Calculating Your Cloud ROI

Increasingly, enterprises are drawn to the advantages of cloud services -- the flexibility, agility and "anytime, anywhere" business models enabled by the cloud are very attractive. But IT leaders can be stumped when it comes to answering a crucial question: What's the return on investment?

The virtualization factor

The fact is, calculating ROI on cloud services is challenging. The abstract nature of the cloud doesn't lend itself to a simple matter of addition or subtraction. If your enterprise has already virtualized a good portion of its environment, you've already optimized your resources to a high degree. The gains may be incremental, rather than game changing. 

That's why there's so much excitement in the telco world about network function virtualization (NFV), software-defined networking (SDN) and cloud services. Telecom carriers have been behind the curve when it comes to virtualization. So they stand to reap all the advantages of virtualization, plus the benefits of the cloud. That's a huge win with the potential to deliver significant "hard" ROI.

In the enterprise world, where virtualization has already reduced capital expenses in terms of hardware, there are still cost-saving opportunities. Building cloud solutions using open source technologies like OpenStack and KVM (kernel-based virtual machine) eliminates the expense of software licenses, which adds up to significant savings over time. Of course, this must be balanced against the cost of building your cloud solution. 

Another important dimension of your cloud investment calculation is organizational readiness. Most IT organizations look at things from a "bottom up" perspective, starting with the infrastructure. But the cloud requires a different mindset -- a "top down" approach that starts with the applications first. This switch is critical, because it enables you to think more broadly and more architecturally. Are you ready to start thinking that way?

Adding up the returns

So what are the potential returns from moving to the cloud?

For starters, productivity in the cloud is tremendous. It's just so much easier and faster to build and deploy apps in the cloud. Deploying more apps in less time means you can either clear your development backlog faster or reduce your overall development costs --both good outcomes.

There's also the opportunity to dramatically reduce up-front costs by going with a subscription cloud model. All of the capital expenses associated with building and deploying traditional data-center-based applications just evaporate. Instead, you pay as you go, paying only for what you need. Think of all the servers you won't have to buy and then depreciate.

The cloud also offers an incremental benefit in terms of improved automation. That leads to even greater density of your virtualized environment. IDC tracks server virtualization around the world and, currently, the density of server virtualization is hovering around 9x or 10x. But the additional automation delivered by cloud services could take that density to 12x, 13x or even more. Depending on the size of your environment, the financial impact of this could be quite significant.

The next big cloud opportunity

But it's not just about the "compute" side of things. The next big opportunities for cloud, particularly in private clouds, are in the areas of networking and storage. Today, these two areas are dominated by systems built on proprietary hardware. The promise of technologies like SDN and NFV is that they release you from this and let you run enterprise-class (and telco-grade) workloads on low-cost commodity hardware. That is a real game changer. While SDN and NFV are not, strictly speaking, "cloud" technologies, they are often employed as part of a larger cloud migration strategy. Together, they open the door to some really compelling benefits in the networking and storage areas. 

So moving to the cloud can definitely generate financial benefits in terms of reducing costs. But that's just part of the equation. Perhaps the greatest potential return lies in what the cloud enables your business to do that it couldn't do before.

The value of competitive advantage

The agility and productivity that the cloud enables allows you to respond faster to market opportunities. You can create new services and business models and extend your reach to attract and retain customers more effectively -- and more cost-effectively, because of the cloud's ability to deliver services at scale. 

Think about the business implications of this for a moment. Perhaps your enterprise delivers a service at different levels – such as Bronze, Silver and Gold -- reflecting the added cost of delivering the higher-level service. And perhaps your major competitor has an equivalent tiered offering. What if the cloud allowed you to offer all of your customers a higher level of service at a lower cost? What impact could that have on your competitive stance?

This highlights an important factor that's often overlooked in cost-benefit calculations: the total cost of customer retention. If you can push that cost down, while increasing customer satisfaction, that's worth a lot. Driving down the cost of innovation is great; if that innovation leads to more customer relationships, your return is multiplied. 

Cloud's "killer app"

Perhaps the final entry in the "return" column has to do with the cloud's potential as an enabling technology. Every IT paradigm shift has had its "killer app." For the cloud, I believe the killer app is big data. The cloud is crucial for leveraging big data. Imagine you're a retailer and you want to make sure the right product is on the right shelf at the right time. That's a massively complex data and supply chain problem. The ability to deploy big data analytics on cloud platforms is the key to solving those kinds of complicated -- yet high-value -- problems. It lowers the barriers to entry for delivering highly sophisticated analytical capabilities that drive real business advantage and serious ROI.

As with any major technology shift, moving to the cloud requires a different approach to calculating return on investment. For enterprises focusing only on short-term costs and traditional metrics, deploying cloud apps may or may not add up. But for organizations that value things like business agility, development productivity, customer retention, and market leadership, the business case becomes far more compelling.