This is the basic principle of ride-sharing and, more largely, of all rental offers. The calculation is simple: you take the cost of acquiring the hardware and software, their maintenance costs, their amortization and you compare this to rental costs of same over an equivalent period.
For services you use only a few times every month, rental can bear an economical benefit. For instance, calculating the potential return of a sales and marketing campaign may require data crunching for just a couple of days. However, for services you use on a constant basis, like electronic messaging or file storage, comparing cloud offerings to on-premises hosting may not be favorable to the cloud.
One of the many constraints of IT is the hardware and software acquisition. There’s generally fixed costs, somehow independent to the number of users. We therefore obtain a graph like the one below, favorable to cloud technologies.
Figure 1 – Classical costs comparison
There are somehow two flaws in the above reasoning:
- Sometimes, there are no variable costs to an on-premises solution. Sure enough, it’s possible to purchase hardware and software, including maintenance, that will cater for user current base and potential growth for the many years to come. The costs are therefore fixed, independently of the number of users.
- A cloud solution can bear fixed costs. Sure enough, increasing the bandwidth is generally necessary and is seen as a fixed opex, independent of the number of users. Another example is the user of a virtual machine at a fixed cost.
We can therefore have a completely totally different diagram.
Figure 2 Fixed costs solution
It’s also possible to have variable costs that are increasing much faster than anticipated due to the options that were selected. Those costs will go over the fixed costs of the on-premises solution.
Figure 3 Explosives variable costs
In this game of comparison, we tend to balance capex and opex. With cloud, everything becomes opex. No amortization, no cash flow to drain to acquire the new solution. However, hardware vendors now propose rental or leasing offerings that go directly to opex. If cloud seems to have an edge, it all depends on the relationship you have with your software vendors.
The reasoning behind “I pay only for that I use, therefore it’s cheaper” does not always work. You’ll need to delve into details, particularly the software licensing scheme, that can be complex and obfuscate a like-to-like comparison with cloud services.