If you’ve shifted your business operations to the cloud, you’ve probably wondered what it’s really costing your company.
Cloud TCO, or Cloud Total Cost of Ownership, helps you answer that question and start gaining control of your cloud spend.
Without a clear understanding of cloud TCO, you risk underestimating costs, leading to budget overruns and strategic setbacks. Hidden fees, fluctuating usage costs, and unexpected hikes can quickly turn a promising cloud strategy into a financial burden.
When you understand the true costs associated with cloud adoption, you can make more informed decisions and ensure that your cloud strategy is both cost-effective and sustainable.
Read on as we explain cloud TCO, its benefits, how to calculate it, and the factors you need to consider.
What Is Total Cost of Ownership (TCO) in Cloud Computing?
Total cost of ownership in cloud computing represents the complete expense of adopting and operating cloud services. It includes all costs associated with your cloud usage over its entire lifecycle, making it a critical factor in budget planning. Key components of cloud TCO include:
- Infrastructure costs: Virtual machines, storage, and network resources
- Support costs: Ongoing maintenance, updates, and customer support
- Software licensing: Fees for software services, such as databases or management tools
- Data storage: Cost for storing and retrieving data in the cloud
- Network bandwidth: Charges for data transfer between cloud and local sites
- Backup & Disaster Recovery: Data backup fees and disaster recovery expenses
- Personnel expenses: Salaries for IT staff managing your cloud system
Performing a TCO analysis allows organizations to weigh the costs of cloud adoption against potential savings, helping you determine whether moving to the cloud is financially beneficial.
What Are the Benefits of Calculating Cloud TCO?
Determining your true cloud TCO offers a whole lot of benefits that ultimately lead to a stronger, more cost-efficient cloud strategy, including:
Comprehensive cost visibility and efficiency
Calculating TCO provides a clear and detailed view of all cloud-related expenses, both direct and indirect. It breaks down costs such as infrastructure, support, software licensing, and personnel, giving you a complete financial picture.
This comprehensive picture allows you to allocate costs more accurately across departments, which helps you improve budgeting and financial reporting.
TCO analysis also helps identify inefficiencies and underutilized resources that can be optimized or eliminated. With a thorough understanding of where your money is going, you can streamline operations, reduce wasteful spending, and ensure that your cloud usage aligns with your strategic goals.
Informed decision-making
By calculating TCO, you get a complete picture of the costs involved in cloud adoption and IT cost optimization. With this data, you can make informed choices about which cloud services to invest in. Knowing the total costs, including initial and ongoing expenses, helps you manage your resources better and ensure more efficient planning.
Machine learning and automation also play a role in this process. They provide insights that help identify trends and potential savings, so your decisions are more data-driven and less risky.
Optimized cloud spending
Understanding TCO also helps you optimize your cloud spending. By comparing costs and adjusting your strategy, you can identify areas for cost savings. This might involve negotiating better contracts or choosing more cost-effective services that can scale to fit your business needs.
Insights from TCO calculations also help you spot inefficiencies and eliminate them, ensuring you only pay for what you truly need.
Improved budgeting and forecasting
Cloud costs are usage-based, making them more variable but scalable, unlike the fixed costs of on-premise systems, which are easier to budget but harder to scale. Understanding your cloud spending allows for accurate budgeting and effective forecasting, helping you avoid unexpected costs and ensure that resources are aligned with your business goals.
While enhanced budgeting keeps spending aligned with business goals, effective forecasting ensures you have the right resources in place to achieve these goals, leading to greater overall efficiency and productivity.
Clearer ROI analysis
Calculating TCO also gives you a clearer view of your return on investment (ROI). By understanding all associated costs, you can measure the value of your cloud investments against expenditure, ensuring you get the most from your cloud services.
Agility and innovation are also part of this equation. A comprehensive ROI analysis using TCO calculations reveals if your cloud strategies are paying off, so you can adjust and optimize for the best results.
Better resource allocation
Finally, calculating TCO helps you find ways to save money. By looking at the costs and benefits of different cloud services, you can focus on investments that provide the best value.
TCO analysis also uncovers hidden savings, so you can negotiate better contracts with vendors or optimize your cloud usage. Reallocating resources that aren’t being fully utilized means you can concentrate on more important areas, boosting overall productivity and financial health.
Understanding TCO makes your business more agile too. When you target resources strategically, you can quickly adapt to market changes and seize new opportunities.
How to Calculate Cloud TCO?
To calculate cloud total cost of ownership, you need to assess your current infrastructure costs, estimate the costs of a cloud solution, and consider intangible benefits like flexibility and disaster recovery.
1. Calculate existing infrastructure costs
To calculate your current IT infrastructure costs, start by assessing both direct and indirect expenses associated with your on-premises setup. This includes the costs of hardware like servers and storage, as well as the expenses related to operating your data center, such as power, cooling, and space requirements.
You’ll also need to account for software licenses, including any renewal fees for operating systems and applications. Next, factor in the costs of IT personnel who manage your systems, along with any outsourced support services. Additionally, consider the expenses tied to disaster recovery setups, ongoing maintenance, system upgrades, and security measures.
Finally, be mindful of hidden costs, such as downtime, which can impact productivity and increase overall operational costs. This comprehensive evaluation will give you a solid baseline to compare against potential cloud costs.
2. Estimate cloud solution costs
Your next step is to estimate the expenses of transitioning to and operating in the cloud. Begin by using cloud provider calculators, such as those from AWS, GCP, and Microsoft Azure to forecast costs for cloud resources like compute, storage, and networking.
You’ll also need to factor in migration costs, which include application modifications and data transfer expenses. The method of migration you choose – whether rehosting, refactoring, or rebuilding applications – will significantly impact these costs. Additionally, consider the prices for cloud resources, such as compute, storage, and networking, and pay attention to indirect costs, like the need for new development tools or staff training. You’ll want to also estimate expenses for cloud infrastructure management and support.
3. Consider intangible benefits
Next, evaluate the non-monetary advantages of cloud migration. Scalability and flexibility in cloud environments can lead to better use of resources, often improving development times and integration. Cloud solutions also offer superior disaster recovery and business continuity, which can justify migration through enhanced security and uptime.
Additionally, cloud features like automatic updates and managed services can reduce long-term operational headaches, making your IT operations more efficient. It’s also important to consider where your business priorities lie. Do you really want to be managing datacenter infrastructure, or could your business benefit more from investing in higher-value areas? These intangible benefits often make cloud migration a strategic move beyond just cost considerations.
Key Factors in Calculating Cloud TCO
When calculating the total cost of ownership for cloud services, you should look at various factors like business size and type, management and training expenses, and cloud risk management. Each of these factors significantly affects your overall costs:
Size and type of business
The right cloud services should align well with your business operations to deliver optimal value. Small businesses may prioritize cost savings and scalability, while larger enterprises might focus on integration and compliance.
Small businesses often benefit from the pay-as-you-go model to keep initial costs low. However, large enterprises might need custom solutions that can handle complex applications, large databases, and rigorous security requirements.
Type of operations matters, too. A startup relying heavily on web-based services will have different needs than a manufacturing business that requires robust data security and compliance.
Cost of management and training
Cloud management tools, licensing fees, and managed services fees can add up quickly. Additionally, your team may require significant training and support to adapt to the new cloud platform.
Although these costs can be high, investing in proper training ensures your team can optimize cloud resources efficiently, reducing waste and ultimately lowering long-term operational costs. By equipping your team with the necessary skills and FinOps tools, you pave the way for more effective cloud management and better returns on your cloud investment.
Cloud risk management
You also need to consider costs related to security measures, compliance, and potential downtime. Security measures could include data encryption, firewalls, and ongoing monitoring, while compliance needs vary depending on your industry and whether you’re subject to regulations like SOC 2 and HIPAA.
Finally, plan for downtime. While major cloud service providers offer robust uptime guarantees, no system is flawless. So factor in the lost opportunity costs of downtime, including potential lost revenue and decreased productivity. A great way to mitigate some of these risks is to select a reliable cloud provider with a strong track record.
Lower Your Cloud TCO With ProsperOps
Calculating your cloud TCO is the first step toward developing a strong, cost-effective cloud strategy that delivers a positive ROI. But with so many different factors affecting cloud costs, it can be difficult to gain clear insight and uncover areas for optimization — and that’s where ProsperOps comes in.
The ProsperOps platform works in the background 24/7 to automate your cloud cost management and lower your TCO through autonomous discount instrument adjustments. This all happens silently, without disrupting your existing infrastructure or requiring time, oversight, or effort for your already busy engineering and accounting teams.
We ensure optimal savings and minimize your commitment risks with zero effort on your part. With ProsperOps, clients can maximize their Effective Savings Rate (ESR), putting them in the top 98th percentile of FinOps teams.
Ready to see how ProsperOps can lower your cloud costs? Request a demo today and start effortlessly optimizing your cloud expenses.
