Welcome!

Cloud Expo Authors: Scott Bampton, Elizabeth White, Gilad Parann-Nissany, Paige Leidig, Anne Buff

Related Topics: Cloud Expo, SOA & WOA

Cloud Expo: Article

ROI: Justifying the Cloud

You can improve TCO by up to 80% by using applications in a public cloud

A classic use of ROI or its twin TCO is in the Microsoft Economics of the Cloud, Nov 2010 paper. The conclusion is you can improve TCO by up to 80% by using applications in public cloud versus on-premise deployment. The basics of the calculation being:

  • improved utilization (10% to 90%) enabled by virtualization/consolidation & elasticity
  • the economies (power, operations, HW purchase etc..) of scale of multi-tenant cloud scale hosting

Given most costs in a DC are directly linked to the amount of infrastructure deployed, then improving utilization from 10% to 90% sounds like the primary justification for the 80% improvement. The misuse of the information is not more evident that when Phil Wainewright writes that the strength of this "research" is enough to put the nail in the coffin of the concept of private cloud. Definitive words indeed.. The problem I have with this conclusion is it is a black & white, monolithic view of "what is cloud". This is combined with TCO/ROI modeling that uses some pretty broad assumptions to underpin the cost model. It is often good marketing or publicity to offer polarized view of the issues, but it does not provide a real-world executable decision making capability (read "value") for future consumer of cloud services (public or private). So why are people needing to kill the concept of the "private cloud"? James Urquhart tweeted it best (4/12/2011):

  • "I don't hear ANYONE who isn't a public cloud provider or SI who bet the farm on public cloud make any claims about "false clouds". Period."
  • "Oh, wait. There may be one or two startups and journalists in there...all of which stand to gain from public cloud. Sorry about that. :\ "

If you take that approach and as a result just build a "cloud" for the sake of "cloud" then you are making "the BIG mistake". Implementing a framework as a product is doomed to fail. If you implemented SOA this way then disaster, ITIL would equal chaos, Prince2 would create inertia, Web2.0 would have resulted in mega-$$$. These concepts, whether they be architectural, process or other are meant to guide execution, not be implemented blindly. So how should ROI be used? So when people ask the question. "What's is the ROI of the cloud?" it is not an issue of "What is an ROI?" or "What is the benefit of Cloud?" or even "What data goes into a ROI calculation?". It is about how to answer the question of why, what and how to adopt the cloud. Most of the Cloud ROI (return-on-investment) or TCO (total cost of ownership) discussions are like the whitepaper from Microsoft. Comparing side by side a complex cloud deployment with a traditional infrastructure deployment. In reality, it's too difficult to develop a model to cater "true total cost of ownership", you quickly have to jump to broad assumptions, and narrow scope to make it manageable. If you start you model as a greenfield cloud deployment, your model has radical inaccuracies as you try apply this to brownfield or legacy enterprises. Try starting based on data of a legacy deployment and you have huge problems dealing with the depreciation of assets. Brownfield models also have the challenge of dealing with the elasticity of the delivery assets or opportunity costs; for example, you can manage 100 or 150 servers with the same team, or your existing 20% utilized asset can possible only support 2X or maybe as much as 10X the workload. You then overlay this with the changing economics of real estate facilities, HVAC, compute. The result is, you end up with a model that can have error factors upward of 100% It's too complex a problem to solve without a huge dataset to validate the variables, dependencies, etc... Armada takes a Fast Track approach to solving the problem. You are looking at cloud as a reference framework to help develop a solution that returns the business value. You calculate ROI based on a specific situation and end-state solution. A ROI needs to have a pay back of less than a year, so long-term theoretical modeling has no significant value. So how do you do it? Remember three things;

  • You must have a triggering event
  • Use scenario analysis and not lifecycle modeling
  • Apply the 80/20 rule to data, and only the stuff that impacts your costs

Triggering Event
Most of the time being a technical architect in consulting creates looks of skepticism from engineers in enterprise customers. Fair enough, when I was in that seat I felt the same way. When I gave up internal politics for politics of "revenue/pipeline", "everyone is a salesperson" and "whitepapers and webinars" a few things became pretty crystal clear. The most important thing is, don't waste time doing anything unless there is a pain point, problem to solve, triggering event. Wants are good, but needs are better. This is important in ROI calculation. The triggering event is the anchor point for the evaluation and defines where you are looking for the biggest "return" in the ROI.. The triggering event can be something specific like;

  • "we will run out of datacenter space in 6 months"
  • "it takes us 6 months to deploy an environment"
  • "we are on CNN if our primary datacenter fails because we have no DR"

Alternatively, it can be softer and described as the business goal, business driver like:

  • "we need to reduce operational management costs"
  • "we need to improve our infrastructure utilization"

These things are scoping statements for the project and then the ROI is applied to the return for this project.

Scenario Analysis
You scope the project, but if you try and calculate the return based on lifecycle costs over a long term, you will be scratching your head forever. If the ROI is not 1-3 years, then you are probably not doing it. Most likely it needs to be in less than a year. Scenario analysis is fairly simple, but a little time consuming. It is, however, a step down the direction of implementation, rather than a detour into developing a business case that will never be used or validated later. You create three (3) scenarios:

  • Business as usual - sometimes this is the "no decision, decision" or just solve the problem the way you have in the past
  • Option 1 - the "go big or go home" scenario, build the pure play cloud solution
  • Option 2 - the "pragmatic solution", or sometimes called the cheap solution. This is often the winner, but generally can be folded into option 1 after a subsequent round of funding.

Gather the requirements. Design the end-state architectures for three options and price out the implementation and on-going costs. You are already starting the design, so when the solution is green lighted, you are ready to go..

80/20 Rule of Data
A basic premise of the Fast Track method is to make decisions based on readily available information. Creating data and model takes time and effort for little return. In the time it takes to do this, IT services are evolving and changing. So in collecting data for a ROI analysis, use what is available, don't over process it and limit yourself to the data that impacts your business. From Gartner and other models we know that the biggest contributors to ROI/TCO are;

  • Hardware Costs (storage, compute, network)
  • Hardware Maintenance/Support
  • Software License (applications licenses, tools licenses etc..)
  • Software Maintenance/Support
  • Management & Operations (people, benefits etc..)
  • Facilities (real estate, hvac, security etc..)
  • Development/Customization/System Integration
  • Opportunity Cost (increase costs in existing infrastructure by reducing its scale)

Focus on capturing this information to support the scope of your project. If your project is not looking for value in reduction of power costs, then don't include it in the model. Just deliver the value you have visbility and control over. You should try and be as complete as possible, without creating an environment of political inertia. So with this approach its easy to capture a return on investment (ROI) calculation. I need to add, that David Linthicum wrote a very relevant post that reinforced that ROI does not make a business case. You need to also include the soft value factors, which for the cloud revolve around agility and time-to-market. Hard to define or place a value, but critical to the final assessment.

More Stories By Brad Vaughan

Brad Vaughan is a twenty year veteran consultant working with companies around the globe to transform technology infrastructure to deliver enhanced business services.

@CloudExpo Stories
When an enterprise builds a hybrid IaaS cloud connecting its data center to one or more public clouds, security is often a major topic along with the other challenges involved. Security is closely intertwined with the networking choices made for the hybrid cloud. Traditional networking approaches for building a hybrid cloud try to kludge together the enterprise infrastructure with the public cloud. Consequently this approach requires risky, deep "surgery" including changes to firewalls, subnets...
SAP is delivering break-through innovation combined with fantastic user experience powered by the market-leading in-memory technology, SAP HANA. In his General Session at 15th Cloud Expo, Thorsten Leiduck, VP ISVs & Digital Commerce, SAP, will discuss how SAP and partners provide cloud and hybrid cloud solutions as well as real-time Big Data offerings that help companies of all sizes and industries run better. SAP launched an application challenge to award the most innovative SAP HANA and SAP ...
The Internet of Things (IoT) promises to evolve the way the world does business; however, understanding how to apply it to your company can be a mystery. Most people struggle with understanding the potential business uses or tend to get caught up in the technology, resulting in solutions that fail to meet even minimum business goals. In his session at Internet of @ThingsExpo, Jesse Shiah, CEO / President / Co-Founder of AgilePoint Inc., will show what is needed to leverage the IoT to transform...
SYS-CON Events announced today that AIC, a leading provider of OEM/ODM server and storage solutions, will exhibit at SYS-CON's 16th International Cloud Expo®, which will take place on June 9-11, 2015, at the Javits Center in New York City, NY. AIC is a leading provider of both standard OTS, off-the-shelf, and OEM/ODM server and storage solutions. With expert in-house design capabilities, validation, manufacturing and production, AIC's broad selection of products are highly flexible and are conf...
We are all here because we are sold on the transformative promise of The Cloud. But what good is all of this ephemeral, on-demand infrastructure if your usage doesn't actually improve the agility and speed of your business? How must Operations adapt in order to avoid stifling your Cloud initiative? In his session at DevOps Summit, Damon Edwards, co-founder and managing partner of the DTO Solutions, will highlight the successful organizational, process, and tooling patterns of high-performing c...
SYS-CON Events announced today that O'Reilly Media has been named “Media Sponsor” of SYS-CON's 15th International Cloud Expo®, which will take place on November 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. O'Reilly Media spreads the knowledge of innovators through its books, online services, magazines, and conferences. Since 1978, O'Reilly Media has been a chronicler and catalyst of cutting-edge development, homing in on the technology trends that really matter and spurri...
SYS-CON Events announced today that Stratogent will exhibit at SYS-CON's 15th International Cloud Expo®, which will take place on November 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. Stratogent is a custom managed services organization based in San Mateo, California. We design, implement, and support mission critical infrastructure 24x7 on premises, in datacenters and in the Cloud. Since 2005, we have acted as an extension of internal IT teams, achieving a customer reten...
SYS-CON Events announced today that Aria Systems, the recurring revenue expert, has been named "Bronze Sponsor" of SYS-CON's 15th International Cloud Expo®, which will take place on November 4-6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. Aria Systems helps leading businesses connect their customers with the products and services they love. Industry leaders like Pitney Bowes, Experian, AAA NCNU, VMware, HootSuite and many others choose Aria to power their recurring revenue bu...
The Transparent Cloud-computing Consortium (abbreviation: T-Cloud Consortium) will conduct research activities into changes in the computing model as a result of collaboration between "device" and "cloud" and the creation of new value and markets through organic data processing High speed and high quality networks, and dramatic improvements in computer processing capabilities, have greatly changed the nature of applications and made the storing and processing of data on the network commonplace. ...
Seagate has a strong track record of collaborating with others to develop better cloud solutions. The Seagate Cloud Builder Alliance program, for example, leverages the company’s knowledge of storage and cloud-optimized solutions to give cloud service providers the customized, flexible and scalable server and storage solutions to meet the high levels of service their customers demand. Seagate also is a member of the OpenStack Foundation and Open Compute Project to help define and promote open-so...
The Internet of Things (IoT) is going to require a new way of thinking and of developing software for speed, security and innovation. This requires IT leaders to balance business as usual while anticipating for the next market and technology trends. Cloud provides the right IT asset portfolio to help today’s IT leaders manage the old and prepare for the new. Today the cloud conversation is evolving from private and public to hybrid. This session will provide use cases and insights to reinforce t...
What process has your provider undertaken to ensure that the cloud tenant will receive predictable performance and service? What was involved in the planning? Who owns and operates the data center? What technology is being used? How is it being supported? In his session at 14th Cloud Expo, Dave Weisbrot, Cloud Business Manager for QTS, will provide the attendees a look into what it takes to stand up and stand behind a highly available certified cloud IaaS.
SYS-CON Events announced today that Gigaom Research has been named "Media Sponsor" of SYS-CON's 15th International Cloud Expo®, which will take place on November 4-6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. Ashar Baig, Research Director, Cloud, at Gigaom Research, will also lead a Power Panel on the topic "Choosing the Right Cloud Option." Gigaom Research provides timely, in-depth analysis of emerging technologies for individual and corporate subscribers. Gigaom Research'...
I'll be hosting an SAP HANA Cloud webinar at 11am eastern time, Wednesday, October 29. You can sign up now. Featured speakers will be Allan Adler, Managing Partner, Channel Cloud Consulting, and Thorsten Leiduck, VP ISVs & Digital Commerce, SAP. Attendees will learn about • Cloud economics, hybrid cloud strategy, market size and opportunity • Introduction to SAP HANA Cloud Platform and how to: - Build new next-generation applications - Extend on-premise solutions non-disruptively throu...
How does one bridge the gap between traditional enterprise storage infrastructures and the private, hybrid, and public cloud? In his session at 15th Cloud Expo, Dan Pollack, Chief Architect of Storage Operations at AOL Inc., will exam the workload differences and required changes to reuse existing knowledge and components when building and using a cloud infrastructure. He will look into the operational considerations, tool requirements, and behavioral changes required for private cloud storage...
Sanjeev Sharma is the latest author to join DevOps Journal. Sanjeev is a solution architect and DevOps Worldwide lead with Rational Software, an IBM brand and the author of 'DevOps for Dummies.' DevOps Journal is focused on this critical enterprise IT topic in the world of cloud computing. SYS-CON Media CEO Carmen Gonzalez is founder and publisher of DevOps Journal, and Roger Strukhoff, long-time SYS-CON editor and the conference chair of Cloud Expo is the editor of the world's leading DevOps...
Join both SAP and Channel Cloud Consulting for our webcast and uncover how you can extend your reach to capture a piece of the US$17 billion cloud application services market with SAP. Learn about SAPs market-leading SAP HANA Cloud Platform and an exciting opportunity to join SAPs growing ecosystem of Application Development partners. When: October 29, 11:00am EST Speakers: Allan Adler, Managing Partner, Channel Cloud Consulting Thorsten Leiduck, Vice President ISVs & Digital Commerce, SAP
SYS-CON Events announced today that IBM is holding a Bluemix Developer Playground on November 5, 10:30 am to 5:30 pm at 15th Cloud Expo. 15th Cloud Expo, co-located with @ThingsExpo, Big Data Expo, and DevOps Summit is taking place Nov. 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA. The labs, for developers of all levels, will highlight the ease of use of Bluemix, its services and functionality and provide short-term introductory projects that developers can complete betw...
The major cloud platforms defy a simple, side-by-side analysis. Each of the major IaaS public-cloud platforms offers their own unique strengths and functionality. Options for on-site private cloud are diverse as well, and must be designed and deployed while taking existing legacy architecture and infrastructure into account. Then the reality is that most enterprises are embarking on a hybrid cloud strategy and programs. In this Power Panel at 15th Cloud Expo, moderated by Ashar Baig, Research ...
The Industrial Internet revolution is now underway, enabled by connected machines and billions of devices that communicate and collaborate. The massive amounts of Big Data requiring real-time analysis is flooding legacy IT systems and giving way to cloud environments that can handle the unpredictable workloads. Yet many barriers remain until we can fully realize the opportunities and benefits from the convergence of machines and devices with Big Data and the cloud, including interoperability, da...