Exclusive: Computer Economics study – cloud saves 15 percent

SUMMARY:

Computer Economics settles arguments about the savings that are achievable using cloud technologies. Cloud wins by a handsome margin.

Affiliate partner Computer Economics has provided diginomica with a confidential preview copy of its new report: The Economic and Strategic Benefits of Cloud Computing. The results are startling. From the executive summary:

The study finds that organizations fully utilizing cloud computing save on average more than 15% in IT spending, whether measured as a percentage of revenue or on a per-user basis

CE fig2

See image above. As far as we know, this is the first time that an analyst firm has documented the savings which can be achieved when cloud technologies are widely deployed. These savings are significant and especially given that IT spend can be anything around 3-5% of total revenue.

In arguments around cloud economics, the on-premises vendors tend to highlight the long run costs of using a subscription service as higher than licence plus maintenance. Cloud players on the other hand talk about the shift from capex to opex. Both cannot be right. What has been missing is a fully costed assessment of moving most if not all IT assets into a cloud environment.

This is the first time we’ve seen an independent effort to put numbers on the various component parts of an IT budget for this purpose. To that extent, CE looked at six key metrics:

  1. Personnel
  2. Applications
  3. Data center
  4. Network
  5. User devices
  6. Other

It should not surprise that while applications cost IS higher in cloud scenarios by some considerable margin, every other measure shows savings. The highest saving came from data center operations where the cost fell by an average of 58 percent. This fits in with gripes we’ve consistently heard from end user organizations and analysts alike about the ongoing costs associated with data center operations.

While the report makes a solid case, it is limited in sample size. The results were garnered from a modest sample of seven businesses ranging in revenue from $50 million and $550 million and between 135 and 860 employees. The sample spans industries as diverse as plastics manufacture and pure services organizations. the quoted applications portfolio includes vendors as diverse as Workday, NetSuite, Microsoft, Box, Google, FinancialForce and Salesforce.

I asked Frank Scavo, CEO Computer Economics the following:

Qu: the sample size is small – to what extent are you confident this is sufficiently representative?

A: Yes it is a small sample, mainly because we put a floor on the size of company we allowed in our sample. There are plenty of five or 10 person organizations that have gone all cloud. But it is not that easy to find companies over $50 million in annual revenue that have moved all or most of their systems to the cloud. But we found seven, between $50 million and $550 million. We hope to get more respondents in the coming months, but I do not believe the conclusions of the report will change.

The reason I am confident that cloud saves money is that the results are consistent. We compared each respondent with its industry peers, whether manufacturing, high tech, wholesale distribution, professional services, or whatever. In every single case, the cloud respondents are spending less on IT than their industry counterparts. That is a very striking outcome. So, we are reporting between 15% and 20% savings. If we get a larger sample, perhaps the number will be 12%. Or maybe it will be 25%. But I don’t think it will flip to show that cloud users spend more on IT than on-premises customers do.

Qu: Presumably the recommendations can only be applied to this size of business?

A: I think the results apply to any size business. As you would expect, our findings show that companies that have migrated to the cloud eliminate most or all of their data center spending. But they also show savings in IT personnel costs across the board. Of course, they spend more on applications software, as that line item has the data center costs bundled in with it. But the savings in data center and personnel expenses is more than the increase in applications costs. I don’t see why that would be any different in smaller or larger companies.

Qu: Did respondents indicate where they are putting saved costs – you say innovation but what does that mean?

One respondent indicated that cloud systems allows his company to grow 25% through acquisition, without having to increase back office costs. Another respondent pointed to the same benefit. A third respondent mentioned the ability to quickly bring new functionality online without the risk that comes with buying licenses. All of the respondents were big on the flexibility and scalability benefits of cloud systems. In fact, it was hard to get them to indicate any downside.

Verdict

  1. This study is long overdue and now provides a stake in the ground upon which others can build.
  2. The conclusions are startling. I can imagine cloud vendors of all stripes will jump on this with gusto but…
  3. The sample size is small but our guess is that this is representative of relatively early stage adoption for full cloud strategies.
  4. Buyers should not assume savings are a given and that a switch is something that is done with a snap of the fingers. CE provides guidance based upon its 2013 SaaS study on acquiring cloud technologies.
  5. As Scavo points out, individual mileage will vary. It is therefore important to undertake a comprehensive review to ensure you understand the fully costed IT model.
  6. The real surprise to me was around data center. The perceived wisdom is that penalties to get from underneath this cost element makes a switch un-economic. That may well be changing.

Disclosure: Workday, FinancialForce, Box and Salesforce are partners at time of writing. You can access the full report here. diginomica makes no revenue from the affiliate link nor from sales of the report.