the level of detail of IT charges business managers will see on their monthly invoice and provides an opportunity to make sure the information is accurate.
The Final Word
Taking a more robust approach to IT financial management improves both vendor management and auditing of cloud invoices. A tool that provides spending dashboards that drill down to very granular levels of detail enables organizations to spot anomalies, errors, and oversights. For example, the organization may be invoiced for 500 licenses on Salesforce.com, but after corporate right-sizing, may only have 450 users. Automated auditing capabilities ensure organizations spot these discrepancies and adjust the rate of consumption.
In this era of cost control, financial transparency enables organizations to understand internal costs and cloud computing services to ensure they have a discipline for evaluating and managing consumption of services. As more organizations move to a cloud delivery model, a stepped-up approach to IT financial management enables internal business units to ensure they get what they pay for and have cost information to drive more-informed decisions. The end results -- better-informed line managers and systemic cost monitoring across the organization’s entire IT infrastructure -- can drive long-term savings.
Louis Takacs is vice president of product development at ComSci, a technology financial management (TFM) solutions provider for IT cost transparency and demand management. ComSci is headquartered in Iselin, New Jersey, and was founded in 1971. ComSci clients include The Bank of New York Mellon, 1-800-FLOWERS.COM, Memorial Sloan-Kettering Cancer Center, and SAP. You can contact the author at ltakacs@comsci.com