What is Cloud Economics and why is it important?

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Cloud Economics

What is the Total Cost of Ownership (TCO) of having my applications on cloud? What is the cost impact of moving to cloud vs an on-prem infrastructure? How can I optimize the costs incurred on cloud? If you are asking any of the above or similar questions, you are dealing with Cloud Economics.

The Definition

While there is no singular definition, Cloud Economics can be considered the study of financial aspects related to cloud computing. It generally involves an understanding of:

  • Total Cost of Ownership of cloud
  • Benefits of moving to cloud vs staying on-prem, including CAPEX vs OPEX
  • Cost optimization strategies for cloud
  • Return on investment in cloud

Cloud Economics not only deals with direct monetary aspects but other financial aspects like opportunity costs and peculiarities of managing the cloud. 

It has two underlying principles – Economies of scale and global reach

  • Scale – The reason that the cloud providers can provide the services at such discounted prices is that they purchase the computing resources in bulk at low prices. This enables them to offer the services at low costs. At the same time, the consumers avoid substantial CAPEX of investing in their infrastructure.
  • Global Reach – With the elimination of the need to purchase their infrastructure, consumers can access cloud resources from anywhere across the world, thus reducing the labor costs and the time to deploy and maintain complex infrastructure.

Let’s deep dive into some of the key areas of Cloud Economics listed above –

Total Cost of Ownership (TCO) of cloud

As the term suggests, it involves all possible costs related to planning, migrating, adopting, provisioning and maintaining a cloud portfolio. TCO is an important element when projecting and estimating the Return on Investment (ROI) on cloud. TCO is often calculated ex-ante of migration from an on-prem infra to cloud. Calculation of cloud TCO involves:

  • Costs of existing IT infrastructure (if any). This includes the hardware and software costs, maintenance, upgrades, personnel and other hidden costs.
  • Cost of planning, migration and adoption of cloud.
  • Cost of operating the application on cloud. This can be the direct cloud bill charged by the provider.
  • Cost of additional personnel obtained to maintain cloud operations.

 CAPEX to OPEX switch

With the traditional IT infrastructure, the cost predictions are straightforward. The expense is decided upfront as the computing capacity needs to be known beforehand. This is called Capital Expense (CAPEX) as it is the cost spent to buy fixed assets. On the other hand, cloud works on the pay-as-you-go model. Consumers pay only for what they have used. These are termed operational expenses also known as OPEX. 

It is important to be cognizant of the implications of the switch from CAPEX to OPEX. While cost is almost fixed in the case of the former, the cloud bill can vary month-on-month. While this change helps save up on upfront costs, cloud costs can spiral up if the resources are not monitored and controlled.

On-demand and elastic pricing 

When it comes to on-premise IT environments, the teams procure additional infrastructure to address the peaks in computing capacity. While these involve significant costs, the components are seldom used. This however changes drastically when it comes to cloud where the resources can be provisioned on demand. This is complemented by an on-demand pricing model. The switch from fixed, predictable pricing to on-demand pricing makes the costs go elastic. This can mean that the cloud costs do not remain in control if not monitored periodically.

People cost

While the traditional IT infrastructure can require considerable manpower to administer, maintain and upgrade hardware and software, moving to cloud does not eliminate the people costs. It becomes a whole new ball game. Migrating to the cloud means a realignment of certain teams, creating Cloud Centre of Excellence (CCoE) and often hiring people to govern and maintain the cloud. Also, a lot of people involved in Cloud Economics may not necessarily belong to the core finance department. Hence recognizing people costs is one of the key elements of Cloud Economics. 

In continuation of the people involved in cloud, an important persona that often gets added is that of a Cloud Economist. 

Cloud Economist is an expert on the principles, benefits and other related aspects of Cloud Economics. They can help businesses forecast cloud spending, estimate the ROI and help optimize costs. A TCO from the cloud economist can help speed up the decision-making process. 

But why do we need a Cloud Economist or even the economics as a whole?

FinOps – The endgame of Cloud Economics

Let’s not forget that the primary reason for any organization to switch to the cloud is cost savings. Everything ultimately boils down to savings and optimization of cloud spending. This is where FinOps comes into the picture. While Cloud Economics helps in understanding the costs involved with cloud, the concepts of Fin Ops bring in financial control, accountability and optimization strategies to gain maximum business value. To know more about FinOps, and why it is important, please refer to this article.

CloudEnsure’s role in Cloud Economics

As we understood in this article, Cloud Economics is a topic that encompasses the financial aspects related to the cloud. If you want to get detailed insights into cloud spending or are looking for recommendations to reduce cloud costs, CloudEnsure can surely be the one-stop shop for all your queries and uncertainties.

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