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The Public Cloud Cost Advantage I

Convincing your board to migrate your enterprise to the cloud often simply comes down to cost. We make the cost benefit case that enterprise cloud computing is not only less expensive than the traditional IT model, but it can actually increase profits

There is no debate on the technical benefits of cloud computing to IT in any business — agility, shorter time to market, and out-of-the-box managed services are just a few.

With the cloud computing revolution, the IT cost model has changed; what used to be very static and rigid is now flexible, scalable, always available, and requires less upfront commitment. All of the major cloud service providers including Amazon, Google, Oracle, and Microsoft offer an abundance of options, all of which change expenditure and cost projections for the better.

The benefits of this pricing paradigm shift are many, and crucially, tangible to any enterprise. In this series we describe the challenges with this new paradigm and highlight how moving to the cloud can be an enticing commercial prospect to both you and your board.

While all of the major cloud service providers have common themes, none offers absolute parity. So in this series, we will focus on the big 3 — Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform (GCP). As usual, we will also draw examples from IBM, Oracle Cloud and Alibaba Cloud.

There is a multitude of cloud cost models on offer to suit most enterprises, depending on need.

The concept of ‘pay as you go’ in the cloud is broad, presenting a range of pricing models. Some of the more common models are described below.

While this is the simplest of the cost models, it is also the least flexible. Generally, a flat rate cost model is a single service at a single price, paid per usage period, which could be monthly, daily, hourly, per minute or even a per second basis.

It is easy to sell for the provider because it is a simple, well-defined offering, and it offers stability over time. The danger of course is that your bills reflect the up-time of the cloud resources and not your actual usage.

More scalable than the flat rate cost model, here you pay as you go — so the more you use, the more you pay. It works well for enterprises that find it hard to predict their usage from month to month, so they can scale up and down depending on demand. This will of course mean fluctuations in the monthly costs of the service.

In this option, a range of packages are usually offered, e.g. minimal, medium, and high usage, much like a mobile phone plan. Flexibility in the service cost as features can be added or removed during the service period by the customer.

Both simple and scalable, as the name suggests, you pay a certain amount per user on your network. The more users, the more you pay. While it is often the most appealing option to large enterprises, adoption could be limited as scale up costs increase.

As the name suggests, the hybrid cost model combines the tiered package/subscription model and the usage based cost model. All of the service prices are based on the tiered package/subscription model, but if you go over your usage limits, you pay usage-based rates.

Also known as real-time pricing, they are considered to be the most flexible price models in cloud services. Using real-time data, prices change depending on various factors, sometimes as often as every 10 minutes.

We use dynamic price models as a plural here, as they can be based on a variety of factors:

● Competition — considers competitor pricing at any given time

● Cost — combining the profit with level of cost at any given time

● Location — price is based on where the user is located at any given time

● Value — based on user-perceived value of the service at any given time

● Customer — based on what the customer is prepared to pay at any given time

While dynamic pricing can be very flexible for an enterprise depending on conditions, individual users are not likely to be aware of the dynamic factors, so they have little say in how much they spend on behalf of the company. For large enterprises, however, the overall cost benefit should be appealing.

With the move from heavy up-front expenditure in traditional computing, to the pay as you go cost model in the cloud, enterprises are able to make the pleasing paradigm shift from Capital Expenditure (CapEx) to Operational Expenditure (OpEx) for their computing needs.

A large portion of an enterprise’s total IT spend is no longer paid up-front in set cycles and treated as equipment, rather, it is now an ongoing cost paid monthly and treated as an operating cost.

For startups and Small and Medium-sized Enterprises (SMEs), the appeal of OpEx focus is obvious; why spend so much on your own costly space and demanding IT infrastructure when you can pay a fraction to use somebody else’s? In the case of large enterprises however, the case for OpEx vs CapEx is a little more nuanced, though still very attractive.

And yes, your enterprise may well have already heavily invested in physical hardware; it may be sitting off site, or taking up space in your offices. So why should you abandon those expensive assets for the cloud? There are both hard and soft benefits to take into account.

The most potent advantage of cloud services are agility and utilisation, perhaps even more so than cost savings. The cloud allows a business to scale up or down with almost unlimited scope, as needed, and with total control of the process.

While in a traditional CapEx IT environment, to support increasing capacity from 40% to 100% utilisation would require waiting for hardware and software acquisition and installation, in a cloud OpEx environment, the shift would be comparably instant.

Transitioning to the cloud allows you to enter into new ventures, markets, handle new customer bases, or comply with regulations swiftly, and all while maintaining your existing workloads concurrently in the cloud.

Under an OpEx budget, a large portion of your IT hardware and infrastructure will require no large up-front investment. Not only does this make your budgeting supremely nimble, it also allows you to spend the costs saved on projects that would normally have been ignored at the expense of this investment. There is no opportunity cost here to consider, so you no longer have to choose one or the other.

Because CapEx and OpEx are in different budgets, the approval process is different. When IT falls into the OpEx category, most businesses are able to skip several layers of management authorisation that they may have had to navigate in a CapEx environment. This means reaping the rewards of infrastructure availability faster, and when you need it, rather than 6 months or a year down the track.

In a traditional CapEx environment where you own the equipment, it is most likely maintained by a legion of your own IT support staff, that all require desk space, salaries and benefits. When using the cloud, the service provider will maintain responsibility for all hardware and infrastructure as part of your simple monthly bill. This represents immense savings both in terms of human resources, physical space, power, cooling and of course, money. So even if the numbers were equal, the effort will be significantly lower.

By purchasing and owning your own servers etc, whether on-site or off-site, you will also be required to purchase ancillary products and services, such as power back-ups, air conditioning, insurance etc. With an OpEx cloud operation, all of this is provided along with the hardware and software by the cloud service provider.

The OpEx elephant in the room may well be the shift from depreciating your IT assets under a CapEx structure, to an OpEx structure that may affect EBITDA without said depreciation. Yes, your board may have its doubts, however an OpEx system can provide an opportunity for leaner and more efficient cost modelling overall.

Because the cloud offers utility pricing, in conjunction with well optimised OpEx, your enterprise will be able to focus its CapEx on core business projects, rather than IT equipment, which would ordinarily draw a large portion of those resources without guarantee of delivering the ROIs in their business case.

Traditionally, every CapEx refresh cycle, you’d be in for an upfront bill to pay for servers, networking, racks, hardware, and a myriad of other IT infrastructure pieces. And that bill was on your desk before you even turned that hardware on.

The first and most obvious benefit of shifting from CapEx to OpEx is the immediate removal of those up front investments, which we’ve already covered. But the benefits go beyond just the cost of that physical hardware.

With an OpEx focused IT system, there is dramatically less downtime since you’re not physically replacing hardware. When each hour of downtime can cost thousands of dollars per hour it’s not hard to see the benefits of avoiding this cost every refresh cycle.

There are no more long-winded explorations into specific IT hardware needs, or the countless other requirements for their maintenance. This leaves you to focus on what is important, steering the ship for a successful enterprise.

It has to be assumed that the shift to a OpEx structure for IT spending is a large part of the reason as to why 40% of large UK businesses will be cloud-only by 2021.

Traditionally in an on-premises networking environment, as well as your hardware, you’ll have to pay an upfront cost for whatever software licences your enterprise needs. Generally these licences last one year, and you will need to accurately forecast how many licenses will be needed for that period.

The obvious flaw in this traditional cost model is that you are stuck with that number of licenses for an entire year. If you purchase 1,000 licences, and you only utilise 500 of them, you’ve paid double what you needed to. You’ll have to wait until next year to manually go over the data, and try to more accurately forecast how many licenses you’ll need.

Once an enterprise has migrated to the cloud however, there are third party cloud management tools that can monitor your usage (across multiple cloud services) to figure out your needs month to month. This allows you to be more accurate in your forecasting, as well as having the information you need much faster.

The real benefit, is that these cloud management tools will only charge you a small percentage (e.g. 1%) of your total monthly cloud usage to monitor your usage and provide the analytics you need to maintain cost efficiencies. The benefits of managing licences by paying a small percentage as you go, vs large and rigid yearly costs for licences will bring down costs considerably.

These days, as old hardware lingers in dust, and its scope meanders in its middle age, IT has regressed to being just another expense, albeit a very expensive one. Spend heavily on IT infrastructure, depreciate said IT infrastructure, rinse, repeat.

The cloud however has the genuine capability to turn your IT department into a genuine profit centre. By upfront costs substantially shifting to an OpEx IT operation you should have a healthy amount in reserves. Of course you

could use this for other parts of your business, but real innovation can happen if you invest it back into IT development.

Now that the cloud has reduced the financial IT CapEx burden, many large enterprises are putting those resources into creating their own proprietary technology that they can then licence on to other external customers

Consider Washington State Employees Credit Union, a US2.3 billion dollar asset fund, who created its own short-term loan mobile app, and has marketed it to other financial institutions. Or Goldman Sachs, who used some of its mobile security research to start a joint venture with Synchronoss Technologies, with the aim to create ‘Bring Your Own Device’ culture to enterprise use.

These are just two examples of companies that have shifted their IT focus from cost to profit, by integrating the technically possible with real-world outside applications able to create genuine revenue.

Cloud computing has changed the paradigm from IT supporting your business, to how your IT department can create business — in other words, your IT force needn’t be just an inhouse capability, but a product to be onsold.

This change in mindset of course takes courage, but it’s proven to be possible, and will be the future direction for the brightest boards across all industries.

Any enterprise that has had their IT as a simple overhead will know that it tends to be treated like a kitchen tap — people and departments turn it on, without much thought to when or why they should turn it off. The obvious risk here is that it can create a black hole of expenditure, usually unattributed to who used it and when.

The main argument against going towards an internal chargeback structure in IT is the time and cost required, but the overall cost savings are evident once cloud computing becomes a factor.

In the traditional model, IT is an overhead that comes out of one budget, usually belonging to the CTO or CIO. In an IT chargeback model, individual departments are charged for their IT use. Because of this IT costs are zeroed out, as they’ve been assigned to individual groups. It is now no longer an overhead, but an OpEx for each department.

The IT chargeback model allows for:

● Much greater transparency in terms of IT cost and usage

● Simplified IT investment decisions

● No surprises in expenditure

● Identify areas of underutilisation/optimisation

● Visibility to reassign or decommission unneeded assets

● Better general knowledge for staff of how the cloud contributes to the business

● Each department becomes accountable for their own IT use

There will be some resistance from executives and departments as its natural to resist accountability, but the cultural shift will be just as beneficial as the financial shift. IT chargeback has been shown to create an enterprise-wide drive to lower IT infrastructure costs through accountability, and more efficient use of space, hardware, and electricity.

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The Public Cloud Cost Advantage I

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