Counting beans in the cloud

by Mark Swanson

There’s no doubt that cloud computing has received a great deal of interest from companies both large and small over the last couple years. Gartner Inc. estimates that cloud services revenue grew 17 percent in 2010 to $68 billion. The promises of ROI, cost savings and lower total cost of ownership are some of the major contributors to this trend.

Despite this fact, there are many companies that still aren’t seeing the cost savings.
The easiest way to think about cloud computing is that your technology infrastructure — the servers and software you purchase, run and maintain — is on the Web. Unlike traditional software, which is deployed onpremise, cloud applications are designed for Web deployment — that is they are multi-tenant and users share processing applications managed by the vendor. From a financial perspective the cloud has three basic attributes: (1) Little or no upfront costs, (2)No hardware or maintenance costs., and (3) Quick implementation process.

After you pick an adequate time horizon, a Net Present Value (NPV) calculation can be quantified pretty easily. But it’s really the intangibles that make or break the calculation. What do you think is an adequate time horizon to evaluate? I suggest analyzing whether to make the switch as a three-year amortization of upfront costs for an on-premise application including servers, software licenses and installation, plus estimated maintenance and support costs, and comparing that to the cost of subscribing to the cloud version of the product for three years. Some might think that three years is too short but according to many studies three to four years makes sense for several reasons. What you have to consider are unplanned events: you get acquired, technology obsolescence, you grow too fast, and the big one, how long apps take to test. Gartner also reports that testing consumes 25 to 50 percent of the average application life cycle. That’s a year right there!

What are the intangibles that sway the calculation? This is where you get into what I call ‘BeanCounteritis.’ Many financial people get wrapped around the axle about the hard cost comparison with premise based systems. The real savings and return lie in the soft costs surrounding cloud based applications, including: (1) Office space, (2) Reduced support costs, (3) Reallocation of resources, (4) Easier and more regular upgrades, (5)Disaster recovery and backup capabilities, (6)and  Credits from SLAs.

Any other symptoms of ‘BeanCounteritis’?  Perhaps the biggest threat of ‘BeanCounteritis’ is not considering risk. Often companies become so gun shy about pulling the trigger on large capital expenses that they let others get a leg up on them. The cloud ultimately is a way you can count your beans and eat them too. The cloud makes it easy to change direction without incurring the capital costs and significantly reduces the cost of failure. That’s the great thing about cloud apps.