11 Steps To Calculate Cloud ROI

Migrating to the cloud for pure cost savings? Be honest about the true budget picture--positive or negative.

Michael Healey, Senior Contributing Editor

January 13, 2011

4 Min Read

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6 Ways To Fail

6 Ways To Fail

The cloud computing hype machine is in full throttle. Even some rational CIOs we talk with predict that 20% of companies won't own their IT systems in five years. From their perspective, what better way to get off the hook for high capital costs and poor system performance than to outsource? It's the ultimate in blame avoidance.

We're not buying that rapid change rate, but two things are clear from our annual InformationWeek Analytics State of Cloud Computing Survey and from the targeted Cloud ROI Survey we fielded in April. First, the movement toward adopting some level of cloud services is close to achieving critical mass. Second, there are gaps in how we're architecting, budgeting for, and engineering the services we buy.

Think your company isn't jumping in blindly? Don't be so sure.

Forty-three percent of our 607 respondents are either using or plan to use some type of cloud service within 12 months. That's up from 27% in our last survey. However, 71% say they have no idea whether that "cheap" cloud service will end up costing a fortune. They're making cloud decisions in a vacuum, bypassing the review that would, as a matter of course, happen for an internal IT initiative. Yes, we're talking about the checklist gauntlet: How much does it cost up front? How much to maintain? How does it connect? How do we monitor it? How do we back it up? How do we secure it? How does it impact everything else? What do we do if it goes down?

"The driving factor for many cloud decisions is cash flow," says Jeff Solomon, head of the emerging technology group at CPA firm Levine, Katz, and Solomon. "For many industries, the capital limitations are so dire they're willing to move to the cloud based on a cash flow comparison alone. They simply aren't doing a proper ROI analysis."

The up-front cost differences between cloud and in-house are so dramatic on rudimentary analysis that businesses are lulled into feeling savings are inevitable; it's the "truthiness" factor, if you will.

As we discuss in more depth in our full 2011 State of Cloud Computing report, it's not that we don't like the cloud; in many cases, providers can deliver a superior-quality service for less money. That said, you don't have to look back too far to see an example of how poor financial justifications hamper long-term initiatives. A case in point is virtualization. The 2006 pitches to CFOs were based on a pure hardware vs. virtual platform analysis and left out the cost of staff retraining and systems management software. And let's be honest: Those omissions weren't just because neither area was fully developed yet. Including them would have weakened the savings argument.

Flash forward to 2011, and many companies are struggling to manage complex mixed physical and virtual data centers because they lack the funds to get the management tools and staff training they need. Integrating cloud services into your enterprise has an even more knotty set of challenges. Simply comparing the recurring monthly operating expenditures vs. capital expenditures with some net present value thrown in for good measure will bite you in the long run.

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About the Author(s)

Michael Healey

Senior Contributing Editor

Mike Healey is the president of Yeoman Technology Group, an engineering and research firm focusing on maximizing technology investments for organizations, and an InformationWeek contributor. He has more than 25 years of experience in technology integration and business development. Prior to founding Yeoman, Mike served as the CTO of national network integrator GreenPages. He joined GreenPages as part of the acquisition of TENCorp, where he served as president for 14 years. He has a BA in operations management from the University of Massachusetts Amherst and an MBA from Babson College. He is a regular contributor for InformationWeek, focusing on the business challenges related to implementing technology, focusing on the impact of Internet- and cloud-centric technology.

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