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What is Cloud TCO? (Total Cost of Ownership)

Cloud computing has revolutionized business operations, making it essential for organizations to accurately estimate the cloud Total Cost of Ownership (TCO) of their infrastructure before migration. As companies shift away from the constraints of on-premises computing, they delegate hardware and software management to cloud service providers (CSPs), redirecting resources toward strategic initiatives and innovation. While lower costs are often touted as a primary benefit of the cloud, there are no guarantees.

Despite differences in cost structures between on-premises and cloud computing, both can incur significant expenses. TCO models provide a comprehensive framework for assessing all cost implications of owning and managing assets. While cloud providers typically outline pricing plans at a surface level, a comprehensive evaluation of all resources necessary for deployment and operation is essential for an accurate TCO estimation.

In this article, we explore the definition of TCO, its model, factors influencing it, and the advantages of TCO implementation. Additionally, we delve into the steps for calculating TCO and highlight best practices for cost reduction.

What is cloud TCO?

Cloud TCO is the cumulative expenses associated with adopting, operating, and provisioning cloud services. The complexity of your operations dictates your specific cloud TCO. Initially, estimation focuses on migrating from on-premise to the cloud, then expands to factors like rack rate, compute, data storage, networking, and data transfer costs.

Cloud TCO provides insight into the expenses of hosting, running, integrating, and managing workloads in the cloud.

What is a TCO model?

A cloud TCO model typically comprises two primary cost categories: upfront and ongoing expenses. Upfront costs include the implementation phase of a cloud computing environment, covering planning, assessment, initial fees from Cloud Service Providers (CSPs), data migration, application adaptation, consultant fees, training, and security measures.

Ongoing operational costs include monthly or annual subscription fees charged by CSPs, often based on usage volume and type of services utilized. For instance, data storage rates differ from data transfer or processing fees. Additional charges may apply for upgraded services like advanced analytics or machine learning capabilities. Ongoing training expenses for skill enhancement and maintenance fees, primarily handled by CSPs, contribute to ongoing operational costs.

Factors that affect cloud TCO

Understanding the diverse factors affecting TCO is essential for informed decision-making in cloud adoption. Numerous factors contribute to the overall cost structure, from business characteristics to technical considerations. Here are some key factors:

  • Type of business: Highly regulated industries (finance, healthcare) or those with bursty workloads (media, e-commerce) may require specialized cloud features that impact costs.
  • Training expenses: Upskilling your IT team on cloud technologies adds to the upfront investment but ensures efficient cloud management in the long run.
  • Application complexity: Migrating complex, on-premises applications to the cloud might necessitate code modifications, potentially increasing migration costs.
  • Regulatory compliance: Compliance with industry regulations, particularly around data privacy, may require additional security controls and audits, which can impact your cloud TCO.
  • Infrastructure attributes: The underlying infrastructure of your chosen cloud provider (data center location, security protocols) can influence cloud service costs.
  • Risk management: Implementing robust security measures to protect your cloud environment adds to the initial investment but safeguards your data and minimizes potential security breaches.
  • Operational processes: The business processes migrated to the cloud, such as email and CRM systems, along with supplementary services like cloud automation and disaster recovery provided by your CSP, will impact resource allocation and, consequently, subscription fees for cloud services

Benefits of implementing cloud TCO

While traditional cost accounting typically involves categorizing costs as direct or indirect, fixed or variable, and allocating them to products or departments, it does not consider the entire lifecycle of an asset or the broader implications of its use. The TCO approach differs from traditional cost accounting by emphasizing improved communication between customers and suppliers and offering a holistic view of the IT artifact’s lifecycle. Additionally, TCO facilitates the analysis of individual cost components through a predefined framework, enabling organizations to make informed decisions regarding cost optimization and resource allocation in IT investments. Some of the benefits of transitioning from on-premise TCO to cloud TCO include:

  • Financial transparency: TCO analysis provides a clear understanding of all costs involved in adopting and maintaining cloud solutions, enabling informed budgeting to save your cloud budget.
  • Strategic decision-making: Armed with insights into the long-term financial implications of various cloud options, businesses can make well-informed decisions aligned with their goals and objectives.
  • Cost optimization: Identifying and evaluating cost drivers enables organizations to streamline resource allocation, optimize expenditure, select the right cloud cost management tool, and maximize ROI in their cloud investments.
  • Risk mitigation: By factoring in potential risks and associated costs, TCO analysis facilitates the implementation of effective cloud governance, proactive risk management strategies, minimizing the likelihood and impact of unforeseen incidents.
  • Performance enhancement: TCO assessment enables organizations to identify inefficiencies, eliminate unnecessary expenses, and optimize downtime, ultimately enhancing the performance and agility of their cloud infrastructure.
  • Competitive advantage: Leveraging TCO insights allows businesses to stay ahead of the curve by strategically leveraging cloud resources to drive innovation, improve operational efficiency, and gain a competitive edge in the market.
  • Scalability and flexibility: Understanding the true cost implications of scaling cloud resources empowers organizations to adapt to evolving business needs seamlessly while maintaining cost-efficiency and operational resilience.
  • Enhanced resilience and continuity: TCO assessment enables organizations to invest in disaster recovery and business continuity solutions, minimizing the potential financial losses and operational disruptions resulting from cyberattacks, natural disasters, or system failures.

How to calculate cloud TCO

To calculate the TCO for cloud services, examine various cost elements, including both overt and covert expenditures. Here’s how to determine the total cost of ownership for cloud services:

1. Understand key cost factors

To facilitate an informed comparison of cloud TCO, calculate the total cost of your existing infrastructure. Infrastructure costs typically encompass tangible expenses that are easily quantifiable, though specifics may vary based on your cloud infrastructure.

  • Infrastructure and operational expenses: Compare hardware, networking, and operating expenditures expenses of on-premise solutions with subscription fees for cloud services.
  • Software licensing analysis: Analyze differences in software licensing costs between on-premise solutions and cloud-based subscription models.
  • Scalability and flexibility assessment: Evaluate how scaling resources in the cloud can influence costs in contrast to the fixed capacity of on-premise solutions.
  • Downtime and business impact evaluation: Evaluate the potential financial impact of downtime for both on-premise and cloud solutions.
  • Data transfer and egress costs examination: Account for data transfer costs between cloud regions and any egress charges.
  • Training and support inclusion: Include expenses associated with employee training and ongoing support for managing cloud infrastructure.
  • Security and compliance consideration: Factor in additional costs for ensuring cloud security and cloud compliance.

Direct costs

  • Subscription charges: Base costs of cloud services, usually calculated on a monthly or hourly basis, depending on usage.
  • Compute instances fees: Charges for virtual machine instances based on their size, configuration, and usage.
  • Networking charges: Fees related to data transfer within the cloud environment and to and from the internet.
  • Backup and disaster recovery expenses: Costs associated with backup storage and disaster recovery solutions.

Hidden expenses

  • Data storage charges: Consider potential charges for storing large data volumes by cloud providers.
  • Data retrieval fees: Note additional charges for retrieving data from certain cloud storage services.
  • Network traffic expenses: Be aware of egress costs and network traffic costs associated with interacting with cloud services, especially across different regions.
  • Vendor lock-in implications: Recognize potential customer lock-in cost implications of switching cloud providers in the future.

2. Determine cloud costs

Once you’ve evaluated your existing infrastructure costs, the next step is to calculate the expenses of operating your business infrastructure in the cloud. While transitioning from on-premises to the cloud often implies potential cost savings, achieving these benefits requires detailed planning and well-timed execution of your cloud infrastructure strategy.

Here are some factors to consider when calculating cloud costs:

  • Assess migration costs Migration involves transferring your on-premises data, applications, and workloads to the cloud. Beyond data transfer expenses, it’s essential to consider the costs associated with adapting or modernizing your applications for seamless integration with the cloud environment. Depending on your applications’ current state and your chosen cloud service provider, you may need to make adjustments or even rebuild certain applications to optimize them for cloud deployment, contributing to migration costs.

  • Understand monthly cloud expenditures Your monthly cloud expenses depend on various factors, including your chosen cloud service provider, the nature of workloads, utilized cloud services, and optimization of cloud features. These costs typically include network services, storage services, and compute services. Cloud service providers offer diverse cost-saving mechanisms such as reserved instances, savings plans, and spot instances to reduce expenses.

3. Evaluate on-premise TCO vs. cloud TCO

After computing costs for both on-premise and cloud environments, a comparative analysis becomes feasible. It’s essential to recognize that cloud computing isn’t inherently cheaper than on-premise solutions; the cost-effectiveness depends on various factors. Cloud computing typically entails lower upfront expenses than on-premise solutions, yet steady monthly payments may accumulate higher costs over time based on usage patterns. A thorough examination of cloud TCO facilitates a clearer understanding of the disparities in cost dynamics between the two environments.

Best practices to lower your cloud TCO

Maximizing cost efficiency in cloud operations requires consistent evaluation and management, even after the initial migration savings. Employing these best practices ensures ongoing optimization of your cloud TCO.

  • Rightsizing instances and implementing autoscaling: Tailoring instance sizes to match your resource requirements prevents overprovisioning, reducing waste and costs. Autoscaling dynamically adjusts resources in response to demand fluctuations, ensuring optimal resource utilization.
  • Strategic workload placement: Different instances are designed for specific workload types, such as memory-intensive or compute-heavy tasks. Placing workloads on appropriately optimized instances minimizes TCO by maximizing resource efficiency.
  • Utilizing managed services: Collaborating with managed service providers may incur additional costs, but their expertise in cloud cost optimization often yields significant returns on investment.
  • Identifying and eliminating waste: Regular monitoring of your cloud environment enables the identification and elimination of underutilized or idle resources, streamlining costs and enhancing resource allocation efficiency.
  • Leveraging cloud cost management tools: Major cloud providers offer robust cost management tools like AWS Cost Management tools and Azure Cost Management + Billing. These tools empower organizations to monitor, analyze, and optimize their cloud expenditures effectively. Third-party solutions extend these capabilities, especially beneficial for hybrid cloud environments, providing comprehensive insights into total costs and resource utilization.

Scale in the cloud with DigitalOcean

Understanding cloud TCO empowers businesses to make informed cloud adoption decisions. Beyond the initial selection of a public, private, or hybrid cloud strategy, the choice of cloud provider significantly impacts your TCO journey.

DigitalOcean, with its focus on cost-effectiveness, simplicity, and scalability, is a compelling option for businesses seeking to optimize their cloud TCO, particularly for startups, developers, and SMBs, offering:

Explore DigitalOcean’s cloud solutions to find the best mix of cloud services to meet the unique needs of your business.

Sign up to get started today.

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