Businesses seem to have accepted that cloud computing leads to lower IT costs, and it’s true that many companies experience some savings in switching to the cloud. Yet, the total cost of ownership for most is still up to 50% more than it should be.
Here’s why. Companies still assume that the software buying and deployment process is the same for cloud and on-premises products. They persist with the old model and end up paying for consulting and support services that are redundant or available for free.
In the world of on-premises software, the buying cycle typically begins with a consultant helping with software selection. The vendor then cashes the license check, and consultants charge for customizing and implementing the system. Once it’s deployed, support, upgrades and maintenance carry costs for years to come.
In other words, a company starts paying for consulting before even buying the software, and continues to pay for services (or hire IT staff) throughout the life of the software. The total cost of services for selection, implementation, maintenance and support ranges from 40% to 100% of the cost of software.
In the world of cloud apps, it shouldn’t be that way. For one thing, it’s cheaper and less risky to try a cloud product than it is to perform software evaluation. Consultants have traditionally made lots of money helping companies with software selection. At $150 an hour, a consultant may charge $12,000 to $24,000 (two to four weeks) in consulting fees to help a company with its decision. That approach is now outdated. In the cloud, for $6,000 to $8,000 you can buy an annual subscription to most cloud products that a team can pilot test for a year. If it works, you can expand usage to the rest of the organization.
Cloud computing also enables a long tail of service providers. Small vendors can leverage public cloud infrastructure to serve niche markets. That means companies don’t need to customize a cloud platform like Salesforce or Google to meet their needs. Instead, they use marketplaces like Salesforce’s AppExchange or Google Apps Marketplace to find what they need and, in doing so, save significant consulting dollars.
Implementation costs for cloud products are 20% or less than those for on-premises software. That’s because cloud apps are multitenant, which means the IT platform – and costs – are shared by customers. Also, the great variety of commercial cloud products ensures a better fit out-of-the-box, which means implementation costs go down. In fact, several cloud providers don’t charge any implementation fees. Cloud apps are ready in days, sometimes hours.
True cloud providers don’t charge for maintenance and support. They operate on a subscription model and, because they want you as a long-term customer, they will probably spend time and effort to keep your company happy. Choosing the right provider helps avoid maintenance and support costs altogether.
So why do companies continue to pay for systems integration and other services? Cloud vendors are still evolving their offerings and market positioning, making it hard for buyers to differentiate between products and services. Also, systems integrators prefer the easy services revenue to the harder-to-earn cloud product fees, and they make a strong case for their services. And many CIOs aren’t ready to embrace cloud providers; their organizations are still wed to the on-premises model for most requirements.
As cloud computing evolves, this will all start changing, and soon. IT teams will figure out how to avoid software’s unnecessary service and support costs.
Alok Misra is a cofounder of Navatar Group, a provider of cloud apps to the financial services industry, and co-author of “Thinking of … Force.com as Your Key to the Cloud Kingdom?”
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