What is Cloud ROI?
Cloud ROI is the measure in cloud economics of the impact a cloud investment has on an organization.
For most businesses, return on investment (ROI) is a success indicator for any project – signifying that a business decision led to a positive impact on the organization’s bottom line. The measure of ROI is simply the increase in the value of an investment over a period of time. If the financial benefit outweighs the original investment the result is a positive ROI.
Cloud ROI is impacted by initial outlay, the speed with which returns occur, and cost decreases that occur as a result of the investment. For example, moving to a public cloud provider decreases capital expenditures, but increases monthly costs. These are also impacted by resulting revenue improvements, product enhancements that enable prices to be increased, or the ability to scale more rapidly to meet peaks in demand that may otherwise have been lost opportunities.
ROI has both tangible and intangible components – a complete ROI picture must include factors such as overall corporate value, customer goodwill, and brand value in the marketplace, to name a few.
Some key factors when calculating cloud ROI include:
- Productivity. If cloud adoption enables the business to meet peak demands rapidly productivity can be enhanced and opportunities gained that might have been lost without cloud scalability.
- Leverage. A single cloud platform such as AWS or Azure can provide the organization with the basic infrastructure to manage many applications. The virtualized nature of cloud services enables resource sharing of VMs and storage pools between multiple departments, and a cloud providers multi-tenancy offers economies of scale that can make cloud services less expensive than on-premises servers and storage for many organizations.
- Pay as you go. By eliminating capital expenditures, organizations pay for only those cloud services actually used in a give time period. There is no need to pre-pay for infrastructure necessary to meet peak demands UNTIL those peaks occur, and then organizations only need pay for increased capacity when it is needed. The same is true of software licenses; only pay for those you need when you need them.
- Provisioning time. Since procuring and deploying new infrastructure in the cloud is virtually instantaneous, new projects can be launched immediately rather than waiting for hardware to be ordered, configured, shipped, and installed. This also has a strong impact on time to value since work can begin immediately upon project approval.
- Capital spending reduction. Migrating applications to the cloud eliminates the need to spend for on-premises infrastructure, as well as eliminating support and upgrade requirements. Lower costs translates to higher profitability and increased ROI.
- Access to new market. Faster delivery and lower costs translate to more competitive offerings, which can open the door to new customers and markets worldwide.
- Cloud risk management. Calculating the cost of project failure, infrastructure outages and natural disasters, as well as ways to mitigate them, via disaster recovering solutions.
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What are the benefits of measuring cloud ROI?
You cannot manage what you cannot measure and measuring cloud ROI gives an organization the understanding of how a cloud project can impact the bottom line over a period of time. Since IT infrastructure investments often have a three-to-five year lifecycle, calculating the cloud ROI for a similar timeframe can demonstrate how substantial the payback can be for cloud investments made today. Migration cost can be demonstrated to translate into operational excellence, cost savings, and enhanced scalability, helping to green-light potential cloud projects.
Some benefits that can be realized as a result of determining a positive cloud ROI include:
- Reduced or eliminated software license costs
- Increased business agility and faster responses to business unit inquiries
- Reduced operational expenses – no more servers or ancillary infrastructure
- Shared cloud resources that all user departments can benefit from
- Improved energy efficiency and reduced electricity bills
- Retiring of IT assets, racks, data centers, and real estate expenditures
How do you measure Cloud ROI?
Cloud ROI is the ratio of monetary gain from an investment. However, in a complex organization it may not be immediately clear exactly what the investment is and what the gains are. A good place to start is by calculating the total cost of ownership for the cloud investment, taking into account savings realized by retiring no longer used infrastructure and facilities.
Once those numbers are in hand Cloud ROI is calculated using a simple formula:
(Gain from investment – investment) / (investment) = ROI
An organization’s ROI can be calculated using the gains realized from the TCO (investment). When calculating the TCO, be sure to include:
- Switching cost and time of moving to the new platform.
- Skill acquisition (and productivity loss) for training for new platform
- Risk factors around lock-in to new platform
- New economic model, understanding the new set of cash flows that will result from the new platform
Other considerations are total costs over time, software and license fees not included in contracts, and cost of any third-party or professional services required. Learn more about cloud economics here.
Although many organizations will start by determining cloud ROI for a single fiscal year, it is important to understand that the savings from a cloud migration will increase over time, since there the migration has already been paid for in year one. That means the 3 or 5 year ROI for a cloud project can be significantly greater than the one year ROI. These considerations should be made clear to all stakeholders while doing the initial evaluation for cloud migration, since one-year ROI may look marginal while three-year ROI shows substantial gains as a result of the cloud project. For example, a $900,000 one-year gain from a $1,000,000 cloud investment shows a negative ROI in year one, but a 3 year ROI of $1,700,000!
Click here to See IDC Report on the Business Value of Cloud