What is cloud total cost of ownership? A complete guide.

What is cloud total cost of ownership? A complete guide.

Posted by Shannon Jackson on Dec 12, 2022 4:39:37 PM

In today’s highly competitive, rapidly changing business environment, organizations need to understand the total cost of ownership of cloud services and be able to accurately measure the return on investment from using these services.  

What is TCO in Cloud Computing? 

In regards to cloud computing, the total cost of ownership (TCO) is the total costs your organisation will incur including operating and provisioning cloud infrastructure, it can also include one-off costs such as migration.  

To completely understand and compare your options when it comes to the cloud, you need to perform a cloud TCO analysis in order to plan your costs when moving to the cloud. Cloud TCO also helps companies determine the cost-effectiveness of cloud migrations compared to existing deployments by on-premises infrastructures.  

To understand Cloud Total Cost of Ownership, it’s important to understand the different components that make up the total cost of ownership. TCO is generally associated with evaluating the costs of static resources throughout their lifetime. But, when it comes to cloud computing, these environments make it more challenging to estimate costs due to their inherently dynamic nature.  

When it comes to calculating cloud TCO, many businesses make the error of comparing the costs of running their on-premises environment. But these costs are not the same as one another and make it difficult to get an accurate comparison. On-premises data centre costs are incurred from initial hardware and software purchases, whereas cloud computing costs are more focused on monthly subscription fees or pay-per-use models to a cloud vendor of your choosing.  

In order to accurately calculate cloud TCO, you need to not only take into consideration the price of on-premises vs. cloud solutions but also include the intangible costs that are associated with either of these solutions.  

In this blog, we'll go through the best approaches and practices when it comes to your organisation evaluating the total cost of ownership for the cloud.  

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Calculating Cloud TCO  

Your cloud TCO calculations should include the cost of software and any existing infrastructures. You need to have a flexible mindset when it comes to creating your TCO model, as this model may not end up completely reflecting the actual costs over time. Make sure you are ready to account for anything unforeseen and that you are adaptable to any changes in your cloud needs. 

Your cloud TCO calculations should include the cost of software and any existing infrastructures. You need to have a flexible mindset when it comes to creating your TCO model, as this model may not end up completely reflecting the actual costs over time. Make sure you are ready to account for anything unforeseen and that you are adaptable to any changes in your cloud needs.  

Calculate your current on-premises infrastructure costs 

Firstly, you should consider the costs of your current on-premises solution.  

Consider the costs of these factors:  

  • Hardware and Infrastructure - The costs of hardware that provide power to your on-premises applications such as physical servers, supplies, replacement parts etc.  
  • Datacentre - You need to consider things such as how much power, cooling and space requirements for any hardware and infrastructure.  
  • Disaster Recovery - How much does your disaster recovery system cost to maintain and manage?  
  • Software – The costs for operating systems such as Microsoft Windows Server, VMware and other management and monitoring tools. 
  • Maintenance - How much does servicing, operating, and maintaining your organisation's system cost including both in-house and sub-contracted maintenance?  
  • Security - What is the total cost of securing your system? Including everything from physical security to firewalls etc?  
  • Employees - How many people are involved in sysadmin, database administration, networking etc. and how much are their charges?  
  • Upgrades - What would upgrade costs to the system look like if required?  
  • Other Costs - How much does it cost the organisation if there is server downtime?  

Estimate cloud solution costs 

After working out the picture of how much your current on-premises infrastructure is costing your organisation, you need to move on to calculating the cost of operating your application estate on the cloud. In this instance, most of the costs that were considered in your on-premises calculations won't apply here as they are moved to your cloud service provider. But it's important to note here that this does not mean that a cloud solution will automatically provide greater cost savings over on-premises infrastructure.  

When an organisation moves to the cloud, they often think that their bill for cloud services will be cheaper. However, the on-demand nature of the cloud means that your cloud bill can greatly increase in instances such as developers deploying instances quickly. Understanding where the large costs come from in the cloud is crucial when trying to streamline your cloud costs.  

Two of the largest costs when it comes to cloud adoption are migration costs and the fees from your selected cloud service provider. 

Migration Costs 

Conducting data transfer and application migration is one of the main steps when adopting the cloud. You may need to modify or modernise your applications for them to work properly in the cloud or fully reap the benefits of the cloud. Some organisations treat these one-off costs separately, whereas others include them in the total cost of ownership, amortising them over a suitable time period. The decision for this is driven by an organisation’s finance policies regarding project costs. 

Our handy cloud migration strategy blog covers all the different methods you can choose to migrate your applications and which option will be best suited to your organisational needs.  

Each application migration method that we cover in our cloud adoption strategy blog incurs its own costs, and you need to estimate these based on the method you think is best suited to your business. As well as these costs, you will also need to estimate things such as data transfer fees that you might be charged when migrating your applications.  

Monthly Cloud Costs 

Your monthly cloud service provider fees will vary depending on workloads, which cloud services you have used, and how you purchase all of this. The main aim here is to work out your potential cloud bill based on your current workload.

Calculations for this will be considerably different for every organisation. At AppScore, we've created a rapid cloud assessment tool called Kickstart to help you understand the costs of running on the cloud and help you build your business case. You can discover more about the tool on the AppScore cloud assessment tool page.  

Major cloud platforms also provide pricing calculators which will help provide a basic estimate of your monthly cloud bill as well.  

There are two main points that will affect how much your cloud bill costs: 

The type of cloud service used: Commodity services, such as computing power and storage cost considerably less than services that are more specialized, e.g., machine learning.  

Cloud consumption model: There are various different cloud consumption models but pay-per-use where you deploy your resources whenever needed is generally the most popular. It is however also the most expensive consumption model for the cloud, and if you choose this cloud consumption model, a lot of your cloud TCO will likely come from this. Another way that you can consider using cloud services is by using savings plans or a prepaid option. You could also consider using a hybrid cloud computing approach. Overall, you need to consider that your cloud costs may drastically differ depending on which cloud consumption model you choose with your chosen cloud provider.  

Training and Consultation: Your current team may not have the knowledge required to conduct a successful cloud migration or the knowledge of how to operate on your chosen cloud provider. Because of this, you may need to factor in costs for appropriate training for your employees and whether you will need to engage with outside experts in the field.  

Consider how the cloud will benefit your organisation 

After comparing the monetary costs of on-premises vs cloud solutions for cloud TCO, you need to further consider the benefits of migrating to the cloud and build this into your business case. As I stated earlier, you cannot compare running on-premises with the cloud-based purely on cost, so this may be the area which makes or breaks the argument for moving to the cloud.  

Things to bear in mind when it comes to cloud TCO 

After you have conducted your cloud TCO analysis, you should have specific cost estimates, along with a list of benefits for each which will ultimately help with your decision-making. You need to make sure that you consider these factors when looking at your results:  

  • Remember that operating on the cloud is not always a cheaper option than running an on-prem model 
  • Cloud adoption tends to be more about long-term ROI and bettering your business outcomes than cost savings or a lower total cost of ownership.  
  • You need to compare the business value of on-premises and on-cloud as well as the costs of both  
  • When conducting your TCO analysis, make sure you identify areas where you can be more efficient or cut costs  

As you can see from our cloud total cost of ownership guide, you have several factors to consider before you decide whether it's more beneficial to stay on-premises or migrate to the cloud.  

If you think you might benefit from some expert advice on cloud costs, our AppScore Kickstart cloud assessment tool can help you and save you considerable time. You can also contact one of our cloud migration and adoption experts who will be happy to help you with any aspect of your cloud adoption journey.