The usage of cloud computing has also a beneficial effect on cost. A good key performance indicator for determining the true value and cost of IT solutions is TCO (Total cost of ownership).

What is TCO?

A widely used definition of TCO in AWS community is:

TCO is the initial purchase price of an asset plus its operating costs.

It’s important that an organization considers not only the purchase cost, but also the corresponding long-term cost of an IT solution. Lower TCO means higher value over time.

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Why is TCO so good?

Calculating the TCO of products and services has important advantages:

  • TCO is an understandable KPI to both business and IT
  • TCO is well suited to compare different IT-solutions over a set period of time

Therefore, the TCO analysis is a determining part of cloud computing consulting.

How Can Customers Lower TCO with Cloud Computing?

  • With cloud computing, customers do not need to invest large amounts of money in IT infrastructure. Instead, they benefit from lower variable cost.
  • Cloud providers offer usually several pricing models for static and dynamic workloads. So customers only pay for the resources, they actually use.
  • Cloud providers share internal cost savings(economies of scale) with their customers. Continuous price reductions for cloud services are the result.
  • The arising savings are getting even higher, the more cloud computing you use e.g. volume discounts.

How to Calculate TCO?

On Premise

To calculate the TCO for an on premise IT solution you need to regard all cost-effective components. The most common TCO components are:

  • Servers and Network
  • Operating System and Virtualization Software
  • Floor Space
  • Power and Cooling
  • Data Center Personnel
  • Redundancy (Durability and Availability)
  • Resource Management and Software Automation
  • Software-Defined Networking

Some of the mentioned components like floor space seem to bear no direct relation to an IT solution. However, they are necessary. The key is to include these resources partially. If you don’t distribute the comprehensive IT cost to the individual IT solutions, the calculated TCO will be definitely imprecise.

On Demand

Calculating the TCO for an on demand solution is simple and transparent. Because the cloud provider takes care of all mentioned TCO components, you just have to add the cost for each required cloud service. And that’s it! Applications like the AWS Simply Monthly Calculator help you to calculate a precise result.

Compare the results

The calculated KPIs are a perfect basis of decision-making. On premise or on demand? TCO will help you to find an answer!

Note:

To get a better understanding of practical TCO calculation, check out the simple TCO Calculator of AWS.

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2 Comments

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  1. Lars Bolanca

    Thanks Michael for your post.

    Unfortunately, even this TCO view is not precise and sufficient enough.

    TCO (Total Cost of Operations) includes purchase price, build up, provisioning of hardware, provisioning of software, onboarding of customer, and then the run cost (including offboarding of customer / system / hardware at the end of lifecyle). It also includudes componets such as HW related services, monitoring, maintenance etc.

    It is intentionally a level more detailed because often cost blocks are not considered.

    All best, Lars

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    1. Michael Herzog Post author

      Hi Lars,

      it’s right, there are different levels of detail for calculating TCO. I discussed one possible approach, which is very common in AWS consulting/community. It is well suited for comparing on demand, co-location and on premise solutions.

      But i think it’s no problem to add further TCO components if they are important for an IT solution.

      Besides, some of your mentioned components are listed in the blog post (e.g. Resource Management includes monitoring, maintenance and other resource-related services)

      Regards

      Michael

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