Understanding the economics of cloud: Four guiding principles for evaluating your cloud investment

By Justin Augat, Vice President of Marketing, iland.

COVID-19 has not only accelerated the move to cloud and the digital transformation journey, but it has also put cost reduction initiatives squarely in the limelight. 

Reducing costs has always been a top priority for IT departments but the pandemic has accelerated its importance over the past 12 months. In fact, according to Deloitte cost reduction initiatives have increased 74% since pre-COVID, with 40% of organisations planning to grow their cost reduction strategies in the next 12 months. However, undertaking a large-scale digital transformation with either a flat or declining budget is no mean feat.  To achieve this, organisations often look to the cloud, and it has become a common assumption that migration to the cloud translates to reduced costs.

The reality though can be a very different story. In fact, without the right cloud provider, the true costs of cloud computing can add up fast. So how do organisations choose the best cloud provider for their business, and are hyperscalers like Amazon Web Services and Microsoft Azure good investments? 

Aligning to lower budget expectations

During periods of uncertainty, like 2020, companies still complete their most important IT projects but will look to see how they can align to lower budget expectations, while potentially putting projects of lower importance on hold. However, businesses often find that their data grows at 30-50% per annum and, if their budget remains flat or decreases, this eventually means they must cut into high-priority project spend.

IT teams can buy time through project extensions, scope reductions, and other means of delaying the inevitable spend. Eventually, however, they need a new way to manage increasing data and demand with a decreasing budget.  Therefore, organisations move to the cloud because it offers a variety of benefits, from agility, flexibility, and scalability to efficiency and cost reduction.   In fact, cloud services spend was already growing much faster than on-premises IT spend at the beginning of 2020, and the momentum only increased during the pandemic. 

“Why cloud?” is clear but “how cloud?” is more challenging 

So, the “why” shift to cloud computing is clear, but the “how” can be more challenging. With so many cloud providers, it can be difficult to look past big brands to choose the right partner for your business. 

Choosing the right provider is particularly important if cost reduction is a key goal. Not all clouds are equal in terms of cost savings to the organisation. While any cloud can probably reduce the costs of a traditional, on-premises environment, the difference in additional savings achieved between providers can be significant.

It is therefore important that from the outset organisations look to build an economic framework and compare features, capabilities, and metrics across providers. This will help the business to set achievable expectations for both cost and performance.  Here are four guiding principles that will help readers evaluate their options and hopefully meet their cost goals, before they deploy new cloud technology.

1. Understand your driver for change. No initiative exists in a vacuum, and cost reduction is no different. It’s important to remember your overall requirements and objectives alongside your mandate to lower costs. Think about the shift in terms of value, not revenue. What value does the move to cloud provide, by virtue of greater speed, flexibility, agility, and/or the ability to accomplish things that wouldn’t be possible in a traditional environment? 
2. Lowest price doesn’t equal lowest cost. It’s critical to fully evaluate the exact costs that your company will incur from any vendor, which can vary widely based on scale, accessibility, speed, and other business requirements. Think about it like buying a car. You may see the lowest monthly car payment advertised, but it doesn’t include insurance, petrol, and maintenance, which can vary from model to model. Further, that low monthly price might be for the base model, which doesn’t have the features you want. 
3. Measure twice, cut once. Cloud can be easy to deploy but effort-intensive and costly to undo. Perform your due diligence up front. Measure every cost and capability thoroughly before deployment for complete visibility into what you will pay and what you will get for your investment. 
4. Cloud infrastructure matters. There are technologies that will be superior to others, for your specific business and in general. At iland, for instance, we run a VMware-based cloud. As a result, if you are a VMware user, the benefits of iland will be dramatic, especially when compared to a non-VMware-based hyperscale provider.

Most popular doesn’t mean more cost-effective

Many organisations look to hyperscalers like AWS, Azure, and Google Cloud to reduce costs through cloud adoption. Unfortunately, that doesn’t always work out as planned and while they may be popular, they’re also expensive.

For example, many of the integral components of an on-premises infrastructure, like network security and monitoring day-to-day operations, aren’t factored into the equation for cloud services. For big hyperscalers like Microsoft Azure and Amazon Web Services (AWS), they are sold separately - and can add up fast. Hyperscaler customers almost always end up paying for far more than they need. In fact, according to Gartner, companies that make mistakes during due diligence and cloud adoption can overspend by 20-50% indefinitely. 

Likewise, hyperscalers commonly claim that they will dramatically reduce total cost of ownership (TCO).  This can be true, if the organisation is able to fully evacuate the data centre and has the skill set to right-size cloud from day 1.  Even then, however, the return on investment can be slow. Gartner found that in a typical migration to a large public cloud provider, ROI was -171% after three years and only become positive seven years in.

A complete cloud at a fair price

Going forward it is important that organisations right-size their cloud and truly understand the economics of their cloud deployment, but most importantly they work with a cloud provider whereby they only pay for the resources they use.