As we continue our FinOps blog series, we focus on building a total cost of ownership plan for cloud transformation.
As we highlighted in the first post of our cloud FinOps series, the first step in successful cloud transformation cost optimization is to baseline your current IT spend through a total cost of ownership (TCO).
A cloud TCO baseline can lead to reliable financial forecasting and is crucial for budget planning as your organization transitions from capital expenditures (CAPEX) to operating expenses (OPEX) spend. When you baseline your TCO at the beginning of your cloud journey, it allows you to establish key performance indicators (KPIs) that will enable you to add business value during the lifetime of your cloud journey. Let’s explore how to use TCO as the foundation of a budgeted cloud migration plan.
Why Do You Need a Cloud TCO?
There are multiple tools and services that can help you develop a cloud TCO, but you must ensure they encompass all data required to get a comprehensive and accurate forecast. Multiple models focus on total impact as it relates to on-premise versus cloud costs. These models are great for a high level, rough order of magnitude (ROM), but responsible organizations should really focus on developing a comprehensive cloud TCO.
An inclusive TCO will allow you to focus on the differentiators that may otherwise fall through the cracks in a typical ROM-style model:
- Physical to digital costs savings
- Operations to innovation cost savings
- Accurate forecasting
- Multi-year migration models
- Migration planning aligned to capital cost avoidance
- Depreciation optimization
- License inventory and savings.
Target planning for platform as a service (PaaS) vs. infrastructure as a service (IaaS) identified KPIs. When high-level planning and forecasting simply isn’t enough to convince your stakeholders to align on a cloud migration plan, building the case for a TCO-informed migration may be the best solution.
How Do You Build a TCO?
When constructing your TCO, there are several processes you must involve – regardless the size, scope or level of support your team is working with. Focus on these six core processes to leave no rock unturned.
- Estimate a five-year on-premise TCO: This model should strictly focus on all hardware, software, licensing, and repairs and maintenance (R&M) to keep your organization running and growing over the next five years.
- Baseline fixed IT costs: Fixed IT costs will not change once you transition to the cloud. These costs mostly focus on licensing but can also include subscriptions, networks, leases and personnel.
- Baseline reduced IT costs: Reduced IT costs diminish during your cloud adoption. Reduced costs typically concentrate on hardware. During cloud adoption, you should build a methodical strategy around end-of-life (EoL) assets, storage arrays, backup appliances, virtual desktop infrastructure (VDI) hardware, disaster recovery (DR) hardware and general migrations off of on-premise hardware.
- Baseline Variable IT costs: Variable IT costs either increase or decrease based on a cloud-first mentality. These costs include professional services, new hires, cloud security, new licensing and physical to digital cost savings.
- Five-year cloud cost model: Finally, you should build a cloud adoption cost model that accounts for annual migration waves, CAPEX to OPEX shifts and cloud service provider (CSP) funding. The cloud model is more than a cost estimate extract of right-sized workloads on a cloud platform. The cloud model includes intricacies around reserved instances (RI’s), license benefits, IaaS vs. PaaS costs, shutdown savings, storage savings, DR savings and holistic cloud cost optimization savings.
How Do You Manage a Cloud TCO?
Building a thorough cloud TCO includes adding guardrail metrics managed through KPIs. Guardrail metrics help organizations quantify the business value of the cloud and maintain strategic alignment. They can also alert you to any potentially negative impacts and allow an opportunity for early recourse.
You may often hear return on investment (ROI) when discussing cloud adoption, but you should only use ROI for specific industries that use cloud services and capabilities to create products, build assets or grow revenue.
If you are a tech startup, software company, or in some form of product development, ROI is an effective performance measure as it leads to revenue growth.
If you are in healthcare, government, energy, or a variety of other industries where your cloud footprint focuses more on operations than innovation, you may want to look at other performance metrics such as return on assets ratio, payback period, break-even point and break-even analysis.
Ultimately, you should remain focused on unit-level economics. If you can baseline unit cost or a non-revenue generating unit, you can ultimately track value during your cloud journey.
If you make TCO the foundation of your cloud migration plan, you’ll be well positioned to experience a smooth, budgeted transition to the cloud. With the appropriate baselines and KPIs in hand, you’ll be able to measure the cost savings as operational processes become more efficient in the cloud.
Next up, we’ll detail how shifting from operations to innovation can increase development speed, production change and user experience (UX), resulting in better responsiveness and overall revenue generation.