We recently worked with a client to conduct a Total Cost of Ownership (TCO) and Return on Investment (ROI) analysis of moving their workloads from their two colocation facilities to AWS. The client had very high costs for the colocation facilities, which was the compelling catalyst for migrating to the cloud and consolidating current facilities.
A company in a colocation facility would typically refresh their hardware incrementally, and then depreciate the assets over their expected lifetime — in this case, five to seven years. These large capital outlays are a common category of enterprise expense known as capital expenditures, or CapEx. However, this client did not refresh their hardware incrementally. Instead, they refreshed their entire data center infrastructure all at once, every five to seven years.
A New Financial Outlook in the Cloud
In the new cloud world of pay-per-use, or metered usage in AWS, you pay only for the resources you need, when you need them. Costs move to an operational expenditure model, or OpEx. Since CapEx and OpEx are such different ways of categorizing costs, it is difficult at first glance to compare them in a financial analysis.
To complicate things further, this company had decided to fully depreciate the new infrastructure assets immediately after purchase. The hourly price of AWS services, such as EC2 instances, includes the costs of both hardware and software, so in order to accurately compare the TCO of the cloud to that of their colo facilities, one needs to include the current value of the hardware in those facilities, plus the ongoing software subscription and license costs. Due to their accounting practice of immediately depreciating hardware, this client only thought of IT costs in terms of monthly software licensing fees. So when we first compared these to the proposed future state in the cloud, it painted a fairly grim picture — the cloud was more expensive!
The infrastructure team was given a mandate from the CIO to both exit their colo facilities and save money. They understood their future state costs in the cloud. However, they could not picture future hardware costs for the colos because it wasn’t a possibility they could ever envision happening. So they were not considering the costs they would avoid by moving to the cloud.
In order to do a complete TCO and ROI analysis you must compare the future state costs to existing costs. We forecasted how much the organization would have to spend the following year if they did not move to the cloud. The estimated costs to purchase new hardware in the upcoming year came to $2 million. They rejected this comparison because it could not possibly happen. What they needed to do was to change their perspective on costs, and take the long view. Their being short-sighted with their accounting principles prevented us from getting them an accurate analysis.
When looking at moving to the cloud, you must consider the cost avoidance involved. You will then see that doing nothing is far costlier than migrating.