As the saying goes, “You have to spend money to make money.” However, we all know that how you spend money will be a major factor in determining your success. By measuring the return on investment (ROI) of a certain expense, an organization can decide whether it is a wise choice moving forward or not.
Cloud computing is a great example of a key IT area for running the ROI formula. Increasingly cloud systems are replacing on-premise ones. Were those decisions the right ones? If you think so, you can prove it with ROI, giving you strong evidence that you are moving your company in the right direction.
This article looks at how many companies do NOT measure cloud ROI; thoughts on agility and the breakeven point from David S. Linthicum; and 5 obstacles to strong cloud ROI.
Poll: 1 in 3 firms do not measure cloud ROI
If you are not yet checking your ROI systematically, you are certainly not alone. There is obviously not a consensus that performing this calculation is a high priority. Almost one-third of organizations do not determine cloud ROI, according to an international survey from the Information Systems Audit and Control Association (ISACA). The ISACA poll of chief information officers found that 68% of firms calculated cloud ROI. ISACA noted that the 32% of companies that were not calculating ROI were able to justify their use of the technology on other grounds: transitioning from capital to operating expenses (CAPEX to OPEX), improved agility, etc.
Organizations that did calculate ROI typically used a 1-5-year timeframe for measurement. Most used a hybrid method that included both perceived quantitative and qualitative factors. The most common elements included in the hybrid model were business impact (time to market, penetration, agility, etc.), time savings, cost of transition, and staffing changes, along with capital and operating expenses.
The survey also found that companies that do come up with ROI numbers often only do it once, which misses the benefit of being able to check your expectations against results. When you look at that population that is calculating ROI, only 52% do so before and after cloud deployment, while 43% only check before and 6% only after the transition.
While 32% may seem low, the figure is rising over time, according to ISACA research director Ed Moyle. Indeed, see this InformationWeek poll of 339 organizations from 2014, showing the level at 20%. Moyle added, “If ROI is not calculated in advance of implementation, it becomes difficult to validate or refute the expected value.” To extend that thought, the validation or refutation could then occur with the second check of ROI following implementation.
An agility-based ROI model
Deloitte chief cloud strategy officer David S. Linthicum explained that this poll demonstrated using agility as the central component of an ROI model now makes more sense. Linthicum has been arguing for moving away from capital and operational cost reduction to an agility-based model since 2011. Linthicum noted that he thinks we are beginning a shift in the understanding of cloud from cost savings to agility – which he believes will lead to much greater disruption.
There are tools that you can use to determine the agility that is generated by cloud adoption. Factors including your business’s size, its level of innovation, and the vertical market all must be included to gauge your agility.
You can bring in your past metrics, and you can use the same algorithms for different environments. You could use an agility-based model to look at competitors, determining their cloud ROI.
While you can create comparative analyses, there is not much as far as cloud ROI public case studies go – so it is challenging to confirm that your numbers are solid. However, Linthicum noted that it is still a good idea to move forward with agility-centered ROI measurement since it will give you a much better sense of the true value the technology is bringing to your efforts.
Breakeven: 20% to 40% of workloads
It makes sense with a new technology to test the waters and wade in gradually. However, it is also important to realize that you will not see the ROI results that you want from cloud immediately.
While Linthicum talks a lot about the importance of agility, there are other key metrics that he believes are pivotal as well. One is commitment to the technology.
Organizations that dabble in cloud in small pieces over time will likely not see any advantage in using it, he noted. That’s because there are sunk costs (unrecoverable costs that have already occurred) related to cloud: integrating cloud systems into your management and monitoring platforms, addressing security concerns, recruiting new personnel, training, etc.
The real question is, when do your returns start to overcome the sunk costs? That is the breakeven point, after which cloud becomes increasingly beneficial since the bill is already partially paid. Linthicum noted that there is very little difference in cost between 500 to 2000 workloads. Once your sunk costs are returned, your operational costs will not rise significantly as you continue to add workloads. It is impossible to avoid the upfront cost to see the ROI benefits.
The breakeven point for an enterprise with 2000 workloads is usually about 400 to 800 workloads, in Linthicum’s experience. That is equivalent to 20% to 40% of all IT processes.
Keeping only small amounts of IT in cloud prohibits an organization from seeing its full benefit. In fact, when companies run the ROI on cloud that only represents a small portion of overall computing, they will often find that ROI is negative – i.e., it is not paying for itself.
Now, while it may make sense to commit a substantial portion of your IT to cloud, you do not want to necessarily move your entire infrastructure to cloud overnight, Linthicum stressed. However, it is clear that the faster you shift most of your systems from on-premise to public cloud, the faster you will see a positive ROI. You will not typically get a benefit from the cloud when you are only moving a small amount of workloads, but only farther along the path of increased adoption.
5 things that hurt cloud ROI
While cloud ROI benefits from increased adoption, it is not as simple as overcoming a breakeven point. Issues can also arise. Consultancy Cloud Technology Partners noted a few things that stand in the way of ROI. Here are those five obstacles:
- Culture – Some obstacles will be within your corporate culture. You have to reconceptualize the way the business runs in order to realize the potential of cloud.
- Politics – Often a political problem that arises with cloud is division over the extent to which it should be adopted, with conflict often between the data center chief and whoever is advocating for cloud.
- Expectations – Many organizations will start out thinking immediately in terms of hybrid cloud or complex systems within cloud management platforms (CMPs). Focus your efforts before expanding to larger and more complex projects.
- Execution – Managing the transition can be tricky. “Minimal viable cloud” is recommended by CTP. This strategy bundles together a small group of workloads, with operations, controls, and security applied to it. Then you can add additional small sets in the same manner.
- Technical difficulties – Dedicating yourself to the cloud will avoid technical issues, particularly when you want to integrate with your on-premise system. When you want to combine on-premise with cloud, it creates difficulty. Consider replacing legacy tools with ones based in cloud.
Realizing strong cloud ROI
We talk quite a bit about cloud as if it were one system, but of course, it is many — and all clouds are not created equal. To realize strong ROI, you need the fastest, most robust cloud platform in the industry. See our High Performance Cloud.