The TCO of Cloud
As the year 2020 approaches, an increasing number of board members in Canada are asking ‘what is the value of moving to the cloud’? So, with the irony of a storm delaying a current client inspection of a data center, a valuable window of time to put down some thoughts onto a page is fortuitous. The specific question that most reading this page are looking for answers on is: what is the value of moving specialized workloads like ERP to the cloud?
First, the primary point in comparing cloud versus on-premise software for any decision maker is to emphasize just how valuable it is to convert fixed costs to variable costs; this not only provides benefits to existing businesses, it also capitalizes on and fuels new business creation. In other words, a cloud deployment enables organizations to move from a capital expenditure approach to provide software to an operating expenditure model that requires less capital up-front. The importance of zero distribution and zero transfer costs that the business model of hyperscalers offers should be factored into this boardroom decision. AWS can serve anyone anywhere immediately. All you need is a browser and a credit card to sign up. That means that cloud computing fixed costs are not only shared with all of AWS’s customers, but also that that your organization can scale more rapidly and at a lower cost. Being able to stand up a new digital business or program in days as opposed to months is not only valuable but fundamental in the networked world of today.
Stepping back to look at the big picture reveals that the hyperscaler dominated Infrastructure-as-a-Service (IaaS) market transacted $24.7B in 2017 revenue and $32.4B revenue in 2018. An annual growth rate of 31.3%, is the definition of a fast moving train and that tells us that lots of value is to be had. Just that fact. As the market has grown over the years, my suggestion has been and remains, that anyone who sells or buys cloud software should read every annual shareholder letter from Jeff Bezos. Here is the 2019 letter to shareholders and a great excerpt for understanding the value of cloud:
“We have to tap into our own inner imagination about what’s possible. AWS itself – as a whole – is an example. No one asked for AWS. No one. Turns out the world was in fact ready and hungry for an offering like AWS but didn’t know it. We had a hunch, followed our curiosity, took the necessary financial risks, and began building – reworking, experimenting, and iterating countless times as we proceeded.
Within AWS, that same pattern has recurred many times. For example, we invented DynamoDB, a highly scalable, low latency key-value database now used by thousands of AWS customers. And on the listening-carefully-to-customers side, we heard loudly that companies felt constrained by their commercial database options and had been unhappy with their database providers for decades – these offerings are expensive, proprietary, have high-lock-in and punitive licensing terms. We spent several years building our own database engine, Amazon Aurora, a fully-managed MySQL and PostgreSQL-compatible service with the same or better durability and availability as the commercial engines, but at one-tenth of the cost. We were not surprised when this worked.
But we’re also optimistic about specialized databases for specialized workloads. Over the past 20 to 30 years, companies ran most of their workloads using relational databases. The broad familiarity with relational databases among developers made this technology the go-to even when it wasn’t ideal. Though sub-optimal, the data set sizes were often small enough and the acceptable query latencies long enough that you could make it work. But today, many applications are storing very large amounts of data – terabytes and petabytes. And the requirements for apps have changed. Modern applications are driving the need for low latencies, real-time processing, and the ability to process millions of requests per second.” – Jeff Bezos
Not only does Mr. Bezos spell out why IaaS is of value, he also explains why specialized databases [such as SAP HANA] are of value and needed for business today. ERP software is often considered the most specialized workload that any large organization operates. Numerous SAP customers have shifted their specialized workload from on-premise to the cloud and experienced significant cost savings whilst also accelerating their digital transformations. Let’s take a look at some of the public case studies on the improvements realized in Total Cost of Ownership (TCO):
- Forrester Consulting conducted a Total Economic Impact study of 4 organizations moving their SAP workload to Microsoft Azure and concluded that a payback on their investment was realized in just 9 months; with an average of $7.2 million realized in legacy infrastructure cost savings.
- Daimler AG reduced operational costs by 50 percent and increased agility by spinning up resources on-demand in 30 minutes with SAP S/4HANA and Azure, empowering 400,000 global suppliers
- News Corp moved SAP to AWS to save in excess of $30M annually from a $100M annual budget
- Colgate-Palmolive provisioned a new SAP Hybris e-commerce platform in 1 day on Google Cloud Platform versus an internal effort that would of required 8-10 weeks
- Microsoft moved their SAP S/4 to Azure and are expecting to slash their Microsoft SAP budget by 20%
- The US Navy completed its largest-ever cloud migration for an SAP system that the Navy runs $70 billion of the U.S. economy through 10 months ahead of schedule and under budget
The reduction achieved in Total Cost of Ownership across specialized workloads is often met with pause and embraced with childlike joy after the transformation. Okay that reaction did not really happen, but Amazon Web Services, Google Cloud Platform, and Microsoft Azure have rapidly growing troves of case studies for those that are reaping the rewards of specialized workloads in the cloud. Every organization is unique, but we have enough data points at this time to provide a soundbite to all of our Board level colleagues that in a nutshell, a ten to thirty percent cost reduction should be expected by moving to the cloud.
Great write up Lance. Very relevant. Thanks for sharing.
Interesting insight, one which has been discussed at length but your blog goes further in explaining that.
Although, I appreciate you focused on TCO for Cloud but surely, in order to stack up a good enough business case there must be more than just TCO as a lever to convince the 'boardroom' to choose a more SaaS based deployment model?
I would be interested in your view.
Thank you for stopping in to have a read Adil.
Great question and transition into the next blog topic that I am writing: “Tech Debt” as the hidden force that holds back innovation, specifically inside large established enterprises.
Check back soon for more on how to tackle tech debt when moving to the cloud!