Bringing Cloud ROI Down To Earth

The calculation on whether to outsource a given IT function must be based on data loss risk, lock-in and availability, total cost, reasonable investment life spans--and consensus on when good enough is all you need.
Any CEO can look good during an 18-month stint with a successful company in a hot sector. The real test comes over the long haul and during market fluctuations. That same extended perspective can be a sticking point for most return on investment and total cost of ownership calculations around newer technologies, including public cloud services. For example, those skeptical of the public cloud aren't convinced that swapping capital investments for ongoing operating costs will benefit IT long term. How much of an operating cost? How long of an operating period? Is it the same time span that you'd use to evaluate a capital investment, or is this a shell game, where cloud is less expensive in the short run but more costly over time?

It's not just an academic exercise. As any expert on corporate strategy will tell you, fiscal responsibility is about much more than short-term gains.

InformationWeek Analytics' April survey on cloud ROI takes a look at how nearly 400 business technology professionals view the financial impact of public cloud services. The good news is that IT isn't running blindly to this new model.

Cloud computing works for commodity applications, but any integration or complex configuration makes the cost skyrocket, says Jack Garhart, an IT manager with a large international financial institution. "Most of the companies I've worked with like their investments to last five-plus years. It seems that the breakeven point for investments for internal versus SaaS is three to four years. We end up paying less in the beginning, but then pay a lot more in the out years," Garhart says.

Respondents are clearly doing some ROI calculations. But the evaluation periods they're using don't always reflect what we'd call a business system lifetime, even if the factors they're considering are reasonable. So why aren't companies doing the the exhaustive discounted cash-flow analysis needed to study all the variables involved when switching from on-premises systems to cloud?

Mainly, because they're evaluating a moving target. While the National Institute of Standards and Technology did everyone a favor by creating umbrella definitions of cloud computing, when we start diving into details, there's little universal agreement on many areas. What exactly is a private cloud? Can software as a service ever run on one, or does that defeat the purpose?

You get the picture.

We're normally big fans of details. It's granular attention that keeps enterprise systems running. But in this case, we can't fault CIOs for not insisting on the same level of analysis they'd use for an established technology. This is not, however, a green light to give up on fiscal discipline. Instead, one trend emerges after studying our research and speaking with a variety of companies: There's a new breed of smart and disciplined adopter who loosely studies ROI and then revisits the calculation over time to ensure that expected returns are panning out.

InformationWeek:June 21, 2010 Issue To read the rest of the article, download a free PDF of InformationWeek magazine
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