Cloud ROI:Calculating Costs, Benefits, Returns · Cloud ROI:Calculating Costs, Benefits, Returns...

Cloud ROI: CalculatingCosts, Benefits, Returns

The decision on whether to outsource a given IT

function must be based on a grounded discussion

about data loss risk, lock-in and availability, total budget

picture, reasonable investment life spans—and an ability

to admit that sometimes, good enough is all you need.

By Jonathan Feldman

A n a l y t i c s R e p o r t

A n a l y t i c s . I n f o r m a t i o n W e e k . c o m

J u n e 2 0 1 0$ 4 9 9

Report ID: R1170610

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CONT

ENTS

4 Author’s Bio

5 Executive Summary

6 Research Synopsis

7 Stay Loose

9 Change Is Coming. How Will You React?

10 Risk/Reward

13 Stay Engaged

15 The Efficiency Factor

17 Get That Stretch

20 Spending Spree? Not Hardly

22 Stay Loose

26 Visual Case Study: Cost Projections Over 5 Years

27 Time Is Not on Our Side

30 Appendix

2 June 2010 © 2010 InformationWeek, Reproduction Prohibited

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A n a l y t i c s . I n fo r m a t i o n We e k . c o m

7 Figure 1: Use of Cloud Computing

9 Figure 2: Primary Cloud Computing Dissenter

11 Figure 3: Primary Reasons for Using or Evaluating Cloud Computing

13 Figure 4: IT Involvement in Cloud Initiatives

14 Figure 5: Ways Business Units Get Information About Cloud Computing

17 Figure 6: Requirements for Business Technology Elasticity

18 Figure 7: Extra Capacity Built into New Systems

20 Figure 8: Spending on New In-House Projects

21 Figure 9: Business Technology Consideration Factors

22 Figure 10: Likelihood to Evaluate Cloud Computing ROI

23 Figure 11: Factors Incorporated in an ROI Study of Cloud Computing

25 Figure 12: Approach to Quantifying Risk in an ROI Analysis

26 Figure 13: Time Period for ROI Comparison

27 Figure 14: Consideration of ROI in Cloud Computing Decision

28 Figure 15: Re-Evaluation of Actual Cloud Savings

29 Figure 16: IT Vs. Non-IT

30 Figure 17: Job Title

31 Figure 18: Company Revenue

32 Figure 19: Company Size

33 Figure 20: Industry

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CONT

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Jonathan Feldman serves as director of information technology

services for a city in North Carolina. The city has won several tech-

nology innovation awards during his tenure, including the

International Economic Development Council New Media Award.

He has also directed professional services in the private sector, pro-

viding security and network infrastructure services to the military, healthcare,

financial services and law enforcement markets.

Jonathan has worked for 20 years in the fields of IT security, reliability and

human resources management, and has written, taught and consulted exten-

sively on these topics, notably as co-author of Maximum Security and author

of Teach Yourself Network Troubleshooting. His writing, which readers call

“funny and easy to read,” has been translated into many different languages.

As an award-winning Network Computing and InformationWeek contributing

editor, he has worked with dozens of public- and private-sector organizations

to document real business benefits, risks and appropriate governance of new

technologies and surrounding practices and procedures.

A speaker at regional and national venues, including Interop, PC Expo, CNet

Radio, The Institute of Internal Auditors and for the United States Army,

Jonathan has been active in the community with organizations such as

Infragard and GMIS International. He holds an MS degree from Georgia Tech.

Write to him at [email protected].


JonathanFeldman

InformationWeekAnalytics



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Think that sneaking feeling of irrelevance is just your imagination?Maybe, maybe not. Our April 2010 InformationWeek Analytics Cloud ROISurvey gave a sense of how nearly 400 business technology professionalssee the financial picture shaking out for public cloud services. One inter-esting finding: IT is more confident that business units will consult themon cloud decisions than our data suggests they should be.

Fact is, outsourcing of all types is seen by business leaders as a way to getnew projects up fast and with minimal miss, fuss and capital expenditures.That goes double for cloud services. But when you look forward three orfive years, the cost picture gets murkier. When a provider perceives thatyou’re locked in, it can raise rates, and you might not save a red cent onmanagement in the long term. In fact, a breach at a provider site couldcost you a fortune—something that’s rarely factored into ROI projections.

In our survey, we asked who is playing the Dr. No role in cloud. We alsoexamined elasticity and efficiency. Premises systems—at least ones that ITprofessionals construct—are always overbuilt in some way, shape or form.We all learned the hard way that you’d better build in extra, since the costof downtime to add more can be significant. Since redundancy createscost, we asked about these capacity practices, flexibility requirements, keyfactors in choosing business systems, and how respondents evaluate ROIfor these assets.

Your answers showed us that adopting organizations aren’t nearly as out tolunch as cloud naysayers think. In this report, we’ll analyze the currentROI picture and discuss what IT planners should consider before puttingcloud services into production, to ensure that the fiscal picture stays clear.




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Survey Name: InformationWeek Analytics Cloud ROI Survey Survey Date: April 2010 Region: North AmericaNumber of Respondents: 393

Purpose:To determine the extent of cloud computing ROI analysis in the enterprise.

Methodology:InformationWeek Analytics surveyed business technology decision-makersat North American companies. The survey was conducted online, andrespondents were recruited via an e-mail invitation containing an embed-ded link to the survey. The e-mail invitation was sent to qualifiedInformationWeek subscribers.




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ABOUT US | InformationWeek Analytics’ experienced analysts arm business technology

decision-makers with real-world perspective based on a combination of qualitative and quantitative

research, business and technology assessment and planning tools, and technology adoption best

practices gleaned from experience.

If you’d like to contact us, write to managing director Art Wittmann at [email protected],

executive editor Lorna Garey at [email protected] and research managing editor Heather Vallis

at [email protected]. Find all of our reports at www.analytics.informationweek.com.

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Stay LooseAny CEO can look good during an 18-month stint with a successful company in a hot sector.The question is, what’s that CEO’s performance going to look like over the long haul and dur-ing market fluctuations? Only time will tell. And that same need for an extended perspective isa sticking point for most return on investment (ROI) and total cost of ownership (TCO) calcu-lations around newer technologies. Specifically, those skeptical of public cloud services remainunconvinced that swapping capital costs 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 span of timethat you’d use to evaluate a capital investment, or is there a shell game going on, where cloudis less expensive in the very short run, but more costly to an enterprise over time?

It’s not just an academic exercise. Fiscal sensibility matters now more than ever, and as anyexpert on corporate strategy will tell you, fiscal responsibility is about much more than short-term gains and expenditures.

Our April 2010 InformationWeek Analytics Cloud ROI Survey gives a sense of how nearly 400


34%

21%

16%

16%

26%

29%Note: Multiple responses allowedData: InformationWeek Analytics Cloud ROI Survey of 393 business technology professionals, April 2010

Software as a service (applications delivered via cloud)

Infrastructure as a service (storage or virtual servers delivered via cloud)

Platform as a service (Web platform delivered via cloud)

Data as a service (i.e., data lookup such as business intelligence, market data, geo-coding, etc. )

Not currently using cloud computing but considering use

Not using cloud computing

Which cloud computing technologies and services are currently in use by your organization?Use of Cloud Computing

1170610_CloudROI_chart 2

Figure 1

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business technology professionals see the public cloud services financial picture shaking out.The good news is, IT is not running blind into this new model.

“Cloud computing works for commodity-type applications, but any integration or complexconfiguration requirements make the cost skyrocket,” says Jack Garhart, an IT manager with alarge international financial institution. “Also, most of the companies I have worked with liketheir investments to last five-plus years. It seems that the break-even point for investments forinternal vs. SaaS is three to four years. We end up paying less in the beginning, but then a lotmore in the out years.”

Clearly, ROI is being calculated, and while the evaluation period many other respondents areusing doesn’t match the lifetime that we’d expect to get from a business system, the factorsthey’re considering are reasonable.

So why aren’t organizations universally creating the exhaustive (and perhaps bureaucratic, intheir opinions) discounted cash flow analyses needed to study all the myriad variables involvedwhen switching from premises systems to cloud? The main impediment to a full cloud ROIanalysis is that you’re evaluating a moving target. While NIST did everyone a favor by creatingwhat we think of as umbrella definitions of cloud computing, when we start diving down intodetails, there still isn’t universal agreement on many topics. What exactly is a private cloud?Can SaaS ever run on one, or is that defeating the purpose? And so on.

Now, we’re normally big fans of small details. It’s the little things that keep enterprise systemsup and running. But in this case, we can’t fault CIOs for not insisting on the same level ofanalysis as we’d use for an established, well-understood technology because, while the generalpublic cloud concept is clear enough, the technical specifics seem to change weekly.

This is not a reason to ignore the cloud model, or to give up on fiscal discipline. Instead, onestrong trend that emerges after studying our research and speaking with a variety of organiza-tions is a new breed of smart and disciplined adopter who has loosely studied ROI, and thenrevisits the calculation over time to ensure that expected returns are panning out. For now, thatmay be the only sane way to approach the ROI of cloud: Figure out what factors are importantfor your organization, calculate the specific returns for the implementation that you’re usingand keep monitoring to make sure reality stays in line with expectations.


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Change Is Coming. How Will You React?We believe cloud services will bring a paradigm shift over the coming five to 10 years. This is amassively different model of computing that will require research, development and processchanges within enterprise IT departments, and for our end users. So it’s troubling that, amongrespondents’ organizations that are not using cloud computing, the CIO is the leading skepticrather than the chief information gatherer—in fact, the CIO is almost twice as likely to be thenaysayer than the next most significant “no” vote.

“CIO” may soon stand for “Cloud Implementation Opposition.”

It’s reasonable and proper for the CIO to have a say in computing models. But given that we’refacing perhaps the most significant IT transformation since the advent of the Internet, it’s notreasonable for CIOs to say “no” to so much a pilot. Sure, say no to production use where itdoesn’t make sense, but for crying out loud, say yes to a proof of concept. How can an IT


Base: 114 respondents at organizations not using nor evaluating cloud computingData: InformationWeek Analytics Cloud ROI Survey of 393 business technology professionals, April 2010

Who within your organization played the most significant rolein your organization’s decision not to use cloud computing?

Primary Cloud Computing Dissenter


Executive corporate management (President, CEO, CFO, etc.)CIO/CTO

17%

No one; we haven’t consideredcloud computing use at this time

Don’t know

OtherCISO

End usersLine-of-business management

32%

1%5%

1%2%

3%5% 16%

17%

1

23

4

5

67

89

IT staff

Other IT management

Figure 2

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organization credibly refute or affirm cloud ROI claims—or even have a rational discussionwith business units—unless the CIO and IT staff have some hands-on experience? It’s justshortsighted.

Most of us who haven’t been living under a rock have had the cloud “use case” discussion. Andthere are very reasonable arguments that some functions don’t yet fit with this model, and maynever. On the other hand, there are reasonable use cases that do very much fit—those thatrequire fast time to market, global scalability and so on. And business leaders have noticed.

We think it’s very likely that CIOs who are saying a flat-out “no” are being bypassed by busi-ness units that do their own technology implementations. If it’s not happening yet, it soon willbe. That also might explain the gap we found when we asked business units versus central IT,“Is IT involved in cloud at your organization,” and found that 94% of IT respondents said yes,versus 79% of those in business units.

Don’t say you weren’t warned.

Risk/RewardIn our April 2010 InformationWeek Analytics Cloud Governance, Risk and Compliance Survey,we asked about the top inhibitors to adopting cloud computing; fear of unauthorized access tocustomer or proprietary information, lack of maturity, and security defects topped the list. Butif risk can be managed, respondents saw good reasons to use these services. As you’d expect,among perceived benefits, speed of deployment is near the top of the list (cost effectiveness isNo. 1). Lower long-term expenses also sounds good—but if you’re one of those folks who’sbuilding a case for cloud around short-term capital savings, do your homework. Yes, a two-year comparison of ongoing cloud expenses may be more favorable than a one-time build ofhardware, but is it still going to be favorable for the entire life of the system, perhaps upwardsof five years?

It well may be, but do the comparison, taking the lifetime of the system into account. (See oursample ROI chart.)

Twenty-eight percent of respondents say that there is inherent goodness in replacing capitalexpenses with operational expenses. That reminds us of the old PC leasing argument, “If wemake PCs an operational expense, then we can’t get denied capital—we’re in a contract, and


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we can’t get out of it.” True enough, but fast forward to today: Most organizations no longerlease, and not just because they’re looking to avoid paying interest. They’ve also brought theirCFOs into the conversation and know that a periodic capital expense can be less expensivethan an ongoing operational expense. Point is, capital expenses are not inherently evil, as longas credit or capital is available, and operational expenses are not inherently good. It’s all aboutthe present value—that is, the normalized value of the future cash outflows in today’s dollars—taking into account the potential cost of borrowing.

A small but crafty group of respondents, 14%, express a desire to move computing expensesout of IT’s pot and into line-of-business budgets. There’s a lot to be said for reducing theexpertise portfolio needed by an IT organization, and shifting operational expenses to line-of-business units can be part of that. Fact is, expressing any purely line-of-business expense in theIT budget misrepresents how much IT costs the organization. Our take is that activities that are


45%

33%

32%

28%

14%

9%

8%Note: Two responses allowedBase: 279 respondents at organizations using or evaluating cloud computingData: InformationWeek Analytics Cloud ROI Survey of 393 business technology professionals, April 2010

Ability to quickly roll out business technology

Expectation that long-term expenses will be lower

Reducing number of activities that require in-house IT expertise

Replacement of capital expense with operational expense

Moving expenses from IT budget to line-of-business budgets

Moving control of business technology away from IT to line-of-business

Other

What are the primary reasons that your organization is using or evaluating cloud computing?Primary Reasons for Using or Evaluating Cloud Computing


Figure 3

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engaged in for the benefit of only one division should reside in that group’s budget. Unlessthere’s another way of encumbering that business unit—like a chargeback—representing theseactivities on IT’s balance sheet hides the cost of that division from the larger organization.

You don’t need cloud computing to make this shift happen—single-purpose silo applicationsshould be paid for by the originating business unit, whether those apps live in the cloud orreside on premises. But the cloud could provide a clean break.

One caveat, lest you think that offloading an expense means that IT will be held harmless if thebusiness gets hosed—for example, by being locked in to a service with an escalating price. Inour experience, outsourced IT engagements that go sour always get blamed on internal IT, nomatter who picked the provider.

How about reducing your business technology overhead by effectively outsourcing a platformor infrastructure?

Well, that’s a horse of a different color, and it’s colored with operational effectiveness, not justcash outlay. It’s an axiom that any well-run IT organization avoids single points of failure incritical areas of expertise. This translates to salary overhead, and it’s really expensive. Therefore,reducing your internal service catalog—and associated areas of expertise—is generally a reduc-tion of expense. The question then becomes, does reducing the IT organization’s expertise port-folio over time get factored in to the calculation of the return on investment of cloud comput-ing? It should.

OK, so does IT need to maintain that redundant expertise for internal, “can’t-be-trusted-in-the-public-cloud” applications? Maybe. But we’ll bet that even on-premises, “private cloud” mainte-nance will be outsourceable in the future. Today, contractors are trusted to touch vital data,after various background checks and contract assurances, and it seems reasonable to assumethat cloud maintenance will be treated similarly in the future.

We’re also betting that IT’s portfolio of “must be internal” job roles will shrink; more on that inan upcoming report.


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Stay EngagedCloud apps are sneaking into organizations in much the same way that rogue wireless APssprouted up a few years ago. The common wisdom among clouderati as to how this is happen-ing: Vendors are bypassing IT and going directly to authorized purchasers in business units.

At first, our research indicated that this might not be a valid view, based on the fact that 90%of respondents say IT is involved with cloud initiatives at their organizations. But when wesliced the data into IT versus non-IT respondents, a different picture emerged.

Now, the situation is not as grim as some say. Seventy-nine percent of business unit respondersinvolve IT in cloud initiatives—a far cry from universal shunning. But there is a gap nonethe-less because 94% of IT respondents are confident that business units are involving them. Putanother way, business units are over three times as likely as IT (21% vs. 6%) to say that ITdoesn’t get involved in cloud initiatives.


Base: 279 respondents at organizations using or evaluating cloud computingData: InformationWeek Analytics Cloud ROI Survey of 393 business technology professionals, April 2010

Is IT involved in cloud initiatives at your organization?IT Involvement in Cloud Initiatives


Yes90%

10%

1

23

4

5

67

89

No

Figure 4

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That can’t be good for security, compliance or management. Bottom line, if you’re a technolo-gist and think, “Surely all of my business units will contact me if they’re considering cloudcomputing,” you may be living in a dream world—perhaps the same one as the “CIOs of No”who think they’ve killed cloud initiatives at their organizations.

Be proactive. Let business leaders know you want to be involved in decisions to outsource ITfunctions, and you won’t automatically quash the idea. Start a pilot project, and provide a miniservice catalog to your most influential and important business unit customers. Consider creat-ing a guide to cloud benefits and risks, service-level agreements, minimum standards forproviders and use cases, including those that IT recommends avoiding.

You could even use these guides and catalogs to figure out what services business leaders areinterested in—and would pay for—which might lead to funding.



What is the primary method by which business units receiveinformation regarding cloud technologies and services?

Ways Business Units Get Information About Cloud Computing


IT researches, provides and maintains a portfolio of appropriate cloud information, and provides this to business units

Business units requestit from cloud vendors

38%

Cloud vendors provide informationdirectly to business units

Other

Business units request it from IT

11%

5%3%

25%18%

1

23

4

5

67

89

Cloud vendors provide information to IT, then IT provides it to business units

Figure 5

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Our data says IT is already doing this to some extent: 38% of organizations surveyed say thatIT has a primary role in providing business units with information about cloud technologiesand services. We were a little skeptical that business units and IT are on the same page, soagain, we separated out the responses. In fact, our research shows that business and IT arepretty much in agreement that cloud vendors providing information directly to business unitsis the least common method of education. Score one for us.

The Efficiency FactorThe major sources of cost savings touted by cloud proponents involve economies of scale, useof commodity gear and elasticity. Let’s look at all three areas.

Efficiency: The vendor argument goes like this: “Building a cloud fabric is the only thing wedo. Your business, unless it’s all about IT, can’t possibly focus to the same degree; you haveother strategic priorities. Therefore, we’re more efficient.” Cloud providers are also quick topoint out that they do time-and-motion studies to discover the best way to handle infrastruc-ture issues and are able to purchase gear in mass quantities.

The argument is a good one, but only up to a point. If you’ve got mature data center automa-tion and a reasonably efficient staff, you can probably do just as well. In fact, our June 2009InformationWeek Analytics Data Center Automation Survey showed 43% of IT organizationsreporting extensive or significant use of data center automation technologies. But that meansmore than half are not using these technologies.

And as we discuss in our December 2009 InformationWeek Analytics State of the Data Centersurvey of 370 business technology professionals, there’s also plenty of work to be done in mak-ing our data centers more efficient: Nearly 60% of our survey participants don’t track powerusage or know their PUE numbers. Cooling is an ongoing problem. And while the economytook a great deal of wind out of the regulatory push for power and carbon limits, the concernhas not gone away. If part of the decision for using cloud versus in-house facilities is, “Wouldwe have to upgrade our data center,” then it certainly makes sense to factor that into any ROIcalculation.

Commodity gear: Most enterprise IT groups still haven’t gotten over the notion of buying top-end gear in order to achieve high uptime and dense virtualization ratios. Cloud vendors tend to


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take the opposite tack: Buy lots of commodity boxes and achieve high uptime through cluster-ing software. That’s probably the one area where cloud providers really do kick the snot out ofcurrent enterprise IT practices. Corporations could start moving to commodity gear, of course,but we think that this is an ingrained culture thing. From an ROI perspective, be realistic aboutfactoring in the real cost of the gear that you will actually purchase.

Elasticity: Finally, public cloud fabrics provide elasticity, a concept not totally foreign to pro-fessional IT architects. Like Scotty on Star Trek, a good infrastructure staffer will always padestimates. Of course, in a premises or private model of computing, that cushion comes at aprice—20% more storage means that you’re spending $600,000 instead of $500,000 on a par-ticular project.

Here’s where the private cloud concept is intriguing: Using a converged fabric architecture,SANs and pervasive virtualization provides on-premises systems with some measure of elastici-ty, meaning that you might not have to allocate that additional 20% to get your capacity cush-ion after all. In fact, your total spend could be much lower since funds spent on extra resourcescan provide elasticity to more than just one system. But guard against oversimplification here.“The reality of elastic ‘on demand’ resources is much less than advertised,” says one surveyrespondent. “The major software vendors do not support adding CPUs easily or without majorincremental costs.”

Providers readily admit this.

“Elasticity is inherently difficult,” says Marten Mickos, CEO of private cloud systems vendorEucalyptus. Users may have elasticity in the database space—for example, an Oracle cluster—but you still need to code applications that scale appropriately. “Cloud doesn’t have any magicdust that solves the clustering issues,” says Mickos.

Darn it, no fairy dust again?


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Get That StretchClearly, IT systems need elasticity. The question is, how often and how much? This is a majorfactor in any ROI calculation. When you’re plotting out how much premises systems will costcompared with similar cloud services over their lifetimes, you’ve got to factor in the cost of in-house elasticity, whether it’s static (as in using physical servers) or dynamic (as in using virtualservers and applications that allow for on-the-fly resource allocation).

Our research revealed that, all things being equal, the most prevalent requirement is “occasion-al” elasticity—something surely accomplishable in the public cloud. Of course, it can typicallybe achieved in-house as well. But how much extra capacity are you going to need, is your datacenter set up for it, and if so, how much did you spend on capacity that’s currently just sittingidle?

Cloud vendors normally do allow for shrinking your capacity fairly easily, but check your con-



How often do IT or business units require business technology elasticity, that is,the ability to quickly add capacity to an application or other technology resource?

Requirements for Business Technology Elasticity


Often requiredFrequently required

30%Don’t know

Never required

Rarely required

15%

3%4%

13%

35%

1

23

4

5

67

89

Occasionally required

Figure 6

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tract. Easy doesn’t always mean cheap. Customers we spoke with say committing to buy a cer-tain capacity can yield savings, but then you’re on the hook. It’s also worth noting that legacyapplications running on IaaS networks don’t scale up and down as easily as native cloud apps.For example, hosted Microsoft Exchange services—even when the word “cloud” is pasted onthe advertisements—are typically more expensive than running the system in-house over afive-year period.

Of course, you can’t run Gmail in-house, but it’s typically less expensive than running thatsame Exchange server over that same period. It’s all relative.

When we ask how much extra capacity respondents typically build into non-cloud computingsystems, including servers and storage, 2% say “none,” something they’ll surely regret down theline. By far, the majority of our respondents claim over 11% extra capacity with new systems,with almost one-third of these saying that they build in over 31%.



When building non-cloud computing systems, approximately how much extra capacity(servers, storage, etc.) does your IT organization typically build into new systems?

Extra Capacity Built into New Systems


11-20%1-4% 21%

5-10%

None

More than 40%

31-40%

21-30%

3%

17%

25%

13%

2%

19%1

23

4

5

67

89

Figure 7

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In the IT world we all grew up in, you can’t blame them. But if you start to build detailed ROImodels to compare cloud with on-premises, you’d better factor in this overbuilding. You sim-ply can’t have five-nines service without overbuilding, by some reckonings, at least 50% morecapacity than you need. So be realistic about what it will cost to build an on-premises system,given your uptime expectations.

Somewhere, somehow, you’re going to pay for that extra capacity.

Naturally, system growth rates are the most important factor when considering how much ofthat extra capacity is needed—a slow-growing system doesn’t need as comfortable a margin oferror. But, of course, it’s hard to know whether your new business system—particularly anexternal one—is going to be incredibly popular, or not. (Which is why external use cases tendto point to cloud.)

The truth is that capacity planning is as much art as science, and even cloud providers have“aw, hell” moments when they realize that they need to add capacity to deal with customerdemand. It’s just that they have an ongoing by-the-use revenue stream to pay for it, whereasnonchargeback IT does not.

Cloud providers also are using technology—SAN, virtualization and clustering—that doesn’talways require universal downtime for upgrades. In contrast, traditional systems (non-SAN,non-cloud, non-virtual) are relatively tough to add capacity to. A physical server normallyneeds downtime in order to add, for example, disk space. And even some high-end apps (forexample, iPlanet mail stores, which handle millions of mailboxes) require downtime forupgrades because of the way that they assign resources to servers.

Our ROI point is, if you have X excess capacity (say, 10%), adding that to separate buckets iswasteful. But adding that to a cloud infrastructure is typically not wasteful—and thus, it’s lessexpensive. It’s just like with virtual servers. Ten traditional servers that need 10% extra storageon a base of 100 GB would use 100 GB of extra storage. But put those servers in a virtual situ-ation, and you might provision half (or less) of that as extra storage for the server farm. InstantROI, whether you’re using private cloud technologies or relying on the cloud. (Vendors keep-ing their costs low can typically pass those savings on to you in a competitive market.)


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Spending Spree? Not HardlySpending for in-house projects is still alive and well, though budgets are clearly not huge.Nearly two-fifths of our respondents cite less than $1 million of in-house spending over thepast five years. For enterprise IT, that’s not all that much. And 60% of respondents had lessthan $5 million to spend. Depending on the size of the organization, that’s not huge, either. It’shard to say whether this simply is a symptom of the Great Recession or whether it’s a harbingerof clouds to come.

Our research also shows that business technologists aren’t keeping it simple when it comes tobusiness technology—and that’s a good thing. Maybe it’s a few decades of ERP, or dealing withall of the silo-prone business applications prior to ERP, but something has taught us that parti-tioned data is rarely helpful. Thus it’s no surprise that the single most-cited factor in selectingbusiness technology for organizations is integration with other enterprise applications.



In the last five years, approximately how much has your organizationspent on new, in-house business technology projects?

Spending on New In-House Projects


$100,001 to $999,999Don’t know

29%

Less than $100,000

No spending on new,in-house projects

$25,000,000 or more

$10,000,000 to $24,999,999

$5,000,000 to $9,999,999

$1,000,000 to $4,999,999

12%

1%

10%

10%

6%

11%

21%

1

23

4

5

67

89

Figure 8

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Yes, there is goodness to integration; in this day and age, your sales application had better besending revenue figures to your general ledger. However, are IT folks so scarred by silos thatwe now feel that everything needs tight integration, no matter what type of system it is?

Just as not every task is a high priority to a project, not every application is a high priority tointegrate. Yes, your project management system for the $40 million initiative should integratewith your financials, but your lightweight project management system for projects under$50,000 might not deliver returns that are worth the expense and hassle.

We thought, at first, that our respondents who don’t work in central IT might have a differenttake on this. And they do, but not by much. They consider cost more of a factor than enter-prise application integration. And this is where some confusion over the ROI of SaaS apps


73%

69%

60%

59%

58%

37%

31%

3%Note: Multiple responses allowedBase: 279 respondents at organizations using or evaluating cloud computingData: InformationWeek Analytics Cloud ROI Survey of 393 business technology professionals, April 2010

Integration with enterprise applications

Cost of software and hardware

Data loss potential and business impact

Business continuity/disaster recovery

Customer or other privacy considerations

Proprietary/business competitiveness nature of data

Cost of non-IT staff time to implement (during business analysis, data conversion, business testing)

Other

Which factors come into consideration when selecting business technology for your organization?Business Technology Consideration Factors


Figure 9

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might come in. We all know about the three (or higher) to one implementation-to-softwarecost ratios of ERP, and it’s no different in the cloud arena. People know about the high cost ofstaff time, but it doesn’t seem to be a primary consideration, either for business respondents orfolks who work in centralized IT. Go figure.

Stay LooseNearly 70% of respondents say they are likely or somewhat likely to comprehensively evaluatecloud ROI. While we won’t go so far as saying they’re spinning their wheels, the public cloudis still an emerging technology, and it may not be a terrific idea to spend a huge amount oftime creating a discounted cash flow analysis when all of the pieces and parts of cloud comput-ing are not yet fully understood. Some experimentation is warranted, regardless of the true ROIpicture, and you can write that off in your R&D budget, even if you don’t think that cloud isready for production or doesn’t work for every use case in your organization.



How likely is your organization to comprehensively evaluate return oninvestment (ROI) for the expected lifespan of a cloud computing project?

Likelihood to Evaluate Cloud Computing ROI


Somewhat likely

Likely

23%

Highly likely

39%

30%

8%

1

23

4

5

67

89

Not at all likely/we don’t calculate ROI for cloud projects

Figure 10

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None of the folks that we talked with were what we’d call terribly uptight about ROI, and only30% of our respondents who have implemented cloud say that they’re highly likely to compre-hensively evaluate ROI for the expected lifespan of the project. We asked several cloud vendorexecutives why they thought this was.

“Customers are mostly in test and piloting mode: ‘We understand the fundamentals; let’s do apilot to see if it’s true and how much it’s worth,’” says Eucalyptus’ Mickos. In his estimation,the true discounted cash flow/net present value calculations (see included ROI chart for anexample) will happen no sooner than a year from now.


71%

64%

63%

56%

49%

48%

41%

38%

Base: 256 respondents at organizations likely to evaluate cloud computing ROIData: InformationWeek Analytics Cloud ROI Survey of 393 business technology professionals, April 2010

Initial capital expenses or savings

Future capital expenses or savings

Operational expenses for lifetime of project

Reduced or increased staffing requirements

Time savings for business unit employees or IT staff

Network or systems management costs or savings

Provisioning costs or savings

Utility costs or savings

Cost or opportunity cost of staff time to implement or assist in implementing

Other

34%

3%

Which of the following factors have the greatest likelihood of being incorporated intoan ROI study regarding the business value of cloud computing at your organization?

Factors Incorporated in an ROI Study of Cloud Computing


Figure 11

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Lew Moorman, chief strategy officer of Rackspace, says the enterprise users he speaks with arechiefly focused on adding cloud computing to the mix of what they’re doing today in a safeway, rather than having a big TCO debate. Moorman also rightly points out that IT budgetsand ROI studies can be maneuvered in much the same way that statistics can be—you can telljust about any story you want if you frame it right.

IT pros we spoke with who put together ROI studies incorporate the usual suspects, such asinitial and future capital costs and savings that can be garnered from network and systemsmanagement, utilities and staff time. It’s worth making the point again that organizations thathave an investment in systems and data center automation likely need less of an investment inongoing staff time, and this should be factored in.

Other issues worth considering are potential escalating costs for legacy systems. Though somefolks we spoke with say they expect legacy applications to stay in house for a while because ofsunk costs, our experience is that these apps tend to get more and more expensive for the ven-dor to maintain. The vendor is then more than happy to pass those costs along to the cus-tomer, up until the point where the customer upgrades to the next product in the lifecycle.We’ve seen costs go up as much as 40% over a two-year period. In-house apps might seem tobe immune to this, but not when you consider how expensive it is to keep multiple folks up tospeed on custom, legacy code.

Training might be a cost consideration too, but remember, most native cloud apps, like Gmailand Salesforce, have gotten where they are because they are relatively intuitive.

Since IT’s role in cloud computing is that of steward—just as with any outsourcing engage-ment—you do need to think about the well-being of your organization in the long term. Sure,put escalating costs and provider lock-in into a worst-case scenario, but at least have the con-versation. “Exclusive” and “value add” can be code for “proprietary.” A systems that’s inexpen-sive now might not seem like such a bargain if you can only get your data back in a nonread-able database format. Sticking to de-facto APIs (keep an eye on NIST and the DMTF) will helpto mitigate this risk.

Cost of downtime and redundancy are factors as well. There’s some debate on whether usingmultiple cloud providers is a good idea or not. Surely, if your cloud vendor offers “availabilityzones” (such as Amazon’s concept, which includes completely independent cloud fabrics in dif-ferent geographical locations to offer resiliency), multiple providers are not needed.


C l o u d R O I




Digital education service provider DigitalChalk connects the actual ROI of itscloud platform for the first 3.5 years of operation with the projected ROI of thenext year and a half. While the actual dollar figures are proprietary, the valueproposition is obvious.

Data: DigitalChalk

Likely

13%

7%

80%

On-site

On-site

Year 1 Year 2 Year 3 Year 4 Year 5

Colocation

Colocation

Amazon

Amazon

Visual Case Study: Cost Projections Over 5 Years

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Or are they? It all depends on the use case. At this point of maturity, we believe any functionso critical that it would require multiple providers is probably not a fit for the public cloud.

Also remember there’s a risk that the assumptions you use to create a complex simulation willbe totally wrong—after all, we’ve never done this cloud stuff before. So, again, we’re not surethat creating a complex simulation on a risk simulator is a productive exercise. The practice ofplotting out best- and worst-case scenarios seems more reasonable, but unforeseen risk, like itor not, is part of deploying technology in a new model.

Just when you don’t think anything’s going to go wrong, it will, and you need to have an esti-mate in your pocket of how much it’s going to cost.

One hazard that you may not have considered: massive unexpected charges due to inappropri-ate scaling. We asked several users of cloud computing whether they’re worried about costs



What approach does your organization use to quantify risks (such as projectfailure or project budget overruns) as cash flow in an ROI analysis?

Approach to Quantifying Risk in an ROI Analysis


Risk simulator or other advanced software tool

We articulate costof risks, then calculate

best-case and worst-casecash-flow outcomes

18%

Don’t know

Other41%

2%

2%

37%

1

23

4

5

67

89

We don’t attempt to factor risks in as a cash flow

Figure 12

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running away from them during, for example, a denial-of-service attack. “Whenever we scaleup and scale down, I know—we get SMS alerts, e-mails.” says Troy Tolle, CTO of DigitalChalk,a maker of e-learning software that uses cloud services.

Point being, if you have appropriate notification systems in place, this can go relatively low onyour list of things to worry about.

Time Is Not on Our SideOne survey finding that does alarm us: When asked what period of time is considered whencomparing return on investment of a cloud service vs. an on-premises system, indicating wheresystems get switched out, 41% of cloud adopters say two years or less; 9% are looking at lessthan 12 months. Fortunately, the No. 1 answer, with 46%, is a more reasonable three to fiveyears.



When comparing return on investment of a cloud service rather than an on-premisessolution, what period of time is considered, or will be considered, at your organization?

Time Period for ROI Comparison


3 to 5 years

1 to 2 years

32%

Less than a year

Don’t know

6 to 10 years

9%

9%

4%

46%

1

23

4

5

67

89

Figure 13

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A good rule of thumb is to treat the ROI period as a traditional capital system replacementcycle. Surely you wouldn’t expect 10 years from most IT capital investments, but two years isjust ridiculous.

Like our respondents, we don’t think that ROI is the only factor in making a decision aboutcloud computing. Especially when the cost of entry is pretty inexpensive, it’s hard to say, “Let’sdo a huge ROI study before we try it.” That’s called paralysis by analysis. But it’s also irrespon-sible not to factor in some level of return on investment, particularly when there are significantworries about cloud deployment in an enterprise environment.

“If it’s already being done efficiently, effectively and at a low cost, there doesn’t seem to be areason to move to the cloud,” says one respondent. “For those that have no IT staff and/or noinfrastructure, platform or application in house and/or have systems that are in shambles, itmay make sense.”



How heavily does ROI factor in a decision to do or not do a cloud project at your organization?Consideration of ROI in Cloud Computing Decision


It’s the most importantfactor among severalconsideration factors

1%7%It does not factor in our decision

It’s the only thingthat we consider

It’s a minor factor

25%

3%

64%

1

23

4

5

67

89

It’s an important factor but not the only one

Figure 14

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The majority of respondents are re-evaluating returns after they deploy, and that’s smart. It’sreally impossible to build an ROI model that takes everything into account: ROI studies andother financial analyses done when all factors are not known are called pro-formas for a reason.They are “as if” statements and don’t reflect a known reality. So, by all means, make it clear tothe business that you will go back and refigure when things firm up.

Cloud computing isn’t the end of the IT department. It’s just yet another reconfiguration—ifyou’re smart and get ahead of the curve. And, when you do your ROI study and then revisit, asTolle has done, it might be a reconfiguration that saves enough money to finally do somethingthat IT has always wanted: become adequately staffed.

“Our cost for bandwidth, storage and server CPU cycles it is so fractional to revenue that it’snot even a blip on the radar,” he says. “I’m focused on spending money on talent.” Now there’sa return we can all get behind.


Base: 154 respondents at organizations where ROI was a factor in the decision to use cloud computingData: InformationWeek Analytics Cloud ROI Survey of 393 business technology professionals, April 2010

Since making the decision to use cloud-computing offerings based on ROI,has your business re-evaluated actual savings from the cloud offering over time?

Re-Evaluation of Actual Cloud Savings


Yes57%

43%

1

23

4

5

67

89

No

Figure 15

Appe

ndix


C l o u d R O IA n a l y t i c s . I n fo r m a t i o n We e k . c o m


Data: InformationWeek Analytics Cloud ROI Survey of 393 business technology professionals, April 2010

Do you work in the centralized IT function at your organization?IT Vs. Non-IT


Yes70%

30%

1

23

4

5

67

89

No

Figure 16

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25%

11%

10%

9%

7%

5%

5%

4%


IT/IS staff

Director/manager, IT or infrastructure

Director/manager, other IT

Consultant

Director/manager, IT operations

Line-of-business management

Vice president, IT or infrastructure

CIO

CEO/president

Director/manager, network systems

Vice president, non-IT

Director/manager, storage or data center

CTO

Other

4%

2%

2%

2%

2%

14%

Which of the following best describes your job title?Job Title


Figure 17

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Which of the following dollar ranges includes the annual revenue of your entire organization?Company Revenue


$50 million to $99.9 million

Less than $6 million11%

17%

13%

6%

16%

9%Don’t know/decline to say


Government/non-profit

$5 billion or more



$1 billion to $4.9 billion

8%

8%

12%

1

23

4

5

67

89

Figure 18

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Approximately how many employees are in your organization?Company Size


100-499Less than 5024%

50-99

10,000 or more

5,000-9,9991,000-4,999

500-999

6%4%

9%

6%

28%

23%

1

23

4

5

67

89

Figure 19

C l o u d R O I




5%

10%

2%

15%

15%

6%

3%

9%


Consulting and business services

Education

Electronics

Financial services

Government

Healthcare/medical

Insurance/HMOs

IT vendors

Manufacturing/industrial, non-computer

Media/entertainment

Non-profit

Retail/e-commerce

Telecommunications/ISPs

Other

9%

2%

2%

3%

4%

15%

What is your organization’s primary industry?Industry


Figure 20

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