If you're comparing cloud TCO, you asked the wrong question

Phil Wainewright Profile picture for user pwainewright March 30, 2016
Don't talk to me about cloud TCO! People who approach the cloud with cost-of-ownership sliderules in hand really have got the wrong end of the stick

Cloud dollar sign under magnifying glass on blue sky © spacezerocom – Adobe Stock
(© spacezerocom – Adobe Stock)
Before I had even opened the email, I knew I was going to disagree with its contents. "How to Compute True Cloud TCO" declared the title. Oh, I have to read this, I thought to myself with a wry grimace.

My dire foreboding was confirmed when I read the opening sentence:

The big question facing organizations of all types and sizes is this: “Which is more cost-effective for hosting our apps and data, in-house or cloud?”

This assertion is wrong on so many counts it's hard to know where to begin. But I feel I must challenge these deeply ingrained misconceptions that persist when people discuss the transition to cloud computing. Otherwise many enterprises will continue to be misled over the true nature of the changes ahead of them.

Flaw #1 — assuming similar outcomes

The fundamental flaw highlighted by the email I received is the notion that the cloud is merely an alternative location for your existing computing. If the cloud were simply a deployment alternative to an on-premise installation, then I accept that it would be logical to compare the total cost of ownership (TCO) of one against the other.

Comparing the TCO of competing solutions is a long established practice in IT procurement and indeed many other fields of management accounting. Where several alternatives produce roughly the same result, it makes sense to investigate how much you will have spent on each of them, once you take into account the lifetime cost of acquiring, implementing, operating, maintaining, upgrading and finally decommissioning the system. You can then make an informed judgement as to which will be the most cost-effective choice.

But this only works if each competing solution has a comparable outcome — if the lifetime value is the same in each case. If the return on your TCO investment varies wildly depending on which solution you select, then you should not be making the decision on TCO alone.

Flaw #2 — accepting similar outcomes

So the second flaw implicit in the email I received is to imagine that the decision whether to go cloud is a question of cost at all. In fact, it's far more about the greater business value that can be achieved with a cloud solution. Indeed, I would contend that, if your chosen cloud alternative delivers so little additional business value that your decision comes down to a cost comparison, then you are looking at the wrong cloud alternative altogether.

The cloud should not merely be a new location for your apps and data but should also allow you to transform how your business operates in significant ways. If you are not moving to a cloud alternative that allows your business to be more digitally connected, more responsive to customers and more agile in its ability to react to changing business opportunities and challenges, then you are not realizing the true potential of the cloud.

Flaw #3 — projecting a static outcome

The final flaw in the email I received is the assumption that moving to the cloud is a one-time shift from a starting state to an end state. This of course is how IT migrations and upgrades used to work, and because these huge implementation projects were so costly and disruptive, no one wanted to undertake them without first quantifying the precise benefit that was anticipated — even if the project accounting exercise was largely hypothetical and often turned out to be wholly inaccurate once overruns and functional failings had taken their toll.

In contrast, the move from a traditional on-premise computing system to a wholly cloud-native alternative is one that can be performed incrementally and which, once started, never stops evolving. Cloud-native platforms are designed to allow continuous upgrades in system performance and functionality over time, adding value while their cost remains the same or even falls. They are designed to allow for far more frequent fine-tuning of processes and features to respond to business changes, continuing to deliver enhanced business outcomes over time.

The constantly evolving and improving nature of cloud-native systems renders the TCO comparison redundant, since the return on investment continues to rise. What becomes important is the opportunity cost of missing out on all that incremental business value, and delaying in order to carry out a TCO exercise is simply wasting time and effort that could be better invested elsewhere.

My take

To conclude, the TCO comparison is a hangover from an old-school approach to IT purchasing that really has no relevance when transitioning to the cloud. Certainly, carry out your due diligence on costs and make sure you're paying a fair price. But if you're so unsure of the business value of moving to the cloud that you have to carry out detailed TCO comparisons then believe me, you're looking at the wrong cloud system.

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