In the midst of a strong wave of digital transformation, many businesses are realizing the significance and outstanding benefits that cloud computing technology brings. However, alongside this recognition, many business leaders still harbor concerns and anxieties before making the decision to transition to the cloud. Among these, the greatest apprehension is undoubtedly about ROI – the Return on Investment after making the initial investment.
According to McKinsey, as many as 23% of businesses have exceeded their budget for cloud solutions, with 30% of that expense going to waste. Therefore, the concerns of these managers are valid, especially when evaluating the ROI of cloud computing can be quite complex. There are numerous factors that need to be considered to strike a balance between costs and benefits when transitioning to cloud infrastructure.
Despite cloud service providers offering a Pay-as-you-go pricing model, there are other costs associated with migrating to the cloud, including employee training, configuring new systems, and application compatibility issues.
Hence, in this article, we will help you easily assess the ROI of cloud computing through some key points of the process.
Evaluating the ROI of cloud computing can be quite complex
Calculating TCO - Total Cost of Ownership
The initial step before calculating the ROI of a cloud computing project is to determine the TCO, which encompasses all costs related to your current server infrastructure, including operational expenses and hidden costs of maintaining the infrastructure. The objective of calculating TCO is to provide business leaders with a clear understanding of current expenses, enabling them to analyze potential costs that can be eliminated after transitioning to cloud infrastructure. This helps businesses establish a more precise assessment of both cost and the ultimate ROI of adopting cloud solutions.
Some types of expenses businesses need to consider for accurate TCO determination include:
- Servers: Servers may require repairs or upgrades, and these costs should be factored in. Additionally, servers typically have an average lifespan of 3 to 5 years, after which businesses need to invest in new servers to replace aging ones, adding to the TCO.
- Maintenance: Careful consideration of maintenance costs for on-premises infrastructure and related resources is essential, from server racks to air conditioning systems in the server room. The supporting hardware, components, and assets that need to be purchased, maintained, and replaced all contribute to increasing the TCO.
- Software Licensing: The use of external software to operate on-premises infrastructure also contributes to the TCO. Careful evaluation of the software you pay for to facilitate these processes is important. Don't forget to include costs associated with customized solutions, even if they are company owned.
- IT Staff Recruitment: Additional staff may be needed, temporarily or permanently, to support the maintenance and management of on-premises infrastructure. These are costs that can be significantly reduced when compared to using cloud-based infrastructure, as you won't need to allocate a budget for numerous staff members to operate the system.
- Electricity Bills: Keeping your on-premises server systems running smoothly requires a significant amount of electricity, especially if you want them to operate at full capacity. You need to carefully calculate these electricity costs and add them to the TCO.
- Physical Space: On-premises server systems demand physical space for storage, and this incurs another separate cost. Even if your business owns the office space, there are still expenses related to accommodating the server storage that need to be included in the TCO.
- Asset Management: A large on-premises infrastructure means that your IT staff will need to dedicate more time to monitoring it. This leads to additional costs in terms of resource allocation for asset management.
Businesses need to carefully consider the maintenance costs for on-premises infrastructure
Factors for Calculating Cloud ROI
Once you have determined the TCO, the next step is to calculate the necessary investment to transition to a cloud infrastructure. Calculating ROI has a specific equation, but first and foremost, a business needs a clear understanding of the required investment and the potential cost savings from the migration.
However, estimating this investment can be complex, especially when identifying various costs associated with cloud computing. This includes initial setup costs as well as recurring expenses like subscription fees, configuration charges, and training. Once you have these figures, you can compare the TCO of your current on-premises infrastructure with the investment needed for cloud migration. If the investment for the cloud infrastructure is lower than the ongoing maintenance of the current on-premises setup, you already have a compelling reason for cloud migration.
And from there, to calculate the ROI, you can apply the following equation:
Cloud ROI equation
Some businesses, when initially transitioning to a cloud infrastructure, might calculate ROI for only a single fiscal year. However, the reality is that the cost savings continue to accumulate over time after the initial investment has been made. Therefore, calculating ROI for a cloud computing project over a period of 3-5 years could result in significantly higher returns compared to the ROI of just the first year. This is crucial for understanding the long-term benefits.
Furthermore, after completing the migration process and gaining a better perspective on how workloads perform in the cloud, cloud resources can be optimized. This creates additional saving opportunities and enhances long-term efficiency.
Once TCO is determined, next is to calculate the necessary investment to transition to a cloud infrastructure
Converting the Core Value of Cloud Computing into ROI
Similar to most modern technologies, the benefits of cloud computing are divided into quantitative and qualitative values. While quantitative value can be easily measured using ROI and TCO, qualitative value requires a strategic perspective. Some core qualitative values of cloud computing include:
- Downtime Reduction: Physical servers are susceptible to disruptions, which are significantly reduced by migrating to the cloud. Cloud infrastructure allows businesses to adjust to real-time needs, providing appropriate resources at the right time and thus reducing downtime. Moreover, cloud providers like VNG Cloud offer Service Level Agreements (SLA) committing to monthly service Uptime rates above 90%
- Agility: Cloud infrastructure enables substantial reduction in the time required to scale IT resources, accelerating project completion and revenue growth.
- Pay-as-you-go: The Pay-as-you-go (PAYG) payment model, offered by cloud solution providers like VNG Cloud, addresses resource over-provisioning or under-provisioning by automating processes, saving unnecessary costs.
- Work Efficiency: The cloud environment fosters smooth collaboration. Accessing resources from anywhere, anytime creates a more productive work environment and leads to improved business outcomes.
- Enhanced Customer Experience: Automation is a significant advantage of the cloud. Businesses can frequently move and test features, thereby improving product quality and enhancing the customer experience.
The benefits of cloud computing are divided into quantitative and qualitative values
It's time to migrate to the Cloud!
Of course, the cost of cloud services may increase over time. Especially when businesses rely more on cloud solutions or tied to a particular cloud provider, there might be higher expenses for increased service demands or switching to a different cloud provider. However, as we mentioned above, the true value of the cloud is more closely related to quality values, which helps businesses grow and enhance efficiency more rapidly.
The innovation that cloud solutions bring is a distinctive factor that leaders need to consider when evaluating budgets. Businesses can harness the potential of cloud computing by implementing new technologies such as AI on the cloud infrastructure. This could automate supply chains or improve customer experiences through rapid development of new products or services. These changes come with real value in the fiercely competitive current market.
While the upfront investment might make some businesses cautious, the reality is that ROI and the benefits of cloud utilization can be accurately calculated with appropriate migration strategies. Innovation is the ultimate goal of this technology, and finding novel ways to use the cloud and maximize investment can help businesses generate even greater ROI in the future. Therefore, business leaders can confidently transition to cloud infrastructure and enjoy its benefits without worrying about ROI concerns in both the near and distant future.