Cost of Cloud Computing: How to Calculate the True Cost of Moving to the Cloud

Identify current direct and indirect costs and potential cloud costs to truly understand the costs of cloud computing.

You’ve learned about the benefits that cloud computing can bring to your organization and think migrating to the cloud might be the right move. You present your case to your boss, who promptly asks, “Well, how much is this going to cost, and how much are we going to save?” Yikes. That’s a tough question. Have no fear, we’re going to break down the key things you need to think about and account for when calculating the cost of moving your IT infrastructure to the cloud. To truly understand how cloud computing impacts your bottom line, you have to take a holistic approach to calculating the cost of cloud computing. Not only should you calculate the direct costs, but you have to also include the indirect costs such as the impact of potential downtime on employee and customer productivity. Let’s take a look at the steps you should take to calculate the true cost of cloud computing.

1) Audit your current IT infrastructure costs

The first step you should take is to perform an audit to better understand the scope and scale of your current IT operations. This will help you 1) understand what you’re currently paying to run your IT operations and 2) determine what your new cloud environment might look like. Having this baseline will help you calculate the potential cost of the cloud resources you’ll consume and compare it to current cost levels. The first thing to keep in mind is that you need to consider the total cost of ownership of your IT operations. That is, the total cost of using and maintaining your on-premise IT investment over time, and not just what you pay for infrastructure. This will include direct and indirect costs.

Direct Costs

Direct costs are the ones that you have to shell out money for and directly hit your balance sheet. The first category of direct costs are the hardware and software that makes up your IT infrastructure. This includes your physical servers, software licenses, maintenance contracts, warranties, supplies, material, spare parts, and anything else that you directly pay for. You can calculate these costs by pulling invoices, purchase orders, and payment records from your accounts payable department. While you might have to wade through paperwork and spreadsheets, these direct costs should be relatively easy to calculate. You should also gain a thorough understanding of how much networking bandwidth, storage, and database capacity you consume with your servers and other technology. Additionally, take note of the attributes and details of your infrastructure, such as database types, number of servers, and storage capacity. You’ll use this information when calculating the total cost of ownership of moving to the cloud. (The next section, “Calculate your estimated cloud infrastructure costs,” goes into more detail on what information you should gather to input into a cloud cost calculator.) The second type of direct costs are operational costs. These can include:

• Labor (internal and external) for maintenance of your servers, databases, and other IT components
• Facilities used to house IT hardware, staff needed to maintain these facilities, real estate costs, and other facilities-related costs
• Internet connectivity
• Any other costs that can be attributed to upkeep of your IT

Finally, you should also consider the administrative costs necessary to maintain your IT department. These can include the resources from your Finance, HR, and Procurement departments that are dedicated to managing your IT staff or outside service providers. While these costs may seem tangential, other departments of your company are dedicating a large amount of resources to hire, train, and manage both internal IT employees and external consultants, and these costs need to be accounted for. You can estimate the number of hours spent on IT oversight by interviewing key employees in those departments and checking training logs, then multiplying this total by an average hourly wage.

Indirect Costs

Indirect costs may be more difficult to calculate but are just as important as direct costs. The largest source of indirect costs is the downtime and loss of productivity your employees and customers suffer if your IT infrastructure goes down. You can calculate these costs by reviewing log files to determine how often your servers go down and for how long, and multiply that time by an average hourly rate. If you can estimate the revenue your company might lose due to downtime, that should be included as well. Indirect costs can be difficult to estimate, but are very important to consider, as they can make up a significant portion of overall IT costs.

2) Calculate your estimated cloud infrastructure costs

Once you have determined your current on-premise infrastructure costs, the next step is to calculate the potential cost of using cloud infrastructure. After you have completed your audit, you should have a good understanding of the networking, storage, and database capacity you need to run all of your company’s applications. While cloud pricing used to be extremely complicated, providers have now simplified their pricing structures so potential customers can more easily understand them. Regardless of whether you have selected which cloud computing provider you’re going with, you can use one of the multitude of cloud cost calculators available to get an idea of what your cloud infrastructure costs may be. Here’s a short list:

• Amazon Web Services (AWS) Total Cost of Ownership (TCO) Calculator and more in-depth monthly cost calculator
• Google Cloud Platform Pricing Calculator
• Microsoft Azure’s Pricing Calculator
• Rackspace’s calculator
• IBM Bluemix’s calculator

Since we are certified AWS consultants, we are most familiar with AWS’s calculators, so let’s try those, starting with the TCO Calculator.

AWS’ TCO Calculator

Click here to access AWS’ TCO Calculator. The first step you need to do is input your existing or planned on-premise infrastructure. If you start with the Basic calculator, you’ll have to input the following information:

• Servers
  • Server type
  • Number of virtual machines
  • CPU cores
  • Memory in GB
  • Hypervisor, Guest OS, and DB Engine, if you input a server type
• Storage
  • Storage Type
  • Raw Storage Capacity
  • % Accessed Infrequently (if you use Object Storage)

You can add rows for multiple server and storage types if necessary. The Advanced calculator will ask for more detail about your Servers and Storage, as well as include Network and IT Labor into the TCO calculation. More detail will produce a more accurate cost calculation, so we prefer the Advanced version of the TCO calculator. Once you input all of your information, the calculator will generate an instant report that summarizes the three-year TCO comparison by cost categories. You can then download a full report with detailed cost breakdowns, model assumptions, methodology, and frequently asked questions. AWS also provides a TCO calculator for comparing the cost of running your backup and archive applications in an on-premise environment compared to AWS. You can find that calculator here.

AWS Monthly Cost Calculator

In addition to an overall TCO calculator, AWS also provides a monthly cost calculator that allows you to get extremely detailed to calculate estimates of your monthly bill.

You will definitely need to be knowledgeable of what AWS components you may require, the amount of data you need to store, and many other aspects of your potential cloud environment. If you don’t have all this data, AWS provides a few common customer examples, such as a marketing website, a large on-demand web application, and disaster recovery and backup scenario. You can use these templates as starting points and adjust them to better fit your current situation. Though things are sure to change, this calculator will be very helpful in providing a rough idea of the monthly cost you’ll have to budget for. If you’re interested in how cloud computing companies devise their pricing, read this article by Expedient.

3) Estimate Cloud Migration Execution Costs

You also have to account for the costs involved in moving your IT operations to the cloud. Depending on the scope of your IT infrastructure and how much of it you plan on moving to the cloud, the migration process could be a big ticket item. Here are the components to consider when calculating the cost of the cloud migration execution process.

Moving Data to the Cloud

Data is the lifeblood of every company, and moving this data from on-premise servers to the cloud is one of the most important steps of any cloud migration. There may be networking costs involved in moving your data, as cloud providers may charge fees for transferring data into their systems. A higher-ticket item may be the labor involved in ensuring your company’s data is properly synchronized once you deploy to the cloud from legacy systems. This is never an easy process. Your company is likely to continue to use your business applications while the cloud migration progresses, so you need to spend time and money to ensure that the data in your on-premise systems don’t get out of sync with the data in the cloud. For instance, we helped Sprint migrate their SMS messaging platform from on-premise servers to AWS. Sprint continued to use the platform to deliver over 3 million messages per day, so all of the customer and reporting data continued to accrue during the cloud migration. To ensure data integrity, we took a backup snapshot of Sprint’s current infrastructure to ensure that no data or any other information would be lost during the transition. Then we created a cloud queueing platform so no new data would be processed by the legacy servers during the migration and the data wouldn’t get out of sync. Once the new cloud environment went live, only then were all new data requests processed to ensure all the data is synchronized. As you can see, there was a lot of work involved in ensuring data integrity during the migration, so you will need to account for the labor and money spent on making sure your data is in sync.

Integration and testing of apps

Some applications just aren’t quite ready for the cloud. Whether it’s older legacy software or larger ERP systems with functionality that depends on on-premise infrastructure, the cost of integrating and testing these apps after moving them to the cloud must be considered in your calculations. First, you will need to spend time understanding how these software platforms interact with your current operating systems and infrastructure. Next, you’ll have to determine the changes necessary for these systems to play nice with cloud infrastructure. Then you have to make these changes and test the apps in the cloud environment. All of this costs time and money, so make sure you budget for them.

Consultant fees

Your company may not have all the skills and resources necessary to fully execute a cloud migration. A cloud migration is not a simple task, and you may need outside expertise to help you along. Whether it’s mapping a strategy, architecting a solution, executing the migration, or all of the above, consultants’ knowledge and experience across many industries and situations can be very valuable. A thorough understanding of your company’s strengths and weaknesses as they pertain to cloud computing and migration will determine whether you need the help of cloud experts. Then you can approximate the costs of these experts’ time based on the level of help you need. If you realize you need outside help, make sure you understand the key things to look for when selecting a cloud migration partner. Partner selection is a very important step, so make sure you know how to find the right partner for your needs.

4) Approximate post-migration costs

What will you have to pay after your cloud migration is complete? Of course, you’ll have to pay the monthly infrastructure costs that you calculated prior. But you should also take into account the direct and indirect costs you’ll have to pay to maintain and improve your new cloud environment. We’ve mentioned many of these costs already, and many of them will continue to hit the balance sheet after your initial migration is complete. Costs such as continued integration and testing of apps, training, labor, security and compliance, administration, and others need to be forecasted in order to determine an accurate post-migration budget.

5) Consider costs vs. tangible and intangible benefits

After you’ve calculated all the costs, you might arrive at a large number. Yet it’s very likely that number is smaller than all of the costs you’re currently paying for on-premise infrastructure. Cost savings is a big reason why you wanted to move to the cloud in the first place, isn’t it? You should also understand that the cloud also brings a myriad of intangible benefits that may be difficult to directly measure. It will allow your organization to be much more nimble and agile so you can test and launch products faster and better react to changing market conditions. You won’t ever have to worry about buying and setting up new servers to handle high demand, as you can auto-scale cloud servers instantly. And you’ll have peace of mind that there is a very minimal chance your applications will go down due to cloud providers’ high availability, load balancing, and backup functionality. Yes, a key benefit of cloud computing is the realization of hard cost savings, but these softer benefits are also strong reason to consider a move to the cloud. Determining the cost and benefits of the cloud requires a strategic, holistic approach. Make sure you understand and account for all of the direct and indirect factors that go into a cloud migration. Only then can you truly calculate the impact the cloud will have on your business. What are some other costs to incorporate into the total cost of ownership of cloud computing? Did we forget anything? We’d love to hear from you in the comments. Like this post? Please share it using the share buttons to the left! Then join our mailing list below and follow us on Twitter – @thorntech – for future updates.