Cloud total cost of ownership (TCO) is the overall cost of setting up and operating cloud infrastructure. Performing a TCO analysis allows organizations to compare their options, understand the impact of different cloud deployments and how they compare to on-premises options and plan their costs when they migrate to the cloud, writes Gilad David Maayan, CEO, Agile SEO.
What is TCO in cloud computing?
In the context of cloud computing, the total cost of ownership (TCO) is the overall cost of setting up and operating cloud infrastructure.Â
Performing a TCO analysis allows organizations to compare their options and understand the costs of different cloud deployments, so they can plan their costs when they migrate to the cloud. A key element in digital transformation strategiesOpens a new window , cloud TCO also helps companies determine the cost-effectiveness of cloud adoption in comparison to existing on-premises deployments.
TCO is usually associated with assessing the cost of static resources throughout their lifetime. When it comes to cloud computing, the dynamic nature of the cloud environment makes it more challenging to predict future costs.Â
A common mistake that organizations make when attempting to calculate cloud TCO is to compare the running costs of the cloud against their on-premises system. However, these costs are not equivalent, and it is difficult to make an accurate comparison — the cost of on-prem infrastructure is dominated by the initial purchase of hardware and software, while cloud computing costs are based on monthly subscriptions or pay-per-use models.
Accurately calculating TCO in the cloud versus on-premises requires taking into account the indirect and intangible costs associated with each.
Learn More: Why CIOs Shouldn’t Race to Move all Data to the Public Cloud
Calculating Cloud TCO
Your cloud TCO calculation should account for existing infrastructure as well as future costs. The TCO model you create may not completely reflect actual costs over time, so you should maintain a flexible mindset and account for unforeseen factors and potential changes to your needs.
The total cost of ownership of a cloud solution depends on many factors, including:
- The nature of your organization
- The functions supported by the cloud solution
- Performance requirements for cloud workloads
- Training costs
- Cloud risk management
The TCO calculation should cover:
- Real cloud operation costs in light of changing demands
- Costs of migratingOpens a new window existing applicationsÂ
- Potential legal costs for violating regulations like GDPR and HIPAA
- Costs of decommissioning on-premises resources or maintaining redundant facilities
- Potential savings in terms of capital expenditure
- Potential for greater productivity resulting from the cloud’s efficiency and agility
- Costs of hiring or training personnel to manage the cloud solutions
Before you can assess the value of migrating to the cloud, you need to consider the TCO of your existing on-premises systems as well. Some expenses involved in operating on-premises infrastructure will be eliminated in a cloud deployment. Examples of costs associated with on-premises operations include:
- License fees — for databases, OSs and applications
- Physical resources — such as real estate, data center and equipment
- Upgrades and replacement of equipment — such as servers and storage equipment, typically required every 3-5 years
- Utility costs — electricity, cooling, etc.
- Resource inefficiencies — in an on-premise, it is often necessary to overprovision resources such as servers to provide redundancy and meet higher-than-average demands.
You can break down these costs to compare them to the monthly costs predicted for cloud products. This should provide a reliable comparison of the TCO for on-prem and cloud-based operations.Â
Cloud Cost Optimization Trends
Cost optimization is now an integral part of migrating to the cloud. Cloud providers are developing native optimization options to help you choose the most cost-effective infrastructure for your needs. There is a special need for cost optimization if you are migrating legacy applications to a public cloud in an infrastructure as a service (IaaS) deployment due to the complexity of the environment and the large number of resources to manage.Â
There is a growing market for cost optimization tools provided by third parties. These third-party tools are especially important for multi-cloud environments as they offer independence from cloud providers, while their enhanced analytics capabilities can help you save without undermining performance.
Learn More: Mission Possible: Operational Flexibility in the Public Cloud
Cost Control and Cloud Financial Management
Once you have migrated to the cloud, it is important to maintain cost control and optimize spending to avoid waste and unexpected costs. To keep your cloud deployment cost-effective, you must have an understanding of the cost and benefit of every service you are running on the cloud, so you can make informed decisions about which services to use at any given moment.Â
Cloud financial management, or FinOps, is an enterprise culture for maintaining visibility over your costs. You can implement governance policies to monitor and control the use of cloud resources, allowing you to stop unnecessary spending early. FinOps also helps you identify more cost-effective alternatives to ensure that you are only paying for fully utilized services.Â
Dynamically Applying Pricing Plans
Cloud service providers offer a wide range of pricing models (for example, see those provided by AWSOpens a new window ) that can help reduce the TCO. However, these pricing models are often complex and require an expert understanding of the specific vendor. Pricing can become more complex when implementing multicloud ecosystems.Â
Automated tools are needed to determine, on a dynamic basis, which pricing models are most appropriate for which workloads, and when to switch pricing models due to changes in the workload.
Managing Orphaned Resources
These compute resources like storage instances that were launched and then forgotten. Orphaned resources continue consuming financial resources even when not used.Â
To avoid accumulating unnecessary overhead, you can set up monitoring and auto-scaling processes that keep track of resources and ensure all active resources are allocated according to actual usage.
Managing Over-Provisioned Resources
Cloud environments can accumulate resources that provide too much capacity. To ensure resources are properly utilized, you should keep track of utilization and then consolidate or re-allocate the resources. You should continuously right-size resources to ensure that the instance type and size required for optimal performance remain cost-efficient.
All cloud providers offer advanced auto-scaling capabilities that make it possible to avoid over-provisioning. Many organizations are adopting containerized architectures and orchestrators like Kubernetes to manage the provisioning of large-scale computing workloads. Another direction is to adopt serverless computing models, in which workloads run exactly when they are needed and are then shut down, eliminating over-provisioning altogether.
Learn More: How Cloud Tech Helps “Everyday Life†Companies
Conclusion
In this article, I explained the main components of cloud TCO, how to calculate the total cost of ownership in the cloud and compare it to on-premises costs. Finally, I discussed the following trends that are driving cloud cost optimization forward:
- Cloud financial management (FinOps) is a new culture that promotes collaboration between DevOps and financial teams
- Dynamically applying pricing plans to ensure optimal cost structure for each workload
- Improved managed of orphaned resources can reduce waste and improve utilization
- Advanced auto-scaling strategies to avoid over-provisioned resources
I hope this will be of help as you improve your understanding of cloud TCO and reduce cloud costs for your organization.
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