How Public Cloud is changing Enterprise IT Spendings
The use of public cloud services is significantly changing the cost structure of IT expenditures. Currently, about a quarter of IT expenditures are capital costs. The use of the public cloud reduces this proportion significantly, as infrastructure, servers, etc. are no longer purchased, but rented.
We examine how the cost structure actually changes using the total cost of ownership (TCO) approach. Among other things, the TCO calculators of the public cloud providers Microsoft (https://www.tco.microsoft.com/) and Amazon (https://awstcocalculator.com/)
How do costs change at the level of a single application?
To understand the impact of public cloud on individual applications, we will work with an example.
Our exemplary application is a classically installed CRM system with medium complexity. It is operated on six servers of medium performance class and can only be run on an IaaS basis, i.e. we do not use any PaaS or SaaS services. The system is operated end-to-end.
The following costs are to be considered:
- Hardware: All costs for devices and technical infrastructure such as servers, network equipment, cables.
- Software: In addition to license costs and annual maintenance costs of the software manufacturer, application licenses and general platform licenses (e.g., network licenses) must be considered.
- External services: Costs for externally purchased services.
- Buildings: Costs for maintaining and operating the data center.
- Personnel costs: Personnel costs for the operation and further development of the application.
What costs change with the public cloud?
When we convert our application from On Premises to Cloud operation, the following changes occur in the costs incurred:
Only the use of external cloud computing resources generates new costs in the area of hardware. In return, substantial savings are made in software, external services, buildings and personnel costs.
How should these changes be evaluated?
If one evaluates each of these changes in monetary terms - naturally taking into account an appropriate multi-year observation period, the project/initial costs as well as the running costs incurred, reinvestments, etc. must also be taken into account.
As an example, values from the Microsoft TCO calculator were filled in for our application with its total of six servers. (Attention! Such a consideration should be taken with caution, as the provider's presentation for the public cloud is sometimes more positive than it is when viewed neutrally).
Including the project costs of €50,000, we can now determine the difference between the total costs and the total benefits: Our calculation shows that, at the values entered, the CRM system will pay for itself in the second year, saving the company a total of €38,559 in costs over a three-year period. (This calculation method does not take into account incoming and outgoing payments, cash outflow, interest and balance sheet effects).
Wie verändern sich die Kosten dann erst auf Ebene der kompletten IT-Landschaft?
Now let's think about outsourcing not just a single application, but all applications running in the enterprise to the public cloud:
We assume a distribution of the stack of 50% IaaS 10% PaaS and 40% SaaS.
Our total annual IT budget is 20 million euros. This is distributed across the classic departments of our IT organization: IT Help Desk, Application Management and Maintenance, Server Management and Data Center, Desktop Services, Network Management and Application Development, as well as the cross-divisional departments Finance, Management and Administration.
Accordingly, our budget is divided among the departments and assigned areas of expertise as follows:
Public Cloud ändert die IT-Organisation von Unternehmen grundlegend
The introduction of public cloud services is changing the classic tasks of the IT organization and thus causing a complete reorganization of the IT landscape in German companies. These organizational changes underlie the determination of a new budget:
On the part of the traditional IT organization, this results in savings of 29% or 4.5 million euros.
What are the costs for using the public cloud services?
However, our savings do not yet include the expenses incurred vis-à-vis the public cloud provider. The amount of these expenses is also difficult to estimate without a concrete use case. Various studies assume total savings of between 23% and 50%. However, it is not clear from the studies which cost types the savings relate to.
In order to determine a guideline value for the public cloud costs for our sample calculation, data center costs of 3.8 million euros were entered in the TCO calculators of Microsoft and Amazon respectively.
These calculations involve a high uncertainty factor. Therefore, an uncertainty factor of 50% is added to the maximum value of 1.4 million euros. The public cloud costs are therefore set at 2.1 million euros in the following.
(Savings from the use of PaaS and SaaS are not considered further. These costs must each be subjected to a detailed case-by-case analysis).
On Premises or Public Cloud: Where is it worth operating the IT landscape?
If we now look at all the costs, savings and the underlying budget, it is clear that a switch to public cloud pays off:
For an average German company, such as the one studied here, annual savings of around 2.4 million euros are possible.
Save costs thanks to public cloud - recommendation with restrictions
Of course, our calculation is based on simple assumptions. Specific savings must be considered for each individual case.
In addition, three further items must be added to the costs shown - the expenses for a transition from the company's own data center to the public cloud, the dissolution of the data center, and necessary employee training measures.
Recent surveys by Gartner present the savings in relation to public cloud in a much more differentiated way and point out the risk of an increase in costs.
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