TierPoint white paper_How_to_Position_Cloud_ROI_2015

WHITE PAPER

As organizations struggle to identify and measure cloud benefits, this paper serves as a guide to 1) calculating cloud ROI using seven metrics you may not have considered, and 2) discusses how to assess where cloud use makes the most sense.

How to Position Cloud ROI

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WHITE PAPERHow to Position Cloud ROI

Table of Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Measure #1: The Speed and Rate of Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Measure #2: The Speed of Provisioning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Measure #3: Flexibility of Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Measure #4: Capacity Utilization Enhancements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Measure #5: Access to Business Skills and Capability Improvements . . . . . . . . . . . . . 6

Measure #6: Increased Margin and Cost Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Measure #7: Total Cost of Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Take Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

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Executive Summary

How do you measure the return-on-investment of the cloud? Almost everyone wants to know: Information Week’s 2014 Cloud ROI surveyi found that nine out of ten respondents are somewhat concerned, concerned or very concerned about cloud costs (see Figure 1 for a more detailed breakdown), and 80% of companies using or evaluating cloud computing are somewhat to highly likely to calculate ROIii. Yet few know how to measure the cloud’s benefits, such as those enumerated in the table below, accurately. Information Week also found that only 23% of respondents were “highly likely” to calculate ROI. They concluded: “Financially, however, companies still are struggling with the right way to calculate the payback; how to measure the cloud’s value in speed, cost and staff focus; and how to assess where cloud use makes the most sense.”

Other studies support that idea. An IDG Enterprises survey found that more than one in three IT leaders (37%) are concerned about the difficulty in measuring return-on-investment and assigning an accurate economic value to cloud solutions (second only to security). The difficulty arises because the changes the cloud brings to the IT equation aren’t one-for-one; they’re transformative. They change the equation at its root, which means we must evaluate cloud ROI from new perspectives.

Benefit Comment ROI Measure

Fast startup For applications that are already cloud-enabled or services that already exist, moving to the cloud can be almost instantaneous.

Speed of change, rapid provisioning

Scalability Cloud allows users to scale up or down as needed to meet corporate needs. Cloud computing works well for seasonal demands and projects that vary in scope and size.

Dynamic usage

Agility Cloud services can quickly evolve to meet business needs, without requiring a major re-engineering effort.

Dynamic usage, capacity utilization

Lowered capital expenditures

Cloud services bill based upon usage with a flat-fee scale, eliminating large initial capital expenditures.

Total cost of ownership (TCO)

Lower support costs Support is included with the services, eliminating the need for dedicated IT support staff or internal help desks.

Margins, TCO

Reduced user expenses

Cloud services require little more than a browser-equipped PC. Margins, TCO

Innovation Increased ability to create rapid DevOps and testing environments for new ideas and solutions.

Capability improvement

If you’ve been struggling with this question, here’s your guide to calculating cloud ROI using seven metrics you may not have considered.

Figure 1.


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Measure #1: The Speed and Rate of Change

To what extent can you speed up transitions from old capabilities and deployments to new ones?

In a rapidly shifting marketplace, business must be able to capitalize on new opportunities quickly or risk being bypassed by other companies with superior agility and flexibility. In this regard, the cloud soars: the cost of adoption/de-adoption is lower in the cloud because the process is simply faster and reduces both delays and decision costs. According to RightScale’s 2015 State of the Cloud Report, over half of respondents (57%, up from 52% in 2014) indicated that faster access to infrastructure was a prime benefit of the cloud, and nearly as many (48%) indicated faster time-to-marketiii.

“Speedy provisioning is not the only big concern,” said Christian Lappin, TierPoint Senior Sales Engineer. “You have to be able to provision resources to the right workloads quickly. That is one of the biggest mindset changes we have seen from customers lately. The conversation is no longer about whether to adopt the cloud. Now businesses ask: How can we utilize the cloud in the most strategic way to get the right workloads the right resources at the right time?”

The easy availability of scalable, on-demand resources also means that businesses can experiment and take small-scale risks with new ideas without an excessive outlay of money or time. Additionally, previous constraints around capacity and cost fall away, leaving companies light and nimble enough to move forward at the true speed of business.

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Measure #2: The Speed of Provisioning

How quickly can you provision or decommission resources and infrastructure on an as-needed basis?

Closely related to the first measure, here we’re talking about something more specific: the cloud enables businesses to scale consumption to meet demand in real-time. In fact, provisioning time can plummet from weeks to just hours. Cloud consumers value this benefit: IDG reports that 39% of IT respondents name “speed of deployment” as the top objective behind cloud investments, matched only by lower total cost of ownership (c.f., Measure #7)iv. It’s only sensible to include this measure in any evaluation of cloud ROI.

Consider: an on-site data center requires capital expenditures that must account for usage needs over the next three to five years before IT can see any ROI. CTOs must exercise nearly prophetic abilities to understand where their needs will fall, and more often than not, one of two scenarios result: they invest in resources to meet maximum need, leaving many resources (and money spent on those resources) wasted under normal usage conditions; or they underestimate their needs and constantly struggle to maintain service levels. Either way, expanding or contracting remains difficult and expensive, if not impossible.

Figure 2 illustrates what we mean by both the first ROI measure and this one: resources can be deployed to meet demand in a fraction of the time traditionally required, as can entire cloud-based solutions. That “value added” section represents the ability of your business to accurately meet customer needs with neither waste nor shortfalls in service.

Figure 2.

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Measure #3: Flexibility of Usage

How well does elastic provisioning and service management target real end-users and real business needs for functionality as the scope of users and services evolve?

Businesses can make dynamic usage of rapid provisioning in order to meet needs faster (and better) than is otherwise possible. Instead of forcing your solutions to conform to existing logistics and infrastructure, you can adapt dynamically and deploy instantly to create better solutions for your customers, faster. This is especially important for seasonal businesses or others that are prone to workload spikes.

In other words, businesses can use the benefits behind the first two ROI measures to use the cloud to power services in new and inventive ways. In fact, according to Gartner, while IT staff and managers name cost reduction as the primary driver behind cloud investments, CIOs and IT Directors actually name “modernization”, “innovation” and “operational agility” as primary drivers.v

There’s another side to this: through automated technologies like auto scaling and load balancing, the cloud “can more efficiently manage [customers’] peak load capacity,” says Deloitte.vi As a result, usage can be dynamically matched to actual demand. This is the scalability of the cloud, which 57% of respondents to RightScale’s 2015 State of the Cloud Report see as the cloud’s top benefit (an increase from 53% in 2014).vii

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Measure #4: Capacity Utilization Enhancements

To what extent does the cloud enable access to new skills and on-demand solutions?

Consider the following example, visualized in Figure 3. Let’s say an application has a steady-state utilization of 1,500 sessions, with occasional peak bursts. You set an auto scaling trigger (e.g., latency on the Web server of X seconds over 5-minute period) to adjust the number of sessions to the exact number of instances needed to run your application – you neither fall short during peak loads, nor waste resources during slow times.

In other words, you can “right-size your instances,” as TechTarget.com writes.”viii Cloud customers can avoid “having multiple compute instances, multiple operating systems, multiple database licenses, and complex configuration of mirror, communication, backups and monitoring.” They estimate that the reduction in complexity and costs can fall by 25% to 50%. Then, you can auto-scale your instances: “auto-scaling instantiates more instances of your application components based on triggers that can be load- or performance-based.”

In Figure 3, in the absence of auto scaling, any demand above the red line goes unserviced; any shortfall between demand and the red line generates wasteful spending. Cloud technologies can correct for both of these situations automatically and dynamically. Admittedly it may not seem like cloud deployments can cost-correct so efficiently. In fact, many CIOs seem to believe that over-provisioning is as necessary in the cloud as on-site, with a recent survey from Vanson Bourne finding that fully nine out of ten (90%) see over-provisioning (incorrectly) as a “necessary evil.”ix

Scaling usage appropriately can result in cost savings and increased customer satisfaction; see Figure 4 to observe where problems can otherwise arise.x While this graph presents what may be an exaggerated case, it illustrates one key point: capital investments and evolving need almost never match exactly, at least without the speed, flexibility and technological enhancements of the cloud.

Figure 3.

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Measure #5: Access to Business Skills and Capability Improvements

To what extent does the cloud enable access to new skills and on-demand solutions?

“The cloud enables business users to focus on their strengths,” explains John Holland, TierPoint Senior Vice President Sales. “You don’t need a deep IT bench provisioning servers. Instead have them focus on your users, your applications, so that you can do what you need to do to grow your business. Then take all of that daily care and feeding and shift it up to a cloud provider who will ensure user experience is maintained.”

Cloud providers’ staff specialize in a way that in-house data center operators, who must multi-task to meet wide-ranging requirements, often cannot. When you combine that level of dedicated expertise with the emerging, dynamic technologies that can be leveraged in the cloud (as discussed above), it unleashes potential many IT departments wouldn’t ordinarily be able to even consider. With the ability to deploy new development and testing environments at will, IT personnel can focus on creating new, improved solutions with no hardware purchase or setup required. The cloud enables businesses to experiment and expand operations easily and with little risk, which in turn generates the kinds of outcomes enumerated in Figure 5.xi

Figure 5.

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Figure 4.


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Measure #6: Increased Margin and Cost Control

To what extent can you pursue new customers and markets for business and revenue growth and service improvement? As a solution that can be completely customized and dynamically scaled in real-time, the cloud presents more of a totality of a solution. “Cloud customers rarely have to worry about getting that square peg into a round hole,” explains Lappin. “When you do that, you’re always going to have some specific access to a solution that’s not needed, or you’ll lack access to one that’s not accounted for.”

Once users are able to select, design, configure and run infrastructure and applications best suited for their needs, it optimizes the total cost of ownership. That’s partially because all of those costs have traditionally been de-coupled when IT projects are handed off to production services. In cloud computer environments, they are joined together. They also incorporate many soft benefits, including reduced downtime, improved performance, fewer security incidents, more efficient backups, faster disaster recovery, and often the more responsive and expert service that comes from access to specialized business skills and capabilities (c.f., Measure #5).

In fact, the way the cloud saves money isn’t always obvious. The idea that the cloud just saves money across the top is misleading; it’s really time coupled with hard money benefits combined with soft money benefits. For example, when you opt away from the cloud, you have the hardware, infrastructure (power and cooling is always one of the biggest line items), and then you have to put the equipment somewhere; if you have dedicated servers capable of doing only one thing, you’re going to end up with server sprawl in order to meet the totality of your needs. The cloud, particularly when combined with virtualization technology, eliminates or minimizes all of that – and it furthermore moves you into a largely fixed-cost model without the huge fluctuations that come with building an in-house enterprise data center.

As you can see from Figure 6, costs generally (though not always) fall over time no matter how you parse it, but it’s not always at equal rates.xii Costs fall more rapidly with cloud deployments because of all those marginal cost savings — from infrastructure like power and cooling to equipment to networking and inter-connects — adding up. The result is an increase in profit margins that only grows more dramatic the longer you live in the cloud.

Figure 6.

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Measure #7: Total Cost of Ownership

How much does the total cost of ownership (TCO) fall in the cloud? In many ways, this is the major measure of the cloud’s true ROI – almost all of the others measures build up to this one. And many IT leaders see TCO as the typical measure – nearly half (44%) of respondents to a Gartner survey indicated that cost reduction is the main reason for investment in the cloud.xiii However, there’s more to this picture than meets the eye, and TCO may be more misleading than you think.

Capital Expense versus Operational Expense

For Measure #6, we discussed how the expense outlay works for traditional data centers versus the cloud. Instead of swapping out servers every three years and seeing a huge uptick in spend, you have a fixed monthly cost with the cloud. Instead of trying to utilize everything you have, you push out only what’s appropriate.

As a result, the cost of ownership gets accounted in a different way entirely. IT becomes a commodified operational expense rather than CapEx, focused on outcomes and performance rather than configurations and processes. It changes what used to be a total cost of ownership into a total cost of consumption, something that is invariable cheaper and easier to measure as well. Or, as Deloitte puts it: “Companies buy computing literally by the drink, converting the cost of computing from capital expenditures to primarily an operating expense.”vi

What’s the effect on IT budgets? According to GigaOm Research’s 2014 Future of the Cloud Computing survey, an average of 80% of IT’s average budget is used to maintain current systems. Shifting to a different model can free up resources.

Total Cost of Ownership versus Total Cost of Consumption

This shift in accounting perspective matters because it renders Total Cost of Ownership calculators for clouds unreliable at best and outright misleading at worst. Consider Amazon’s TCO calculator; it’s not wrong, but it’s based on some assumptions that don’t apply to the ways clouds truly cost and consequently can skew ROI evaluations. For example, it assumes no re-use from existing resources; yet this is one of the major advantages of cloud deployments: you can almost always create a configuration that incorporates resources already at your disposal.

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It also disallows partial amortization and assumes you will fully eliminate hardware costs, which may or may not be true. When you own the data center, it’s fairly straightforward to tally the costs associated. But when you consume rather than acquire a cloud, the way the costs get parsed becomes murkier. A total cost of consumption approach considers the cost of shared services stacks and how much of the stacks your apps use.

Why cloud computing ROI tools are of limited valueAnd that, in effect, is why typical cloud computing ROI tools are no substitute for comprehensive due diligence - they are often simple models that just don’t work. To truly understand and calculate the business values of using cloud computing - public, private or hybrid - requires a complex and dynamic analysis that is unique to the problem you’re trying to address. While the ability to avoid CapEx costs is a great benefit of the cloud, if it’s your primary driver, you’re missing out on the true value of cloud computing.

The value of cloud computing depends directly on the type of business, business processes and specific problems you’re looking to solve. Additionally, you need to determine how much value you truly get from the increased agility and scalability that are core benefits of cloud-based platforms.

As a result, a simplistic ROI calculator that looks only at hardware and software avoidance will provide, at best, skewed results. Businesses that buy into the oversimplified models to determine the ROI of cloud computing are likely to eventually find out they were way off the mark. They will have invested in cloud technology where they should not have, wasting money and time. Likewise, they won’t have invested in cloud technology where it actually was the better approach for providing strategic benefit.

Ignore those simple cloud ROI calculators, and do the comprehensive due diligence to understand what you truly need and what you don’t. It takes more upfront effort, but it pays off handsomely.

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Action Steps

1. Measure Yourself

• Measure utilization among your existing servers for a representative period of time - say, 30 to 90 days.

• Look at CPU, memory, disk usage and network consumption.

• Re-Size your cloud instances to meet the average utilization measured.

• Don’t worry about usage spikes.

Understanding CPU, memory and disk use over a period of 30 to 90 days is critical in determining the steady-state utilization. You don’t want to over or under-size your instances. You want to right-size them to fit your average use and correlate that use to a key metric such as user sessions. Elasticity is part of what makes the cloud valuable.

2. Check for Environmental SaturationEnsure that when all your machines are up and running that they have not pushed you beyond N+1 [what you need to have in place to keep operational in the event of a failure].

3. Disaster Recovery CapacityLook at your current project and workloads running on your production systems and make sure that your DR site or solution can handle your change in data growth and system capacity. Often production environments grow without watching the recovery solution to ensure it can handle a failover event.


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Referencesi. Babcock, C. (2014, Jul 31). “2014 Cloud ROI Survey.” Information Week. Retrieved February

2015 from http://reports.informationweek.com/abstract/5/12526/Cloud-Computing/2014-Cloud-ROI-Survey.html.

ii. Babcock, C. (2014, Aug 4). “Cloud ROI: Why It’s Still Hard To Measure.” Information Week. Retrieved February 2015 from http://www.informationweek.com/cloud/infrastructure-as-a-service/cloud-roi-why-its-still-hard-to-measure/d/d-id/1297746.

iii. RightScale. (2015). “RightScale 2015 State of the Cloud Report.” Retrieved February 2015 from http://www.rightscale.com/lp/2015-state-of-the-cloud-report.

iv. Columbus, L. (2014, Nov 22). “Cloud Computing Adoption Continues Accelerating In The Enterprise.” Forbes. Retrieved February 2015 from http://www.forbes.com/sites/louiscolumbus/2014/11/22/cloud-computing-adoption-continues-accelerating-in-the-enterprise/.

v. Rivera, J. and van der Meulen, R. (2014, Nov 25). “Gartner Survey Reveals That SaaS Deployments Are Now Mission Critical.” Gartner. Retrieved February 2015 from http://www.gartner.com/newsroom/id/2923217.

vi. Ferrara, J. (2014, Jul 16). “The Buzz: Top 7 Benefits of Enterprise Cloud – As Reported By The Enterprises Themselves.” IO.com. Retrieved February 2015 from https://www.io.com/the-buzz-top-7-benefits-of-enterprise-cloud-as-reported-by-the-enterprises-themselves/.

vii. RightScale. (2015). “RightScale 2015 State of the Cloud Report.” Retrieved February 2015 from http://www.rightscale.com/lp/2015-state-of-the-cloud-report.

viii. Green, R. (2014, Jun). “Cloud Value Proposition Heightened With Proper Cost Controls.” TechTarget.com. Retrieved February 2015 from http://searchcloudcomputing.techtarget.com/feature/Cloud-value-proposition-heightened-with-proper-cost-controls.

ix. Schofield, J. (2015, Sep 5). “Cloud customers are still paying for twice as much as they need.” Retrieved February 2015 from http://www.zdnet.com/article/cloud-customers-are-still-paying-for-twice-as-much-as-they-need/.

x. The Open Group. “Building Return on Investment from Cloud Computing.” Retrieved February 2015 from http://www.opengroup.org/cloud/whitepapers/ccroi/roi.htm

xi. KPMG. (2014). “2014 Cloud Survey Report: Elevating Business in the Cloud.” Retrieved February 2015 from http://www.kpmg.com/US/en/about/alliances/Documents/2014-kpmg-cloud-survey-report.pdf.

xii. The Open Group. “Building Return on Investment from Cloud Computing.” Retrieved February 2015 from http://www.opengroup.org/cloud/whitepapers/ccroi/roi.htm.

xiii. Rivera, J. and van der Meulen, R. (2014, Nov 25). “Gartner Survey Reveals That SaaS Deployments Are Now Mission Critical.” Gartner. Retrieved February 2015 from http://www.gartner.com/newsroom/id/2923217.

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About TierPointTierPoint is a leading national provider of cloud, colocation, managed services and disaster recovery solutions designed to help organizations improve business performance and manage risk. With corporate headquarters in St. Louis, MO, TierPoint operates 13 highly-redundant, Tier III plus data centers located in Washington state, Texas, Oklahoma, Pennsylvania, Maryland, New York,Massachusetts and Connecticut.

To learn how TierPoint can help with your cloud, colocation, managed services and disaster recovery initiatives - call 877.859.TIER (8437), [email protected], or visit us at www.tierpoint.com.

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TierPoint white paper_How_to_Position_Cloud_ROI_2015