For many companies considering a move to cloud computing, cost is a significant point of consideration. In general, savings is frequently the goal of choosing the cloud, but understanding what exactly goes into the expense isn’t necessarily as straightforward as it sounds.
For many companies, per-user costs are the most important, but total cost of ownership, also known as TCO, goes further than that. This is what business decision makers need to know to make an educated decision about how to calculate acquisition costs of implementing cloud solutions.
What Is Total Cost of Ownership?
Total cost of ownership, or TCO, refers to the total expense and actual costs that goes into the procurement of technology or IT spend. This goes beyond the cost of software purchases – or, in the case of cloud computing, user costs – and incorporates all asset and operating costs related to preserving business as usual.
Total cost of ownership is one of the most important elements to consider with any kind of technology solution, particularly in evaluating hidden costs in a project. However, many companies, particularly those new to implementing large-scale solutions, fail to make the connections. Without evaluating all of the expenses and how they play into the total cost imposed on a company, the chances of making an unwise investment increase dramatically. As such, it’s very important to understand what elements are considered in a TCO analysis in order to make an educated choice.
Total Cost vs. Price
The prices quoted by public cloud providers, for example, tend to only include the bare minimum – what clients will be paying for each user – but this only scratches the surface. To get a better picture of true costs, companies need to ask themselves tough questions about what choosing this kind of path, or any of the alternatives, will do to impact the organization overall, like:
- Who will be supporting your enterprise solutions? Will this implementation require hiring additional FTEs?
- If something goes wrong, who will be responsible for a fix, and what is the monetary value of the information potentially at risk? What expenses are related to a disaster recovery plan?
- Do you have sufficient equipment to support implementation, or will moving forward require purchasing additional workstations, software, or hardware?
- How will utility bills, like telecom services, change or grow with the addition of further services?
- What are current maintenance costs? How much maintenance do the services you are looking to replace entail?
These kinds of hidden expenses are imperative to include when considering the acquisition of any product or service as they aren’t negotiable. When solutions are implemented, these kinds of factors are inevitable, so understanding these TCO components before making a choice can make or break financial stability. Opportunity cost shouldn’t be a point of concern in the future.
Take, for example, private cloud platforms. At first glance, many third-party private cloud providers appear to be much more expensive. For companies on a shoestring budget, even the benefits provided by a private cloud can seem too expensive. However, a TCO analysis can provide a more realistic breakdown of acquisition costs as well as overall direct and indirect expenses. Many private cloud packages include things like support services, reducing the need for on-site employees, as well as coverage of ISP and telco bills. This alone can even out price points, putting a private cloud on the same level – and many times ahead of – a public option.
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What Is Included in a TCO Analysis?
A TCO analysis involves creating a breakdown of what expenses related to implementing an enterprise solution. These costs generally fall into four categories: ISP bills, staffing, hardware and software.
Hardware, which includes equipment and tools like desktops and laptops, mobile devices and tablets, servers, firewalls, WiFi access points, virtual machines, cables and switches, and onsite and offsite backups, are important assets and can be a big part of the cost of storing data. Laptops and desktops have an average price of around $700 per unit and an average of 36 months in product life cycle, and servers can run $10,000 or more and require refreshment every five years or so. In evaluating your hardware expenses, keep these questions in mind:
- How much are you paying for hardware?
- How often are you refreshing hardware?
- If your equipment replacement process is longer than 36 months, how much is that costing you in operational efficiency and performance?
- Will your chosen enterprise solutions require changes to your existing hardware?
- How does depreciation affect the supply chain from a tax or accounting perspective?
Making the choice to switch to a cloud provider for data storage may not require a change in many hardware features, like computers, but eliminating expenses related to servers can lead to significant savings.
Software expenses are now primarily associated with license fees, which can run anywhere from several dollars to several thousand dollars per user. For many companies, things like SQL server license fees, firewall licenses, and anti-virus software licenses can be a significant part of the IT budget.
These kinds of software expenses may seem inconsequential in the big picture, but failing to attend to proper software solutions can lead to security breaches, putting your business at risk. Before writing these kinds of things off, consider these questions:
- What are your cyber security costs, and if you don’t have cyber security measures in place, how much does a breach cost you?
- How much do backups cost, and how frequently do you test your backup/ and disaster recovery plan? How often are backups ran?
- How much would you lose should something happen, and how long would you be down before you were fully operational?
In choosing a third party cloud provider, many of these kinds of licensing and security costs will be covered by a vendor and included in the per-user price. With superior security monitoring services, particularly for small businesses without an advanced infrastructure, relying on outside resources may be on the surface more expensive, but better resources can provide superior options, particularly for companies with sights set on growth.
Overhead employee costs are among the most significant indirect costs many companies face, and thus should be a major component in any TCO analysis. A dedicated in-house IT person can mean $70,000 or more in associated expenses, which may not be sustainable for a growing company, particularly when more than one employee is required. Before making the decision to hire – or fire – ask yourself:
- How much does support cost you?
- What does downtime cost you?
- Do you have a dedicated IT employee or does another employee split their time between IT and their normal role?
- How will scaling impact workloads and, consequently, the number of FTEs needed?
Outsourcing, however, can save money, especially when combined with other services. By investing in resources that offer offsite support, it’s possible to minimize expenses while still receiving specialized services. Calculating the kinds of metrics related to staffing can be a key part in managing costs and benefits, especially for companies who choose a private cloud vendor that can take over IT personnel duties.
Utility bills are a large cost for companies that rely on the internet, particularly when high bandwidth is required to sustain storage and cloud-based applications. For businesses otherwise unaware of mounting costs, utility bills can be $500 a month or more, not including taxes and fees.
In some cases, a managed third-party service will include the cost of utility bills in a per-user rate, mitigating the potential expense increases as usage scales.
Who Needs a TCO Analysis?
A TCO analysis is an essential part of building a business case when considering enterprise technology solutions. This can mean moving to the cloud, changing computer operating systems or migrating from one accounting platform to another. Making any kind of large-scale shift without an analysis of ownership costs on some level is irresponsible and can lead to serious financial implications.
TCO Analyses and ROI
ROI, or return on investment, is one of the biggest priorities for companies at all levels. This refers to the advantages that come with any kind of investment. ROI doesn’t necessarily mean immediate advantages; in many cases, ROI is a long-term process that may involve higher upfront costs in order to save money down the road.
Cloud computing can have a very high ROI. With countless benefits, financial and otherwise, there’s a lot to gain by choosing a cloud provider over a traditional server. The initial costs may seem steep, or may be higher than what you are currently paying, but in the long run, the benefits can outweigh the upfront expenses.
If you are considering cloud computing, analyzing TCO is a critical part of ensuring an affordable yet effective alternative. A TCO analysis of a product like Avatara’s CompleteCloud demonstrates the importance of weighing all factors – when exploring total cost of ownership versus the core price per user, investing in a private cloud becomes a wise fiscal decision.