IT budget for Cloud Computing
Anyone wishing to expand their IT infrastructure with cloud resources – be it in the form of a private, public or hybrid cloud – quickly realizes that this shift requires a re-orientation of the IT budget – especially the evaluation of cloud computing. Cloud services cost accounting follows different rules than an on-premises architectures.
During our projects with different customers we have learnt that when planning cloud projects, the impact on the IT budget is oftentimes underestimated. In this article, we would like to share our experience with you and help you to overcome these hurdles. Reading time 8 minutes
Investment costs become operating costs
CAPEX to OPEX shift
The key difference between on-premises architectures and cloud services is the shift between CAPEX and OPEX. When we use cloud services, we no longer talk about ownership. You don’t own externally produced cloud services, you use it just like you get electricity from the mains. In accounting, this is reflected in the shift from capital costs to operating costs.
The planning horizon of IT budgets usually covers twelve months and the planning is generally carried out more than six months in advance. It is therefore important to be aware of this change at an early stage, so as not to be pinned down by the budget.
Calculate cloud costs
Total cost of ownership
The best-known model for approximating the direct and indirect costs of IT investments is Total Cost of Ownership (TCO). The concept was developed for Microsoft in 1987 by Bill Kirwin, Gartner’s Research Director at the time. In addition to the obvious costs of an acquisition (e. g. purchase price), TCO also includes indirect costs (e. g. training measures). Microsoft used it in the 1990s to show corporate decision makers the advantage of PCs over large fully managed leased IBM machines.
TCO and cloud are incompatible
The objective of Total Cost of Ownership accounting is to answer the central question: What does outsourcing my IT infrastructure cost me? How do these costs compare to a local data center? How are my future costs influenced by different cloud providers?
As I have already mentioned, we are confronted with a problem here: ownership. Cloud services are immaterial. I do not own a physical asset. To asses cloud services with the help of TCO is like hammering a screw into the wall. With enough force and sweat, the screw will probably disappear into the wall, but the result will be less accurate and short-lived. A hammer (or TCO in our case) is simply the wrong tool.
Total Cost of Service
The originator of the TCO concept, Bill Kirwin, saw the same problem. So, in order to keep pace with the technological changes cloud computing and big data confront us with, he developed the next generation of TCO in 2015: Total Cost of Service (TCS). Due to the early stage of maturity of this concept, we are yet to receive detailed calculations. According to Alinean Inc., TCS takes into account the cost of SLAs, speed, flexibility, scalability, elasticity, agility and risk. TCS is based on the level of service volume (TCO based on asset value), is consumption-driven (TCO is resource-driven) and OPEX-centric (TCO is investment-centric, i. e. CAPEX).
Return on Investment
It is not enough to merely look at the costs when making a decision in IT management. This makes return on investment (ROI) an essential concept. Because ROI enables you to quantify both the costs and the expected benefits of a project over a defined period of time.
The advantages of the cloud include user-friendliness, low investment costs, remote access capabilities from multiple locations, increased security, scalability, optimized resource utilization, and the flexibility to quickly respond to change.
But here, too, the problem of possession is once again revealed. Investments relate to goods that become part of a business’ assets, but cloud services are operating costs.
Checklist for Cloud IT Budget
| 1 | Understand TCO & ROI in relation to cloud |
| 2 | Include the controller actively from the beginning |
| 3 | Identify IT services fit for the cloud |
| 4 | Create a cloud roadmap |
| 5 | Check costs of actual state (cost carrier accounting) |
| 6 | Calculate TCO & ROI |
| 7 | Plan the transformation of CAPEX to OPEX |
| 8 | Define planning horizon |
| 9 | Get started! |
Transforming the IT Budget
A solid business case
When you present your business case to the management, do not walk into the trap and argue with hoped-for short-term profits of cloud computing. There are only a few cases where the aforementioned advantages of the cloud immediately increase the value of the offered services. For example, because new applications can be developed that do not have an on-premises counterpart.
Still, we would like to mention the use case of Netflix. The online streaming platform is subject to strong fluctuations in its viewer counts. It is difficult to map these requirement in a local data center. Either server remain unused for the majority of the time or they are brought to a standstill by an unusually high number of requests. In the cloud, however, these fluctuations can easily be managed.
Using Cloud TCO and Cost Calculators
Some cloud providers have developed TCO calculators to estimate the cost of their offerings. These computers allow you to compare the TCO of an on-premises infrastructure with that of a cloud-solution based on your compute, storage and network requirements. However, as mentioned above, many of the advantages of a cloud offers are not factored in. Here you will find the TCO calculator from Amazon Web Services (insert link https://awstcocalculator.com/) and from Microsoft Azure (https://www.tco.microsoft.com/Home/Calculator).
We are well aware of the irony of introducing a TCO calculator here, where we have just denigrated the concept as impractical. The calculators only compute TCO on the on-premises side, the expenses for the cloud much more resemble a TCS analysis. But TCO is still the more sensational title.
Transformation of the IT Budget
The IT budgets are based on medium-term planning. As already described, the planning horizon covers twelve months. Budget planning is usually carried out more than six months before the start of the budget period. The decisive difference in the budgeting of cloud computing is that capital financing is replaced by operating costs. And all this in the right size and at the right time.
The challenge at the beginning of the journey into the cloud is to estimate the expected OPEX budget needed in the next budget period. Similarly, the CAPEX reduction associated with OPEX financing must be planned.
In an ideal world, we would have a detailed overview of the IT costs of a service based on the cost of the assets and manpower employed. However, in the real world, not even large companies have set up a cost unit for their internal IT services.
In addition, we have a number of assets in use that could possibly be offered in the cloud. These assets are not impaired. The decision to stop using them before the expiry of their financial term causes costs.
Transition costs arise
During your migration to the cloud, it is necessary to continue offering on-premises hosted services, which means additional transition costs. Short-term gains from the conversion of IT infrastructure to cloud computing are only seen in a few cases where new services are developed that do not have an on-premises counterpart. Or in use cases such as Netflix, where the advantages of the cloud such as agility, flexibility and more already represent an enormous increase in value for the offered service. In the case of Netflix, cost savings through cloud-based IT were therefore secondary.
Your friend – the controller
In order to successfully communicate the complex restructuring of the budget, in particular the shift from CAPEX to OPEX, to the IT department, support from bookkeeping is essential. To me the most sensible way seems to be to carry out this transition in the form of a controlled project, accompanied by a strong mandate from management. In this project, the establishment of a cost object accounting system could become the basic prerequisite for further decisions on the way to cloud-based IT.
Tip: Free Tier and Test offers from Cloud Vendors
Many cloud providers offer new customers with a free quota. This allows you to get a feeling of how cloud resources are being used and what kind of costs you will be faced with. Additionally, you always have the possibility to run services in a test environment. Of course, this does not yield reliable data for a real scenario but it will certainly give you an impression.
Recap
The transition into the cloud isn’t done by overcoming the technical hurdles and introducing cloud governance. It’s just a start.
You have to plan and manage your IT budget as well. Work closely with your controlling department. Set the appropriate planning horizon for the budget. Think of a flexible rollback strategy – even for the budget!
Good luck!
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