A Better Metric for Analyzing the Value of the Cloud

While you may be reading and hearing about positive financial and the economic analyses regarding the benefits of Cloud computing, those analyses are based on unrealistic total cost of ownership (TCO), return on investment (ROI) and misinterpreted CapEx/OpEx calculations. Indeed, these calculations are missing a complete understanding for the value of the Cloud in the IT service delivery equation, which is why comparing Cloud computing alternatives requires a modern metric that fully understands the service delivery model.

In my opinion, no two metrics were more injurious to the IT field than TCO and ROI. I have yet to meet one senior executive with budgetary responsibility that has accurately tied investment in IT back to a sizable gain or to represent a true TCO. Let’s face it; these are notional concepts at best that were devised to be manipulated to provide IT executives with justifications for funding projects of questionable value to the business.

Before you inundate me with nonsensical comments about investments by the likes of Amazon, Dell and Google, please note, IT is an expense line item for these companies; it is their business models and processes that delivered the profitability that ensued. Indeed, I would go so far as to assert that if you track a specific IT investment, directly acquired to support a singular initiative, for one year forward you may be able to show a positive return relative to that expenditure. However, if you track that investment over next three years, most likely you either have a break-even scenario or a loss.

The reason I assert you will end up with break-even or a loss is because if you start to accurately identify the additional expenditures necessary to maintain and operate that investment, then costs start to dramatically increase relative to this single expenditure. To offset these costs, a business would need on the order of a 25% costs reduction or increase in profits to have a “return”. As I noted above, TCO and ROI are notional concepts designed to be manipulated by those with budgets to justify expenditures. I have yet to see one CIO actually go back and reconcile the initial ROI estimates against the original assertion past year one.

This brings me to the point of this article. Interestingly, it’s IT that loses in the long run using these metrics because ,traditionally, these financial justifications have worked against them resulting in missed expectations. If you don’t believe me, compare the turnover of CIOs to CEOs or CFOs in the business world. Now, with Cloud computing on the tongues of every executive who can pick up a copy of Forbes or Time, its critical for IT executives to ensure they select an appropriate metric that allows them to illustrate and accurately calculate value for investment dollars; especially in a down economy.

Total Service Cost (TSC)

The metric I recommend is total service cost (TSC). Basically stated as a formula, TSC is:

(Cost of Infrastructure + Cost of Operations + Cost of Software + Cost of Risk) – Billed Usage = TSC

Cost of Infrastructure: Whether you’re considering public, private or hybrid Cloud solutions, there is a computable cost associated with the infrastructure. Of course, computing this for private Cloud configurations can be more difficult, especially if you have not established effective metering solutions. That is, without effective metering solutions, an accurate TSC requires that you allocate and track percentages of the overall costs for the used infrastructure, inclusive of utilities, network, storage, etc. across services. Additionally, while it would be simpler to estimate, the problem with estimates is that it will impact your ability to accurately determine costs for underutilized infrastructure; a key component in deciphering Cloud alternatives.

Cost of Operations: These costs must include all resources involved with delivery of a service including management of the information, such as information quality and assurance, in addition to traditional network, systems and data center operations.

This is one area where service oriented architecture (SOA) is an important design paradigm for Cloud computing. Those who recognized the strategic value of SOA to specify and manage services will really see simplification in computing operational costs on a service-basis over those that have delegated SOA to being a technical effort focused on Web services and ESBs

Ultimately, SOA is a fractal pattern. Services are made up of other services. Packaging and costing those services simplifies the overall costing models for aggregate service; in this case help desk, monitoring, system administration, etc. By packaging and costing each of the operational services appropriately, you can amortize the cost of the operational services across all the composite services that are dependent upon them.