Cloud Total Cost of Ownership.

What is TCO in cloud computing?

Cloud TCO is a method used to tally the various costs to host, run, integrate, secure and manage workloads in the cloud over their lifetime. These include fees associated with the resources consumed, such as compute, data transfer and storage. It also includes integrations with related cloud services, ranging from security and management tools to machine learning and AI. Even calculating personnel costs for cloud engineers can be part of a cloud TCO equation.

Common cloud cost considerations

Running workloads in the cloud involves many types of costs. These include, but are not limited to, the following:

• application migration (rehost, refactor or redesign);
• infrastructure-based resources (compute instance size, data storage requirements, and network and SaaS usage);
• data transit costs between cloud services;
• data duplication across regions or availability zones; and
• future usage/workload growth over time.

There are also intangible costs to consider and account for in a TCO model, such as risk management, flexibility and scalability, which can be difficult to quantify but important in the bigger cost picture. Some of these, such as risk management and specific aspects of security, are partly absorbed by the cloud service provider (CSP). Others, such as flexibility and opportunity cost, reflect how certain costs can restrict or free up the ability to invest in other areas of the business.

How do you calculate cloud TCO vs. on-premises TCO?

To calculate your organization's cloud TCO, start with comparing what it costs to run the same workload on premises and in the cloud. You also must understand the complete functionality required by your application, especially its security requirements and other areas that can add significant costs.

Steps For Calculating Cloud TCO

Below are some of the steps you should follow when estimating cloud total cost of ownership.

Step 1: Calculate your current IT infrastructure costs.

Understanding the actual cost of your current IT solution is the first step. This means calculating the direct and indirect costs of running and maintaining your current system as well as estimating your current workloads, including servers, databases, storage, and network bandwidth.

Consider the following cost areas:

• Hardware and infrastructure—Identify the cost of the hardware that powers your on-premise application. These include physical servers, supplies, spare parts, etc.
• Datacenter—How much does it cost to power your data center? How much does it cost to meet your current cooling, power, and space requirements?
• Software—Calculate your current software usage, including the number of licenses and cost of these licenses.
• Personnel—Identify all the personnel involved in system, network, and database administration and how much it costs to payroll them.
• Disaster recovery—If you have a disaster recovery system in place, how much does it cost to maintain and manage that site?
• Maintenance—Calculate the cost of servicing, operating, and maintaining the system, including the cost of both in-house and outsourced maintenance.
• Upgrades—How much will it cost to upgrade the system if the need arises? Would you need to overhaul the system completely?
• Security—Estimate the total cost of securing your current system, from the cost of physical security to firewalls and security experts.
• Hidden costs—How much does downtime cost you? Review log files to determine server downtime frequency, hours lost, and the cost implication of those hours.

Step 2: Estimate the cost of a cloud solution.

Next, calculate the cost of operating your applications in the cloud. Keep in mind that many of the cost areas considered for on-premises infrastructure will not apply in the cloud because they will be offloaded to the cloud service provider. However, it’s important to note that a cloud solution is not inherently cheaper than on-premises infrastructure.

When businesses switch to the cloud, they often assume that their cloud bill will be automatically cheaper. But the on-demand nature of cloud services means your cloud bill could quickly spiral out of control as developers deploy instances and move at the speed of the cloud. Understanding the major cost areas in the cloud is key to optimizing your cloud cost and ensuring a lower TCO.

Two of the major cost areas to consider for the cloud are?migration costs ?and the?monthly cost of your selected cloud services.

1. Migration costs

Moving your applications and data to the cloud is a key step when switching to the cloud. Your current applications may require modification to function properly in the cloud. Gartner?identifies ?the five ways to move applications into the cloud, namely:

• Rehosting applications without making any changes to their architecture
• Refactoring or running applications on a cloud provider's infrastructure
• Revising the application, i.e. modifying or extending the existing code base
• Rebuilding or rearchitecting the entire application for the cloud
• Replacing the application with commercial software delivered as a service

Each application migration method has its cost implications and you need to determine the costs associated with the method you choose. In addition to application migration costs, estimate data transfer charges that will accrue when moving your application.

2. Monthly cloud cost

Your monthly cloud cost will depend on your workloads, and the specific cloud services consumed and method of purchase. The goal here is to estimate your potential monthly cloud bill based on your current workloads.

Since this calculation differs considerably for each organization, major cloud platforms provide pricing calculators that make it easier to estimate your monthly cloud bill. The?AWS pricing calculator , for example, allows you to estimate your infrastructure cost based on the retinue of AWS products and services selected.

Two of the major factors that will affect the size of your cloud bill are:

Type of cloud services consumed:?Commodity services, such as storage or raw compute power, are relatively less expensive compared to more specialized services, such as machine learning.

Amazon, for instance, offers Rekognition which does image and video analysis, and Polly, which is a text-to-speech service. These services have higher workload costs than storage. The total cost will depend on the types of services your business needs.

Cloud consumption model:?The on-demand model, where resources are deployed as needed, is the most popular cloud usage model. However, it is also the most expensive cloud consumption model. The other way to consume cloud services is to use a savings plan or prepaid option (reserved instances). You could also opt for a hybrid model. Your cloud costs will differ depending on the consumption model your business adopts.

3. Consultation and training costs

If your team lacks the expertise required for the migration process, factor in the cost of hiring consultants for training.

Step 3: Consider the intangible benefits of the cloud.

Beyond comparing the monetary implications of on-premise versus cloud solutions, there are opportunity costs associated with?not?switching to the cloud. You need to quantify what this means for your business.

Innovation—The cloud offers hundreds of services you can access on demand. By continuing with an on-premises system, you sacrifice the ability of developers to move fast and respond quickly to market changes.

Elasticity—Handling demand in an on-premise environment is always a challenge. The solution is usually to maintain redundant infrastructure in anticipation of peak loads. In the cloud, however, you could easily deploy instances to take care of the additional peak without any downtime.

When the peak is over, you go back to operating at your normal capacity at no additional cost. While you may incur a larger monthly cloud bill at peak, you will experience no downtime nor would you need to maintain redundant infrastructure when the surge is over.

Comparing On-Premise TCO To Cloud TCO: Key Things To Keep In Mind

At the end of your cloud TCO analysis, you should have specific numbers that can help with your decision-making. A few things should guide understanding of the results:

1. Cloud computing is not inherently cheaper than an on-premise model.
2. Cloud adoption is rarely about pure cost savings. Often the end result is a larger ROI and better business outcomes, not lower TCO, even though it could be both.
3. Comparing the business value and opportunity cost of switching to the cloud versus using an on-premises model is just as important as comparing head-to-head costs.
4. Identifying cost savings and efficiencies is critical when performing a cloud TCO analysis.