What the Cloud Really Costs: Do You Know?

CIO — For CIOs who distrust most technological promises (having heard too many of them), cloud computing sets off alarm bells. Yet those CIOs finding success in the cloud say their colleagues should be equally skeptical of IT managers who claim they can deliver better and cheaper results internally. (For expert advice about cloud-vendor contracts, see "How the Cloud Can Turn Toxic.")

DeVry University CIO Eric Dirst is careful to keep his team honest about the real costs of internal IT. “You have to think it through. We try to calculate 10-year [total cost of ownership] when we make a big purchase. We don’t want to have to replace things in two or three years,” he says.

An honest comparison must take into account the cost of provisioning servers and replacing them about every three years, plus the overhead of system administration, security patches and disaster recovery. Those are built into the monthly fee for a cloud computing service, Dirst says. So far, DeVry uses software as a service (SaaS) applications for CRM, HR and email. It has also has deployed custom applications on Saleforce.com’s Force.com and custom utilities on Amazon Web Services (AWS).

It’s difficult to make direct comparisons between cloud computing and internal IT, notes Larry Bolick, CIO of the creative services staffing firm Aquent. “It’s not like when you upgrade a server, and the clock speed is twice as fast or you’re getting four times the memory. That kind of comparison doesn’t exist necessarily in the cloud.”

Over the past two years, Aquent has converted more than 30 offices in North America to a cloud-based phone system and moved its core business system to the cloud. In the process of changing the company’s homegrown ERP system to a Web-based model, Aquent switched it from traditional data center colocation to hosting on AWS. The software now runs in three AWS clouds—one in the United States, one in Ireland and one in Singapore—to deliver global coverage. “With that particular application, we get some disaster-recovery capability in the bargain because we’re replicating between the three different instances,” Bolick says.

James Staten, a Forrester Research (FORR) analyst, agrees that companies tend to underestimate the cost of internal IT. “Often, organizations only count the capital expenditure, not the operational costs, so they come to the incorrect conclusion that it would be cheaper to do it on premise,” Staten asserts.

The Capital Expenditure Monster

At that point, says Hugos, “I think it becomes a CFO discussion about capital expenditure.” CFOs may increasingly force the issue of replacing investments in IT equipment with the variable costs of cloud computing. In addition to the direct costs, a CFO is likely to consider the opportunity cost of tying up capital in fixed assets such as servers, he says.

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