Cloudware Economics - Guide to Cloud Computing for Business and Technology Managers - page 284

TABLE 14.1
IT Cost Components

Direct Costs Indirect Costs Overheads

Server Network Facilities

Storage Storage Power

Software (application) Software (infrastructure) labor (operational) Bandwidth

Implementation Maintenance and upgrades Labor (admin)

Support
Training

Moving from traditional on-premise IT to on-demand cloud service
requires examination of the assumptions underlying TCO. The cloud envi-
ronment tends to abstract asset virtualization, obfuscate labor, and deliver IT
services at a contracted rate. In comparison, cloud services are supplied and
metered on the resources consumed, and the cloud provider will typically
have clear pricing models that cover the cost of the consumed resources.
Hence, in cloud TCO calculations, there is an opportunity to consolidate and
simplify some of the cost components, as the main infrastructure and up-
front costs are displaced by service subscription and reassigned as opera-
tional costs.
While calculating TCO, it is common to evaluate multiple scenarios by
carrying out a sensitivity analysis to understand how various patterns
of usage influence cost derivers and overall TCO. It is then important to
have a baseline cost advantage target (in %) to be able to benchmark the
cloud deployment costs against it. Depending on their level of maturity,
organizations engage differently with cloud technology. In the case of
many SMEs, reactive response to incident management, undocumented or
unrepeatable processes, and unplanned implementations tend to increase
the complexity and cost of any IT service regardless of the delivery
mechanism.
Organizations need to study the fully loaded costs in the light of the busi-
ness benefits gained and the opportunity costs of not moving to the cloud.
Often, it might be a case of paying a premium for much improved, opti-
mized, or secure IT provision. Hence, it is imperative to benchmark costs
beyond an equivalent amount of internal server capability.
Baseline TCO can be calculated as follows:

1. Identify all different cost streams both business and technical. Some
common sources of cost include amount of compute capacity, net-
work traffic, and storage. Certain services may be on a pay-for-use
basis but some costs such as static IP address for certain applica-
tions; in the same, there are some service support and management