ROI Cloud Computing

Contents

Executive Summary

Introduction Ensuring ROI from the Cloud • Proactive Utilization – Elastic Provisioning and Service Management• Fast Provisioning • Grow Profits Shifting from CAPEX to OPEX and Pay-as-you-go• Change in Cash Flow • Changes in Cost of Capital• OPEX Model• Pay-as-you-go Business Model Cloud Computing• Key Performance Indicators • Key Performance Metrics Importance of Business Perspective of the Cloud

Conclusion

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Contents

Executive Summary


Conclusion

Executive Summary

This whitepaper sets out details about various key performance indicators (KPI) and metrics alongside the Return on Investment (ROI) of cloud computing. Cloud computing is an emerging model and has brought about a paradigm shift within IT service delivery. It offers an on-demand access to computing resources, which includes servers, network, storage, applications etc.

Two major factors which have led to a wider adoption rate of the cloud are low IT costs and efficient resource utilization. Adopting cloud based IT solutions impacts revenue and budget lines. It offers a high degree of availability, accessibility and security, while allowing enterprises to:

• Increase ROI and productivity• Extend business opportunities

It further defines certain ways to evaluate and build ROI with respect to business through cloud computing. Also include are several advantages of improving and transforming business processes, which have been outlined below:

• ROI barriers• Comparison of Cloud ROI with existing technology• Improvising ROI with Cloud Computing• Different parameters to measure ROI

Introduction


Cloud Computing has been able to bring about a technological transformation through the convergence of a number of new and existing technologies.

Here are some of the key technical attributes of cloud computing:

• High-performance and scalability that enables multiple users to scale up or down their resources as and when required

• Seamless abstraction of infrastructure ascertaining critical applications are not locked into devices or locations

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Executive Summary


Conclusion

• Pay-as-you-go pricing model of the IT service enabling users to only pay for what they use, with no or minimal up-front costs

• Critical applications and confidential data retrieved from any access point.

The above technical attributes can also be found in non-disruptive technology solutions. The rate of transformation, magnitude of overall cost diminution and technical performance of cloud computing are not only incremental, but can also improve an organization’s business processes approximately five to ten times.

The acceptance of cloud computing as the latest technological breakthrough is mainly attributed to its low entry cost and fast return on investment (ROI). In this view, enterprises are evaluating immediate costs of cloud migration, which includes long term operating costs, hidden costs and expected returns on investment. This can be estimated by weighing the overall capital expenditures by investing in the cloud technology against its potential returns.

A careful appraisal of this model needs to encompass – short, medium, and long run benefits of adopting this technology along with the associated termination costs. Moreover, the evaluation also needs to quantify tangible & intangible benefits in the equation.

Cloud computing, just like any significant investment, needs a comprehensive ROI analysis, including up-front or variable outlays and continuous or fixed expenditures that are required to be incurred throughout its life span. In this concern, it is imperative for enterprises to identify all potential costs while making a decision to proceed to the cloud.

Quantifying cloud ROI considerably varies from one company to another, depending upon different business functions of an organization. Most of the companies that are engaged in the financial business follow well-defined guidelines for calculating return on investments and other financial value metrics. Even though, the calculation can be highly complicated owing to its abstract nature, it is vital for businesses to focus on identifying the meaningful information in order to make accurate estimates.


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Executive Summary


Conclusion

This whitepaper outlines a framework to enable enterprises in making appropriate

decisions by reasonably analyzing components while calculating ROI.

This includes:

• Defining cloud computing model and ROI estimation

• Describing common challenges, costs, and benefits associated with cloud

computing

• Evaluating return on investment for cloud projects, in terms of

- Project funding approaches

- Total cost of ownership and Key Performance Indicators

- Risk Management

The above structure will help companies to clearly define their business objectives

supported by various financial metrics while making a move to the cloud.

The finest way to estimate ROI is to evaluate the initial project cost, upfront capital used to deploy infrastructure and the new investment savings. However, cloud migra-tion requires no initial investment eliminating a need for upfront capital. It offers users to pay only for the services they have used. This is called as Pay-As-You-Go model.

In cloud, the initial project cost indicates the total cost of ownership (TCO) of main-taining one’s own datacenter. This is because it eliminates the need for datacenter maintenance ensuring companies to benefit from scalability, flexibility and elasticity of resources. Apart from gaining improvement in ROI, companies migrating to cloud also benefit from faster provisioning of resources allowing them market their products and services at the least possible time.

1. Proactive Utilization


Ensuring ROI from the Cloud

For efficient utilization of resources and capabilities, cloud seems to be an adept plat-form. It facilitates users with quick provisioning of compute resources to handle peak demands while optimizing resources to achieve business objectives.

2. Fast Provisioning

Rapid provisioning helps to scale up and down resources as per instant demands. This creates a novel way to scale IT and enables business expansion. Time compression from weeks to hours is demonstrated by cloud computing providers. This rapid provi-sioning saves time and defines new business operating models. Organizations come up with new develop business plans and deploy infrastructure in a proactive manner. Sometimes customization, design, development, testing and support get boosted with the provision of IT services.

Providers and clients view rapid provisioning as an exposition of services. Rapid provi-sioning services are provided to sustain certain buyer needs from existing IT services. They further deliver choices to ensure innovation and also boost introduction of new technology.

Influence of rapid provisioning on ROI business is intense. They have led to the emer-gence of online Cloud-based marketplaces as criterions for current and future trade between providers and clientele.

The challenges faced by traditional computing model including support barrier, hefty maintenance expenditure and manpower crunch are being addressed by this latest technology. It further helps deploying requisite software applications and custom-built tools without incurring licensing fees.

With either static utilization volume or variable functional utilization, new pioneering consumption models empowered by cloud computing allow businesses to cogitate using IT in an elastic and responsive way.

This technology can transform the proprietorship procedure from consumer to vendor in the sense that IT becomes commodity procurement, and consumers’ emphasis on result-oriented performance and selections.


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---------------------------------------------3. Profit Maximization

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Evading over-provisioning and under-provisioning is a core aspect of cloud computing. It is tagged up alongside cost, revenue and margin advantages of certain business service enabled by rapid deployment of cloud services.

Cloud computing lets businesses increment change improvement and disrupt trans-formational effects resulting into innovative business operating models. Further it offers them to pursue fresh markets through rapid entry and exit routes. Hence the requirement of additional infrastructure to test and enter new markets gets elimi-nated.

As a result, Cloud computing has a deep impact on the profit margin. It deploys cost reduction and economies of scale to utilize existing resources in an optimized way. Thus ROI business case in an enterprise makes more money through Cloud computing by utilizing resources better.

In this section we will discuss how the adoption of cloud computing model can facilitate service providers as well as individuals and service-oriented businesses in achieving greater Return on Investment (ROI) over the traditional IT models.

Shifting from CAPEX to OPEX and Pay-as-you-go

Profit Margin

Ability to Sell AnnuityServices

IncreasingMargin

Value Services

Price/Cost

Efficiencies

Time

Profit Margin

Reducing Cost perFunction Point

Revenue Line

SourcingLobg tail

Move from Non-Linear to Linear Scaling


The implementation of pay-as-you-go utility billing method sets-off changes in the cash flow of a business. This implies that the primary source of cash outflow and revenue streams are calculated on per unit usage basis, including the volume/component used at a given point of time. Cash Flow after Taxes (CFAT) indicates the ability of a business to generate cash from its operations. Making a shift from the CapEx to OpEX model underscores the application of operational expenditure compared to the capital assets in the treatment of operating statements as opposed to the balance sheet management.

Changes in cash flow divulge adjustments in the working capital, revenue, and cash, which further connote the availability and use of funds vis-a-vis liquidity after incurring

Change in Cash Flow:

Availabilty versusr recovery

SLA

Workload-Predicable Cost

Workload-Variable Costs

Capex versus Opex Costs

Workload versusUtilization %

Workload type allocations

Instance toAsset ratio

EcosystemOptionality

Indicator of availabilityperformance comparedto current service levels

Indicator of Capexcosts on-premiseownership versus cloud

Indicator of Opex cost for on-premiseownership versus cloud

Indicator of on-premisephysical asset TCOversus Cloud TCO

Indicator of costeffective cloud workloadUtilization

Workload size versus Memory/Processor distribution. Indicator of % IT asset workloads using cloud

Indicator of % and cost of rationalization/ consolidation of IT assets, Degree of complexity reduction (%)

Indicator of number ofcommodity assets, APIs &catalog items

Cloud Computing ROI Models Cost Indicator Ratios


Software-as-a-Service (SaaS) and utility-based cloud computing models are the recent themes in the field of information technology. They are changing the provisioning and utilization of new technological innovations. An important aspect of this includes making a shift from the CapEx (Capital Expenditure) to Pay-as-you-go and OPEX models, which commands change in the cost of capital investment and cash flows. Let’s discuss these concepts in detail:

Changes in Cost of Capital: As an enterprise makes a move to the cloud computing model, it observes changes in its ongoing and upfront costs. The operating expenditure mainly focuses on maximizing the capital for acquiring IT and other assets while mitigating the risks associated with funds used for the initial business investment along with ongoing maintenance costs. The cloud model evidently implies a move to OpEX service model, wherein Quality of service (QoS) and costs are considered as relevant factor in line with the business performance and service provider’s SLA requirements.

TCOTotal Cost of Ownership

Time to marketTime to valueTime to protection

Faster rate ofcost reduction

Faster time tocost reduction

Adoption of OPEXbased services

Adoption of rapidDev/Test/DeployLifecycle

Time

Leveraging speed & Cost

Cloud

Traditional


operational expenditures. By embracing the Cloud technology, companies can realize more revenues as the model drives down expenditures by achieving greater efficiencies in the working capital. Furthermore, cloud computing leads to zero or minimum upfront costs and improves asset turnover ratio, average revenue on per unit basis, average asset recover ycost, and average margin per user.

An enterprise with a high weighted average cost of capital (WACC) primarily shifts from CAPEX to OPEX. In such a situation, a company strives to consider and evaluate outsourcing solutions, such as cloud hosting solutions, private cloud, and hybrid cloud hosting solutions.

The above graph indicates that OpEx reduces as an organization’s business agility improves. This point is depicted as ‘Sweet Zone’ in the graph.

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Reducing cost whileIncreasing businessagility

OpExSweetspot

Agility inflection point

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OPEX Model By leveraging the OPEX financial model, a company can release capital from the resources that require initial investment and acquisition of IT assets. Conversely, investment in the computing platform requires capital outlays as well as changes in the funding and payment of service that is amortized over a broader shared service model to achieve economies of scale.

The cost of capital from debt and equity sources may vary from public to private sector enterprises, which have share holders and government sources to fund their investment. If an organization’s overall objective to maximize its capital usage by capitalizing on the available equity and debt funds, cloud business model using OPEX is the best way for optimizing the capital investments of such enterprises.

Pay-as-you-go Business Model: Leasing and financing are the two ways of implementing pay-as-you-go model, wherein a company shifts its payments or billings to future. Such type of utility financing is construed to facilitate subscribers to budget their capital expenditures or cash outflows effectively. This further enables them to pay a premium amount in case they exceed their capacity limits.

However, if the billing cycle is not associated with the business outcome metrics, most of the utility buyers select annual or monthly fixed rates. This means, if a company’s billing is tied to application metrics or IT infrastructure that is not correlated to its business activity, then it opts for fixed rate billing. Alternatively, if its billing is predictable and controllable, then it prefers usage-based billing model.

MonthlyRentalPlan


1. Key Performance Indicators At this stage, we are clear about the financial value of the shift from CAPEX to OPEX and pay-on-the-go cloud model. This section outlines ways to build return on investment from cloud computing.

Cloud Computing:

For the records, service-oriented business and IT wings experience extensive frameworks on cloud. Hence developed ROI models depicting how cloud computing benefits businesses, IT consumers and providers, are required.

Cloud computing ROI models & KPIs involve various indicators. These assessments oriented ROI models are as follows:

Indicators of cloud computing are as follows:

I. Cloud ROI model and the outline of its cost indicator ratios: a) Availability versus Recovery SLA indicates performance availability against a service level agreement.

b) Workload is compared with predictable costs to indicate CAPEX cost on-premise ownership against cloud costs

c) On comparing workload with variable cost, one can gauge OPEX cost for on-premise ownership versus Cloud. This also indicates burst cost. d) CAPEX versus OPEX cost outlines the difference between on-premise physical assets such as TCO and Cloud TCO e) The indicator of cost-effective Cloud workload consumption is depicted by workload versus utilization percentage

• Performance Indicators compare traditional IT metrics with Cloud Computing solutions. These are categorized as quality, cost, time and profitability meters which gauge Cloud Computing characteristics.

• Return on Investment saving models determine quality, cost, time and margin improvements by comparing traditional IT with Cloud Computing solutions.


II. Cloud ROI time indicator ratios are:

Time

Cost

Quality

Margin

Speed of reduction

Speed of reduction

Optimizing cost of capacity

Optimizing cost to deliver/execution

Optimizing time to deliver/execution

Optimizing ownership use

Green costs of cloud

Optimizing Margin

Availabilty versus

recovery SLA

Workload versus

Utilization %

Experiential

RevenueE�ciencies

Woekload predicable cost

Workload typeallocations

SLA Responseerror rate

Marketdisruption rate

Workload variable cost

Instance to Asset ratio

Intelligent automation

Capex versus opex cost

Ecosystem Optionally

Cloud Computing ROI Models Cloud Computing KPIs

Timeliness

Throughput

Periodicity

Temporal

The degree of service responsiveness anindicator of the type of service choice determination

The latency of transaction thevolume per unit of time throughputan indicator of workload efficiency

The frequency of demand and supply activitythe amplitude of the demand and supply activity

The event frequency to real-time action andoutcome result

f) To determine workload type allocation, size and memory/processor distribution indicates IT asset workloads on Cloud

g) Instance to asset ratio indicates the percentage and cost of rationalization alongside consolidation of all IT assets

h) Ecosystem optionality specifies the quantity of commodity asset, APIs and catalog


III. Cloud ROI quality indicator ratios are as follows: a) Experiential: It is the quality of perceived user experience, User Interface (UI) design and interaction

b) SLA response error rate determines the rate of faulty responses

c) Intelligent automation measures the level of automation response

IV. Cloud ROI Profitability Indicator Ratios are as follows:

2. Key Performance Metrics:Cloud computing providers aim on key performance indicators (KPIs) over cloud benefit metrics. Cloud computing providers are mainly concerned with two different measurements; IT Capacity and IT Utilization.

RevenueE�ciencies

MarketDisruption

Rate

Ability to generate margin increase per revenue

Rate of annuity improvement

Rate of revenue growth

Rate of new product market acquisition

Increase in provisioning speedspeed of multi-sourcing

Rate of change of TCO reduction by cloud adoption

Aligning cost with usage. Capex to Opexutilization pay-as-you-go savings from cloudadoption

Portfolio TCO Licensecost reduction from cloud adoptionopen source adoptionSOA resue Adoption

Reduced supply chain cost �exibility/choice

Increase in Revenue/Pro�tmar�t margin from cloudadoption

GreenSustainability

Time Cost Quality Pro�tability

Speed of reduction

Speed of reduction

Green costs of cloud

Optimizing Margin

Rate of change of TCOreduction by cloudadoption

Optimizing cost of capacity


Optimizing ownership use



Run through the following key performance metrics that help to translate the indicators from IT capacity-utilization curve to direct and indirect business benefits:

1. Reduce TCO: Cloud adoption compresses time and reduces TCO (Total Cost of Ownership). For an example, several cloud users across the globe think that they do not need to spend time on thinking about online threats. Cloud protects servers from malicious viruses automatically.

2. Optimize Delivery Time: Cloud computing increases in provisioning time and also enhance the speed of multi-sourcing. It reduces supply chain cost. Cloud is one technology with complete elasticity that improves delivery time.

3. Quick Cost Reduction: Cloud technology reduces the cost of IT infrastructure. SMBs have decreased almost 6x of the total amount spend on IT infrastructure and security than the small scale businesses which are still using traditional hosting technology.

4. Augment Cost of IT Capacity: Cloud balances symmetry of the cost of IT usage and CAPEX to OPEX IT utilization. Users can avail pay-as-you-go option. Users also experience cost flexibility on IT infrastructure setup. 5. Reduce License Cost : Cloud helps in reducing license cost from cloud adoption, open source adoption and SOA Resue Adoption. Users can save money on portfolio TCO and on other IT related expenditure. 6. Achieve Optimal Cost: Cloud technology is affordable for all scale businesses. It is cost–efficient over a dedicated server and is easily maintainable. Users can seek help from the cloud administrators to avail support. 7. Increase Revenue With Cloud: Cloud users can easily elevate their profit slab by capital preservation, reducing cost of occupancy, reducing resources cost and more.

Importance of Business Perspective of the Cloud


Nowadays, enterprises undertake different ways to differentiate their business processes and service quality to achieve operational success.

They can achieve cost rationalization and service quality through cloud by first understanding their business processes and service operations.

Cost rationalization is directly proportional to infrastructure enhancements. Service quality is an indispensable ingredient in gauging the business efficiency. Key components of service quality include infrastructure, resources, and services spanning complete business lifecycle.

1. Achieving Economies of Scale In cloud computing, shared platform helps in resolving operational challenges encountered by multiple users. Elimination of problems is just one instance of how a cloud solution can help businesses in achieving more favorable service quality levels. Business value can be achieved through the unifiedand transparent congregation of service environment created by the cloud.

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ManufacturingHospitality Transportation LegalBanking

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OMR

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Utilize

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Capture/Transform

Acquire

Industry

OperatingExpense

OperatingExpense

Rented Services

CapitalExpense(Purchase)

Economies of scale achieved through cloud computing

Technology used by organizations to capture data


From a technical infrastructure perspective, cloud computing is hypothetically missing the bigger picture in relation to real impact of ever-evolving technology on the business. However, what matters the most is clear outlining of the value to business. Business value can be defined in different ways. It not only encompasses the financial values of Total Cost of Ownership (TCO) and Return on Investment (ROI), but also customer value, vendor/supplier value, broker value, brand value, trade value and technical value of the investment.

Any venture undertaken by any organization is actually the portfolio of business processes. Through implementation of effective portfolio management techniques, an organization can classify business processes into three spheres. The processes in each domain have shared IT enablement solution selection benchmarks (for instance, segregation based on IT, segregation not based on IT, and no segregation), and apply the solution selection norms.

The business perspective also involves consideration of whether adoption of Cloud services can help simplify interactions with business partners, associates or partner organizations-for instance, by using Service Oriented Architecture or EDI via the Cloud.

2. Focus on Business Portfolio

Conclusion


The evolution of cloud computing over the past few years is undeniably one of the key advances in the history of computing. To realize the benefits of cloud one must have a strong understanding about diverse issues involved, right from the supplier’s perspective to technology users.

Key performance indicators and metrics of cloud computing assesses current and future operational profits of businesses and numerous IT service requirements related to the potential of this emerging technology. Companies are examining their performance metrics by shifting from the CAPEX to OPEX model. From a financial perspective, this means that enterprises consider cash flows as a significant indicator to drive their business performance.

In such a scenario, they implement different computing models in line with their business requirements. For instance, fixed rate billing is employed by companies with unpredictable business activities, while pay-as-you-go business model is preferred by the organizations with controllable usage-based billing.

While a lot of research is presently happening in the sphere of cloud technology, there is a stark requirement to comprehend the business-related qualms surrounding this technology such as ROI. Therefore, understanding these complications and comprehending their impact upon business functions is truly essential.


ROI Cloud Computing

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