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.
The cloud is "not a silver bullet. It's not the right answer for every situation," says Casey Coleman, CIO for the General Services Administration.
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, she says. So in May 2009, it launched an effort to thoroughly examine its current costs and the projected costs of 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 cybersecurity 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."
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," says Coleman.
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, with many consolidated and reworked. Cutting so many apps meant that the GSA could then turn off 300 in-house servers, Coleman says.
Those cuts plus others enabled the GSA to project 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 an on-premises installation of Exchange for student email to Microsoft's hosted offering, known then as Live@edu, it didn't save money as a result of the change. But the university gained value because the service allowed for easy integration with smartphones and online storage with Microsoft's SkyDrive service. "Even though the costs were flat, it provided more services to students," says Tim Ferguson, CIO at the university.
Just Say No -- Even Temporarily
Northern Kentucky University is also in the midst of a transition to using virtual desktops rather than physical systems for its computer labs, and it has been turning down vendor offers that just don't make sense economically, hoping 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 Ferguson.
About 18 months ago, the university did trials of virtual desktop software from a few vendors, all hosted in-house. The systems didn't meet expectations in terms of either price or performance, so the university declined to implement any of the vendors' offerings. "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.
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 transitioned all of the university's labs to virtual desktops hosted in a public cloud by 2014 or 2015, and he expects that move to cut costs by about 30%.
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 is involved in doing things like deploying patches. He also knows when peaks and valleys in usage occur -- and that's important information that could help the university find savings in a move to a public cloud.
The data comes in handy 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 money is by pushing its vendors to offer true usage-based pricing. Many SaaS vendors that Ferguson has looked at try to charge on a per-seat basis. But that model doesn't make sense for a university that has slow times during the summer and holiday breaks. At peak usage, per-seat pricing would save the university money, but on average, because of the valleys, that model often ends up costing more than running apps in-house.
To try to figure out the ROI of any of its prospective 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' personal identifying information, including Social Security numbers. 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.
When calculating ROI, the values assigned to various factors, such as privacy, will vary from organization to organization. One business might see security as the most important consideration, while another might place more weight on the speed at which you can add capacity, and others could deem liability to be the highest priority. "That question of value is complicated," says Marc Brien, vice president of research for Domicity, a consulting and IT analysis firm.
The value of redundancy is one factor that many organizations struggle with when transitioning to the cloud.
There are two types of organizations that don't build in redundancy when using cloud services, 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 those that are simply unaware of the need for redundancy. They don't know, for instance, that when they move a workload to a cloud-based platform like Amazon Web Services, they must distribute that workload across data centers in multiple regions if they want to avoid the possibility of losing all of their data because of an outage in one particular area. AWS has been good about releasing white papers and other advice on how to properly do this, Eisenberg says.
In the second group are organizations that don't bother with redundancy because they make conscious business decisions not to shoulder the cost of building in redundancy. Such a decision might make sense if the systems running on the cloud aren't mission-critical. "It depends on what they stand to lose," Eisenberg says.
The cost 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 syncing 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, 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 agree to multiyear contracts. But that leads to vendor lock-in and restricts users from switching to services that might better meet their needs. "So you have this three-year contract. Maybe you outgrow it or maybe you find another app that does a similar thing but better," says Connor Sullivan, an analyst at IDC who follows cloud computing. Businesses in that position likely feel trapped with an app that's not the best fit or they end up "double-dipping" -- signing up for a new service at an added cost, he says.
Businesses also should thoughtfully consider costs over time. It turns out that prices for SaaS apps in general aren't coming down the way that many people once predicted. Historically, the thinking was that as more users turned to cloud services, economies of scale would reduce costs for all, Sullivan says.
Some providers like Salesforce.com have true multitenant cloud services and are benefiting from scale. While Salesforce is passing those savings on to customers, it is also continually adding new features, which cost extra. "People want those new functionalities and so the cost to the end user hasn't gone down," Sullivan says.
"The message we've been drumming is it's all about scale," Eisenberg says. "If your business problem is not about scale, cloud is in all likelihood not your ideal solution."
The type of workload an organization hopes to move to the cloud will also determine whether the transition makes sense economically. "We have paid close attention to what sort of circumstances make for a successful cloud deployment," the GSA's Coleman says.
Underlying the decision is the pressure on IT managers from their bosses, "who are looking at the success of Amazon and saying, 'Why can't you take 10% off your budget?'" Brien says. At the same time, those IT people don't want to rush into using a cloud service for the wrong reason only to see it cost more or impact their service levels.
All those pressures mean that enterprises are taking it slowly. Larger businesses are still at the stage of "primarily playing around" with the cloud, Brien says, as they try to decide which apps make sense there. "They're just moving slowly, doing it bit by bit," he says.
"It's really early days, even though all you ever read about is the cloud," he says. "The overall economics of the cloud are that it will ultimately absorb most machine cycles, but it will not happen as fast as people tend to think it will."
This version of this story was originally published in Computerworld's print edition. It was adapted from an article that appeared earlier on Computerworld.com.
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