Understanding a Move to the Cloud and Its Impact on ROI

Surjit Singh Bawa
Published 05/02/2023
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Cloud ROICloud migration has been a central factor in today’s digital transformation, enabling new levels of access and storage at lower costs than traditional, physical servers. It’s predicted that within the next five years, 95 percent of all workloads will be on the cloud, according to 74 percent of global IT decision-makers. When exploring migration to cloud-based services, businesses have several options to consider. Factors include upfront costs, the logistics of moving operations from the on-premise organization, and ongoing expenses. Perhaps the most significant challenge is determining the return on investment (ROI) of transitioning to a cloud-based model. It is likely most companies will consider cloud services in the future, and understanding ROI and related expenses of migration is an organizational imperative.

Why it makes sense to migrate to the cloud

Planning to move computing functions from on-premise to a cloud-based provider should occur only after fully understanding the benefits by using metrics that will quantify the ROI. It can be challenging to ensure everyone in an organization from the top down—and from the bottom up—fully understands why a move to the cloud is prudent, especially when the on-premise model seems to work. While there may be a generational factor at play, some employees may not fully comprehend the immediate and long-term benefits of cloud migration.

Cloud providers offer the ability to scale up or down depending on the traffic load to a site. Employees can connect from anywhere via the internet, providing additional hiring options. The scalability of services makes it easier to grow a business exponentially or to acquire other companies since cloud capabilities can expand automatically with that growth. Providers offer enhanced security measures (a cost-saving benefit for businesses that don’t have to hire people to write custom programs) and can minimize costly downtime with disaster recovery solutions. With support from artificial intelligence, many on-premise tasks and routine processes can be automated through the cloud, reducing the risks associated with manual errors while simultaneously improving efficiency.

Pay-as-you-go versus enterprise-level cloud solutions

How a company moves ahead with a cloud migration helps determine its initial approach. A pay-as-you-go model can help save on IT costs for businesses not ready to take the full plunge into cloud migration, as it is based on the cloud resources they utilize. Those services are more limited than those offered at the enterprise level, where cloud solutions can include options like load balancing, monitoring for performance and compliance issues, and issuing necessary alerts. Enterprise-level cloud solutions allow for increased customization, often with enhanced scalability and security functions. Connecting to other cloud providers or to on-premise servers when needed is also available more readily at the enterprise level.

Businesses with more unpredictable usage patterns (perhaps due to being a newer player in the market) may find pay-as-you-go models to be more cost-effective, at least initially. For example, this model avoids large upfront hardware investments; in fact, it’s more like plug-and-play. Software as a Service (SaaS), transportation, and telecommunications companies may be ideal candidates for this model that employs many automated turnkey services. Larger businesses or organizations requiring higher levels of security, compliance, and data control, such as in the financial sector, may opt for an enterprise-level cloud service provider right out of the gate when deciding to migrate. Healthcare, government services, and e-commerce retail companies are ideal candidates for enterprise-level cloud migration. These providers offer features like encryption, multi-factor authentication, and access controls to protect sensitive data. Dedicated cloud servers can ensure the bandwidth and storage needed are always available, without concern about the impact from other users hosted in the same cloud.

ROI considerations

There are always drawbacks to making any major move in how a business or organization operates, and its impact on the bottom line. Integrating a company’s services formerly performed in-house with the cloud and the higher costs associated with enterprise-level services are major considerations. The need for more specialized and possibly more costly in-house IT staff to handle the integration with cloud services is another factor. A shift to another cloud provider may be more difficult if it requires an additional round of time-consuming customization to once again “reinvent the wheel.” It can also be difficult to compare cloud pricing when evaluating multiple vendors pre-migration, since the array of services and fee structures may differ. On the other hand, the company’s infrastructure can largely be moved offsite, decreasing a company’s digital footprint. Pay-as-you-go models have drawbacks, including variable costs that may be harder to predict or forecast, more limited customization than desired, and the possibility of overage charges for exceeding usage limits.



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Capital and operating expenses

Capital expenditures (CapEx) are typically used to purchase or upgrade long-term assets, such as hardware and property. Operating expenses (OpEx) represent just about everything else: salaries, utilities, and rent or mortgage, for instance. Pay-as-you-go cloud models avoid the upfront large investment, with the tradeoff being more limited features, and are more closely aligned with OpEx. Cloud service fees, the cost of transferring data to and from the cloud, security, compliance, and management costs, as well as staff training expenses for the new cloud environment, are all associated with OpEx.

Moving to the cloud will still reduce CapEx since the upfront investment is not as large as an on-premise model. Additionally, CapEx can often be spread out over several years via depreciation, while OpEx (as with pay-as-you-go) is restricted to the period where those expenses occurred. These major considerations and identifying which model might work best are important to review when exploring cloud migration.

The challenges associated with measuring cloud migration ROI

The costs associated with cloud migration are different from, for example, trading in one work vehicle for another, or even upgrading on-premise servers. To ascertain the total cost of ownership, it is necessary to compare cloud service fees, data transfer costs, and security/compliance fees. ROI is calculated by subtracting the initial cost of an investment from its final value, dividing this new number by the cost of that investment, and then multiplying it by 100 (ROI = net income / cost of investment x 100). It is typically expressed as a percentage, not a ratio.

While the above formula calculates the monetary ROI, this figure needs to be weighed against the cost savings from the cloud migration and the numerical value associated with the flexibility provided by that migration. Quantifying those benefits in financial terms can be difficult and with cloud service options still developing to meet changing customer needs, it can be challenging to place value on long-term savings.

Cloud ROI: Art and science

In today’s digital landscape, cloud migration may not be an if but a when consideration. To maximize migration success, organizations must first ascertain what level of integration with cloud-based services make sense, both in the short and long term. Understanding the costs and benefits of such a major move and communicating the impact of that initiative throughout the organization can help prevent unnecessary, costly course corrections in the future. With the benefits of cloud migration not always immediately visible, measuring ROI may be a combination of art and science. However, many organizations believe cloud migration is still worth making the move.

About the Author

Surjit Singh Bawa is a solutions architect with more than 17 years of experience in enterprise software. He is an expert in SAP, helping companies improve and automate business processes. He has helped Fortune 500 companies in retail, manufacturing, oil and gas industries to build, implement, migrate, upgrade and integrate enterprise applications. For further information, contact surjit.sb@gmail.com.


Disclaimer: The author is completely responsible for the content of this article. The opinions expressed are their own and do not represent IEEE’s position nor that of the Computer Society nor its leadership.