Calculating the real ROI of cloud apps requires the analysis of a lot of factors, and cutting corners on that process means you might not save money.
The key to earning a positive return on investment when adopting cloud services -- including software-as-a-service and infrastructure-as-a-service -- is carefully studying costs and benefits to ensure that such a shift will pay off.
Sounds like many of the other IT projects you've shepherded, right? But it turns out it's incredibly complex to determine whether a move to the cloud will pay off for a given application. When done in haste, that analysis can lead companies to adopt the cloud for the wrong reasons, leaving them with higher costs or an inferior product when compared to an on-premises installation.
The good news is that despite all the hype around the cloud, it appears that many businesses recognize the dangers and are proceeding with caution.
"It is significant that the enterprise market is really moving to the public cloud at quite a glacial pace, and I think it's because they know ROI is much more complex than just the avoidance of hardware and software costs," says Marc Brien, vice president of research for Domicity, a consulting and IT analysis firm.
It is significant that the enterprise market is really moving to the public cloud at quite a glacial pace, and I think it's because they know ROI is much more complex than just the avoidance of hardware and software costs. Marc Brien, vice president of research, Domicity
There aren't comprehensive estimates for how many enterprises are using cloud services. Amazon Web Services, the most popular IaaS offering on the market, doesn't reveal such detailed stats. However, Cloudyn, a company that monitors AWS usage for customers, says that just 11% of Amazon's AWS customer base around the world has more than 1,000 employees.
Software-as-a-service offerings from certain providers like Salesforce are much more popular in enterprises, with niche or legacy app cloud services a mixed bag in terms of enterprise adoption, Brien said.
Among those businesses that are using cloud services, there are plenty of success stories showing that the cloud can significantly cut costs. Nucleus Research examined 70 case studies of companies adopting SaaS and found that the services offered 1.7 times greater ROI than on-premises apps, largely due to their ability to offer increasing benefits over time without a proportional increase in costs.
But there are also some businesses that are adopting cloud services and regretting it. Nucleus Research found in a survey that 52% of cloud CRM customers were willing to consider switching vendors within six months. "What we saw was that companies had often been sold aggressively and they spent less time on due diligence and planning," says Rebecca Wettemann, an analyst at Nucleus, which offers IT research and advisory services.
The cloud doesn't fit all use cases. "It's not a silver bullet. It's not the right answer for every situation," says Casey Coleman, chief information officer for the General Services Administration.
Only fools rush in
As the first federal government agency to deploy a cloud-based email service agency-wide, the GSA didn't have a road map to follow, says Coleman. So beginning in May 2009 it thoroughly examined its current costs as well as projections for the cloud service.
"It is the case that it has to be well thought out and methodical. This is an IT project like any other. You have to plan for change management, promote user awareness, ensure cyber security in contractual terms, like with any IT project. If you don't approach it in that manner, you might have a different experience," Coleman says. "The promise of cloud computing has been borne out in our experience."
Moving to the cloud "has to be well thought out and methodical," says Casey Coleman, chief information officer for the General Services Administration. "You have to plan for change management, promote user awareness, ensure cyber security in contractual terms, like with any IT project."
When the GSA adopted Google Apps for email in July 2011, it was able to realize added cost savings by also transitioning non-email systems that were attached to its legacy email system. The agency had been using Lotus Notes for email, plus Domino for workflow apps. As part of its review of adopting Apps for email, the GSA took a hard look at the Domino apps. "We ended up reviewing those apps and eliminating most of them," she says.
The GSA had 2,000 apps in Domino, ranging from small databases to more substantial workflows. It got rid of all but 500 of those apps, with many consolidated and reworked in Force.com. Cutting so many apps meant that the GSA could then turn off 300 in-house servers, Coleman says.
Those savings plus others meant the GSA projected that it would save $16 million over five years by moving to Google Apps for email -- and to date that estimate is proving to be accurate, Coleman says.
Not every transition to the cloud will save that kind of money, but closely examining costs and benefits may reveal that the cloud makes sense even if it doesn't impact the bottom line.
In 2009 when Northern Kentucky University switched from on-premises Exchange for student email to Microsoft's hosted offering, known then as Live@edu, it didn't save money over its existing implementation. But the university gained value because the service allowed for easy integration with smartphones and online storage with SkyDrve. "So even though the costs were flat, it provided more services to students," says Tim Ferguson, CIO for the university.
The hosted service also allowed the university to boost the size of student inboxes. "What we were able to offer to students when we hosted email on site was minimal at best," he said. "With the move to the cloud-based email, students now have enough email storage to meet their needs."
Ferguson studied what it would have cost to adopt the latest version of Exchange and upgrade storage capacity to match what was offered with the hosted Exchange, and he estimated the additional annual cost would have reached $100,000. Instead, by moving to the hosted version, his costs remained flat, while gaining functionality.
Just say no -- even temporarily
Northern Kentucky University is in the midst of a transition to using virtual desktops rather than physical computer labs and has been turning down vendor offers that just don't make sense economically, with hopes that still-to-come products and pricing models will eventually meet its needs.
The university decided to approach the project in "baby steps," by running the virtual desktop software on premises with the idea of transitioning it to a public cloud later, says Tim Ferguson, CIO for Northern Kentucky University.
Around 18 months ago, the university did trials of the virtual desktop software from a few vendors, all hosted in-house. The software's performance didn't meet expectations and neither did the price, so the university declined to implement any of the vendors' offers. "They were surprised. We said, 'Here it is in black and white. You'll cost us more money. The ROI is not good enough. Come back to me when you can solve it,'" Ferguson says.
When Northern Kentucky University first attempted to move desktop virtualization to the cloud, the ROI wasn't there, says Tim Ferguson, CIO at the university. "We said, 'The ROI isn't good enough. Come back to me when you can solve it," he says.
Since then, the university has deployed VMware's View virtual desktop software in-house and is about to start trials running the software on Dell's public cloud, and possibly others. Ferguson expects to have deployed all of the university's labs as virtual desktops hosted in a public cloud by 2014 or 2015, and to be saving around 30% over current costs.
The university closely tracks costs in order to be able to present current expenditures to vendors. For the virtual desktop project, Ferguson knows how many staff members support the current implementation, what the hardware costs and how much work it takes dealing with software patches. He also knows usage peaks and valleys, an important issue for a university and one that could help it save money by moving to a public cloud.
This data is extremely important when working with potential vendors, he says. "If I clearly articulate what it costs today, if they can't save me money, why do it?" he says. "If you can't articulate that, it's kind of hard to ask a vendor to do something for you."
One way that Northern Kentucky is making sure cloud services save costs is by pushing its vendors to offer true usage-based costing. Many vendors of SaaS services that Ferguson has looked at are trying to charge on a per-seat basis. But for a university, with its slow times during the summer and holidays, that pricing model doesn't make sense. At peak usage, the pricing would save money for Ferguson but on average, because of the valleys, the per-seat model ends up costing him more than keeping many apps in house.
That's a particularly important issue for Northern Kentucky's ERP system, which supports class registration. The system peaks when students are registering for class and then "flatlines," he says. While his group spends a lot of time managing the on-premises SAP implementation, "if I have to pay for the peak for an entire year, that's not very interesting," he says.
Also, the SAP system is one that the university can't take risks with because the software has to be totally available when students want to register for class. That means Ferguson is going to move that system to the cloud only when he's totally confident it won't fail. "We're going to accept less risk when it comes to those bread and butter systems," he says.
To try to figure out the ROI of any of its proposed cloud projects, Northern Kentucky starts with an ROI calculator and research from Gartner, adapting it for the university's own special needs.
For instance, Ferguson has strict privacy requirements since many cloud services used by the university handle students' information including Social Security numbers and other personally identifying data. NKU includes privacy in its ROI calculation by subtracting value when considering a vendor that doesn't seem to grasp the university's privacy requirements, he says.
The value of various factors will vary based on the organization. Security may be more important at one business than another; the speed at which you can add more capacity might be most important for another; and liability could be critical to others. "That question of value is complicated," Domicity's Brien says.
Valuing redundancy is one factor that many businesses struggle with when transitioning to the cloud.
There are two camps that don't build in redundancy when using cloud services like IaaS, says Mark Eisenberg, who formerly worked on the Azure team at Microsoft and now is a director at IT consulting company Fino Consulting. The first are businesses that simply don't know that, for instance, when moving a workload to AWS they must balance it across regions if they want to avert the repercussions of a regional outage. AWS has been good about releasing white papers and other advice on how to properly do this, Eisenberg says.
In fact, after an outage about a year and a half ago, AWS wasn't particularly sympathetic toward customers that suffered, Eisenberg says. AWS essentially reminded customers that it recommends they build in redundancy.
The second group of customers makes a conscious business decision not to shoulder the cost involved with building in redundancy. "It depends on what they stand to lose," Eisenberg says.
The costs of building in redundancy can be daunting. Take data storage. It costs twice as much to fully replicate data. But there are also architectural decisions to consider. Having two data stores separated by a long distance introduces latency when synching the stores. For many applications, that latency might not matter. But for some types of applications it could create problems.
Cost is a factor for compute redundancy too. Businesses that can tolerate the delay involved with spinning up new cloud-based servers -- usually around five minutes -- can wait until a problem occurs before they fire up backup instances, Fino Consulting's Eisenberg says. Others may run half as many additional servers instead, because they can tolerate some latency with their apps better than they can handle a complete outage for a few minutes.
The scale issues
Architecting scale also is a challenge that comes with cost repercussions. "Just as in the on-premises world where capacity is kind of an art more than a science, it's the same in the cloud," Eisenberg says. "It's easy to say 'I'll just have more capacity than I need,' until you find out the high costs associated with doing that."
SaaS deployments come with their own set of potential cost overruns. SaaS providers often offer their best deals to customers that sign on to multi-year contracts. "So now you have this three-year contract. Maybe you outgrow it or maybe you find another app that does a similar thing but better," explains Connor Sullivan, an analyst at IDC who follows cloud computing. Businesses then feel trapped with an app that's not the best fit or they end up "double dipping" -- signing up for a new service for additional cost, he says.