Hybrid Cloud – Financial Considerations

How will I save money with a Hybrid Cloud Model?

There is a lot of hype around hybrid cloud and the IT /business community is divided on the cost benefit. Some organisations claim to be significantly saving on the cost of running and operating their IT and business service delivery, other organisations… not so much and there are many reports in trade publications of organisations experiencing significant bill shock.

If the solution is architected correctly organisations can receive significant cost savings. However, there the current trend in cost analysis is to attempt an “apples to apples” comparison of on premises infrastructure to moving it all into the cloud. The failure in this model is that it is incorrect. It assumes that an on premises solution and a hybrid cloud solution are the same. But they’re not! Think of it this way, comparing private, on premises compute to a hybrid cloud is like comparing a car to a train. Sure, they are both transport mediums and will both get you places. But you don’t use a car like a train and vice versa. They both have different cost structures and very different use cases.

The fact is that where a hybrid cloud uses public cloud services, the per unit of capacity will be higher than on premises. However, the failure in this comparison that most organisations make is in identifying all of the component costs and cost drivers that are associated with implementing and maintaining on premises infrastructure and service delivery.

These costs are hard to quantify but where the real savings (or costs) can be found is largely with the services required to build and maintain the complex internal IT support infrastructures. And whilst cloud costs are higher, they have all of this built in. Once these factors (cost drivers are included, it is clear to see that the massive scale of cloud allows cloud providers to spread these hidden costs amongst thousands of customers. With on premises infrastructure – you are the only customer and you pay it all yourself.

On the On-Premise side of the equation: Big upfront costs and larger ongoing costs

Traditional IT models demand massive infrastructure investments with complex architectures, large teams of support staff. 

On the Cloud side of the equation: Smaller upfront costs but higher ongoing costs

The “pay for what you consume” models can be daunting and if mis understood, left unchecked, or improperly planned for, can lead to a rapid increase in cost.

Where am I most likely to save money in adopting a Hybrid Cloud model?

Adopting a hybrid cloud model means that your organisation no longer needs to build and maintain a large and complex infrastructure. This enables cost efficiencies by reducing the overheads, sunk costs and reducing the size and complexity of the IT function. It also allows for business agility, where the organisation (and the IT that enables it) can flex or retract in line with organisational demand. So, it may not be Mr. CIO that saves money directly, but the business, as a whole, will.

The additional complexity with hybrid cloud cost model comparisons is that the savings are ongoing and can be much higher in areas that are not traditionally quantified into cost models – Through efficient access to services, increased innovation and business agility.

What are the key benefits to offset the cost of implementing a Hybrid Cloud?

There are three key cost benefits to a hybrid cloud model:

  1. Flexibility – A hybrid cloud model provides flexibility. The pace and ease with which cloud systems can be deployed and modified allow organizations to test new markets and services more easily, deploy resources quicker and where required, reduced or removed altogether, without sunk costs. This flexibility allows for a truly agile approach, to support the organisation at the speed that it changes as well as the ability to quickly absorb new services or acquisitions into the operations of the business or where needed, respond to an increase or reduction in demand.

  2. Scalability – Generally, with a hybrid cloud model you only pay for what you consume. This flexibility allows you to remain a customer, regardless of how much or little you consume and how much you change your consumption over a given period of time. There is less ramifications to incorrectly planning for, effectively locking in payment up-front for all of the capacity that you may require over a 3-year period and in having to accurately calculate and include future capacity for growth or the capacity to handle demand spikes.

    With the hybrid cloud where you only pay for what you use and only when you use it. This shifts your cost base from upfront capital expenditure and where miscalculations become costly exercises down the track, to operating expenditure that is flexible and aligned to the business operations. Typically, the use of cloud equates to the delivery of services to the business based on demand, this demand equates to revenue generation and so in a way your hybrid cloud costs align more closely with revenue generation. The organisation has more money to pay for the increase when it is needed, and it costs less to run your infrastructure when the business is not generating as much revenue.

  3. Standardisation – Standardised, commoditised applications and infrastructure components are far cheaper to build and consume than bespoke, highly customised applications. If 80% of the functionality can still achieve the core business requirements or better still, if two or three componentised systems can each deliver 1/2 or 1/3 of the required functionality respectively, the cost savings on each are significant, yet the business still gets the services they require.

    Standardisation in backend business processes can also enable an organisation to adopt best practice and learn from communities of practice. In a well-planned hybrid cloud model, it is the low value, commodity services that would be sources in the cloud and the differentiating services that would be kept inhouse. Relating back to point 1: Flexibility, the organisation has the flexibility to determine which services should be provided from where. Relating back to point 2: Scalability, the organisation can then scale individual functions as needed, rather than entire systems or not at all.

How do I know what is the most cost-effective model?

Identifying the optimal Cloud Model is the most critical decision that needs to be made in the Hybrid Cloud journey. Specifically, the organisation must carefully evaluate and determine what cloud service and deployment model will provide the most appropriate mix of services, flexibility, scalability and cost benefit over the long term.

These decisions determine the level of functionality, control and privacy necessary for cloud adoption and its sustainability. Getting this correct before widescale deployment of services into the cloud is the largest cost related challenge that an organisation will face. Past this point everything can be refined and fine-tuned to optimise costs and service delivery appropriately.

I’ve deployed workloads into XYZ Cloud but it is not costing me less. WHY?

Studies (Gartner/ Forrester / Forbes) have identified that most organisations who adopt a public cloud strategy purely to reduce IT costs often find that their costs actually increase. In most of these cases the cost increase is attributable to a much larger infrastructure footprint than was required on premises. The assumption here is that the cloud model must be more expensive, however, what is often overlooked is the planning and controls around the usage of cloud infrastructure. The elastic capacity means that the infrastructure is allowed to run at much higher usage levels (more VMs, higher CPU/memory) resulting in higher costs.

This situation is often down to poor planning or control of the cloud environment. Often this is actually an adjustment of the infrastructure or services in response to actual demand that was not able to be catered for with the more rigid on-premises infrastructure. What is not evident and generally not calculated in these cost models is that the business may now be operating more effectively and is now able to generate more revenue. Often it is what has not been included in the original or hybrid cost models that determines or identifies the true cost and true savings with a hybrid cloud model.

Aren’t I just going to spend my savings on Infrastructure into increased security costs?

Third-party data management and storage opens new areas of risk that did not previously exist. Transferring data into the cloud / over the internet, as opposed to storing and processing it internally can significantly increase security risks. New challenges such as identity and access management, authentication and encryption emerge and business need to adopt new security models.

An investment is needed here which does increase the costs, however, these increased security measures should not be undertaken in a hybrid cloud model alone. The days of hiding behind a large firewall and only guarding North/South traffic are over and all organisations should be focussed on technologies such as microsegmentation to broaden their security defences across the East/West traffic plane.

Will Hybrid Cloud mean that I no longer have to fund internal IT Operations?

There is a common misconception that the adoption of cloud-based services will significantly reduce or replace the need for internal IT staff. The reality is that the operational costs change but don’t necessarily disappear. Instead they move from the finding of positions that undertake low value commodity services to more services and business focussed roles that enable and work more on the business that in the business and work to providing technology-led innovation.

Are staff costs the same for hybrid cloud roles?

Internal IT roles that change to focus more on providing greater business aligned services and operate hybrid cloud infrastructure significantly change the cost structure of IT operations. An organisation typically reduces the number of staff required to undertake lower level, commodity like e.g. in support and administration roles but has to introduce (a small number of) new roles. Typically, these roles, being more business and strategy focussed command higher salaries but there are less of them.

There is also the need to run some level of old structures and roles whilst implementing the new operating model structures and resources. Factoring this all in over the lifespan of an IT organisation, staff costs stay the same over the medium term but the business benefits from increased agility and a focus on activities that maximise and create revenue. Over the medium to longer term however these new structures, their increased strategic alignment and agile capabilities added to the increased use of cloud sourcing (thereby continuing to slowly reduce on premises operational costs) definitely reduce the overall internal IT support cost.

So, can I retrain my existing IT staff to undertake these strategic, business aligned roles?

This is a difficult question and the answer really depends on the people, the organisation (and how much step change is required) the existing roles and the degree of upskilling required. Traditional IT roles (system maintenance and administration) are generally not the best placed to undertake these roles. Whilst they may understand a great deal about the way that technical services were architected and operated in the past, the underlying infrastructure has changed. The move to the cloud means that this existing knowledge and expertise is redundant. Similarly, without a deep understanding and appreciation of the business, the services they need and the linkage between the business services/functions to the organisational strategy or how this achieves organisational goals or increases revenue, they would find the role a struggle.

Organisations need to take into consideration the existing skillsets of IT staff and weigh this up against the needs of the business to understand what skills will be needed for migration/transformation and ongoing basis. At the very least there will be a learning curve and productivity dip whilst roles adjust. So, in addition to training, extra support will be required during transition and whilst the new structure is being formalised.

We have very specific requirements; how can we possibly adopt and find value in a Hybrid Cloud solution?

Cloud services are highly standardised and so will not provide the same level of benefit for all organisations. To receive true value from hybrid cloud services, organisations often must adapt existing business and operational models to conform to the process requirements of the cloud services. Whilst most organisations find this concept challenging, there are benefits: It forces organisations to standardise functions and process. Often the CSP has a well-defined model for organisations to adopt. However, depending on the organisations maturity, willingness to change and complexity of existing systems and processes, such standardisation may not provide the required functionality and the organisation may be worse off in the transformed state. Inversely, customising cloud solutions to conform to the business may provide the required functionality but will come at a cost.

Customisation to a cloud service or trying to build cloud services in the same way that on premises services are delivered is often just as costly as customising an on premises solution. A hybrid approach does allow businesses to take advantage of the cloud in an agile fashion by enabling the migration of certain applications to the cloud, winding down some existing on-premise systems and maintaining others. Decision-makers must look at the enterprise as a whole and determine which areas of the business it makes the most functional and financial sense to deploy as a cloud service, and which business functions can and should be continued to be maintained on-premise. A hybrid cloud solution is exactly that: Hybrid. It is not a replacement for on premises. Some things can and should utilise the cloud, but others can’t or should not. If this mix is done correctly and the solution is truly a hybrid of public/private cloud and on premise, then significant cost savings, flexibility and scalability are achievable.

How do I understand what my cloud costs will be? What model do I chose? What about those calculators every CSP provides?

Cloud Service Providers provide a range of value-added service options and provide the ability to consume and adjust services on demand. Whist this is great for delivering services in line with business demand, the variability of and rapid change to the units charged means that understanding every and all cost driver and accurately forecasting spending becomes incredibly complex.

There are a few rules to go by that will ensure successful identification and management of your hybrid cloud costs:

  1. Sort out cost components that are meaning full to your business – Define your own Cloud Architectural Model and understand what cost drivers are meaningful to your business

  2. Understand workload optimisation (possibilities and requirements before you move to the cloud – or use knowledge gained during some small-scale deployments (DR, or Dev/Test)

  3. Use a cost analysis tool – make sure you pick the right one that contains enough detail to model your business and cost drivers.

  4. Learn and adapt (in cycles) from every move you make in the cloud and adjust your cost model as the business changes.

How can I get definitive cost analysis?

Sadly, there is no one size fits all financial model and your analysis needs to consider:

  1. The organisations business needs and strategy

  2. The specific requirements of the application and its current TCO

    The direct and hidden costs of the CSP and the use of their service e.g. data transfer, network, security and support

I’ve done the numbers and won’t make significant savings, why adopt hybrid cloud?

Full-scale adoption of and migration into the cloud is not a cost eliminator for IT. On the other hand, the adoption of a hybrid cloud model enables you to identify those component services that are cheaper and more beneficial to be run from the cloud. In many cases, hybrid cloud is a cost transfer. The costs may remain the same, but the capabilities, flexibility, elasticity and agility dramatically increase.

Hybrid Cloud based solutions let the organisation focus on what it does best: its differentiators and by lowering the time/cost barriers for business innovation and the time to market of new products and services.  As an example, Hybrid cloud adoption may provide a new financial model enabling a new use case or reduce the time required to deliver a project that generates huge efficiency gains. Done right, hybrid cloud models improve business agility and can improve customer experience to such a degree that revenue increases.

The adoption of hybrid cloud should not always be viewed as a cost saving strategy. For IT, hybrid cloud adoption is an IT program just like any other IT initiative and as such it requires investment and has a program delivery requirement with timeframes. Despite the appeal and ease at which cloud based infrastructure can be procured and utilised, caution is required. As with any IT program, done incorrectly the cost impacts can be large and given that hybrid cloud infrastructure and services have the ability to scale rapidly and has many components that can vary and increase the cost, the potential to dramatically increase operating costs is magnified.

Hybrid cloud is great, but I just can’t seem to prove enough value to get funding

Ignoring the technical and operational components, there are several financial blockages to the deployment of hybrid cloud services and adoption of a hybrid cloud model. Financial limitations span from overall budget, CapEx/OpEx investments, restrictions placed on new spending, and the risk and cost impacts of autoscaling. All of which are key risks that concern most C level executives and the focus on quarterly revenue figures and ROI make it difficult to steer attention to the numbers that matter. In most organisations, financial/ funding model changes (CapEx to OpEx) are lengthy and require significant C-level support. The financial reality may heavily influence the assortment of technologies, your approach and the resultant hybrid cloud strategy.

How do we reshape our financial thinking for the adoption of a Hybrid Cloud solution?

The first step is to avoid the pitfall of engaging in head to head Public vs Private discussions and to not focus purely on the infrastructure layers. The diehard infrastructure gurus in the organisation will happily pick fault and pile complexity into any cloud-based model in the need to compare apples to apples. These are unproductive discussions and often further the divide between infrastructure and operations when what is needed is exactly the opposite. The benefits to the organisation are exactly that, to the entire organisation. Not every part of the organisation will benefit in the same way and not every part of the organisation will reduce cost. Some teams and functions will, but others will require significant initial investment and transformation. Our advice is to:

  • Work within the constraints the existing budget as a starting point.

  • Define and implement a small-scale deployment focussing on a new or isolated functional need.

  • The second step is to use the proof of concept to secure more budget, ensure the results and your logic is sound and ensure that initial discussions are at the at or at least include the C-level.

  • Ensure affected teams fully understand what it means to adopt a hybrid cloud model and undertake cloud migration calculations (particularly for applications and workloads) start with simple cost models and add complexity as the funding discussion progresses.

  • Don’t set out to fully prove or disprove the viability of the cloud. Instead identify and carve off business services or functions.

  • Identify what can, should and shouldn’t be migrated to the cloud and then develop a strategy around that.

Whilst finances won’t be explicitly stated in the strategy, defining scope of a cloud strategy based on financial realities is key. It sets expectations on personnel, whether to target new and existing apps, and limitations on vendor selection. This level setting may re-enter the entire strategy. The good news is that smaller strategies are more targeted with faster outcomes and fewer functional elements (i.e., simpler). Larger budgets let you dream big and instil more ground-breaking change — but expect heartache and complexity on getting there. Large strategies must have a dedicated leader, solely focused on this, or suffer significant delays.

What is an appropriate Use Case to demonstrate Hybrid Cloud cost savings?

The promise of cloud-related cost savings is dependent on the specific use case and is largely connected to public not private cloud. Achieving cloud economics within a private cloud environment requires a large, diverse usage base, highly standardised costs, a pervasive chargeback system, and aggressive capacity planning and consolidation practices. Many enterprises find that the application of cloud economics to a private cloud environment is unattainable. Even in a public cloud environment, savings aren’t a guarantee but rather, are specific to fluctuating usage and scalable workloads.

Where the savings for IT?

The savings in operating a hybrid cloud lies in the ability to run workloads on cheaper commoditised infrastructure within the public cloud environment, not tie up financial resources in large scale capital investments and in the ability to consume as needed and turn off and/or reclaim unused resources as needed, in real time. In a public cloud environment, the service provider can easily reallocate unused resources to the next customer while the end user’s bill drops to zero for that resource. In a private cloud environment, you are the service provider and your company is the only customer. Excess capacity must be available to support fluctuations, but unused capacity can’t be reallocated to another paying customer, and your bill never drops to zero. Achieving cloud economics requires the same type of pay-per-use structure (e.g. chargeback) while pushing average sustained utilisation rates to avoid the need for excess capacity. Furthermore, having a diverse user base can balance out the highs and lows of each department/workload. Most research suggests that the larger the organisation is (in terms of business users and teams/functions/corporate divisions), the higher the savings generally are.

A word of advice on calculating cost benefit of Hybrid Cloud

If hybrid cloud adoption is purely a cost-saving story for your organisation, then focus on workload specific public cloud usage rather than a more cloud like model for on premises operating as a private cloud. It is possible to achieve cost savings with an internal private environment, but examples of this are few and far between. Private clouds by their nature require significant transformation in both infrastructure and operations teams to successfully transform into a delivery model that operates with the agility that public cloud does. Sadly, the challenge is uphill as there are little economies of scale represented by a large, divers multi-tenant user base.

Hybrid Cloud ROI is a struggle without considering Productivity Gains

ROI with any cloud solution (hybrid or otherwise) isn’t straightforward and should not be your primary justification for the effort. There are countless published case studies that boast significant private cloud cost savings. The majority of these stories focus on and fold virtualisation and consolidation savings into total savings. This is fine for less mature enterprises, but the greater potential value lies with full automation of resource provisioning and commoditisation to provide greater enterprise agility and in the transfer of and elevation of roles within IT to focus on higher level, business value generation innovation and enablement.

What would be a typical example that demonstrates the difficulties of calculating ROI?

Improved consolidation and capacity optimisation can generate potential savings by leading to a higher sustained utilisation rate and cost avoidance from purchasing additional hardware. However, organisations with advanced virtualisation and consolidation efforts might find the reported additional savings limited, especially given the over $500,000 in yearly licensing cost (assuming a 1,000 virtual machine [VM] environment) of using a software-only solution on top of your existing resources. With an additional $500-per-VM cost, it can be a long shot to achieve ROI with hard cost savings alone. In reality, it is the soft cost savings associated with automation that will deliver the most significant savings and added value.

A key element of any hybrid cloud strategy should be the inclusion of Infrastructure and Operations team efficiency and in minimising software costs. This can be the difference between achieving ROI or not. Hybrid cloud not only increases IT infrastructure efficiency, it substantially improves Infrastructure and Operations staff efficiency. Outsourcing some low commodity functions whilst reducing provisioning time from two weeks to 15 minutes using an automated self-service private cloud portal means less manual task effort, and less waiting around for developers, thereby speeding time to productivity for business users. Ultimately, this translates to more productive hours for employees and tighter alignment to revenue generation. Diverse (non-typical/non-infrastructure based) metrics are a great way to track a more balanced view of ROI.

Looking at on-prem and Hybrid Cloud from a CapEx vs OpEx standpoint?

Outside of their tax and payment treatments, there are several financial advantages and disadvantages to procuring major IT capabilities on premises or in the cloud as either CapEx or OpEx items. Let’s look at infrastructure procurement as an example, and how it differs when procuring it as either a capital expense as part of an on premises (implementation/upgrade) or as an operating expense under a Hybrid cloud model. The following breaks it down into common items you would need to consider for each scenario.

Expenditure Approval

CapEx and OpEx items go into different budgets, with different approval processes. Capital items generally must be approved through several layers of management (including executive management), which will hold up purchasing until approval is received. Procuring Infrastructure as a Service as an OpEx item is generally an easier process, if the item is covered through and budgeted for in the operating expense budget.

Up-front investment

For a capital purchase, all money must be paid up front. Purchasing Infrastructure capability on lease or from a hosting company as an OpEx item still allows the organisation to pay as you go, on a monthly or quarterly basis. This can free up budget dollars for more bottom line revenue producing projects.

Supporting infrastructure capabilities

Purchasing infrastructure components as a CapEx item may also require you to purchase several other supporting capabilities, including redundant power supplies, UPS systems, generators, air conditioning, insurance, maintenance, and of course, having access to a Data Centre to run it all in. Procuring the same capability as an OpEx item through a hybrid or public cloud provider contract will usually include all the infrastructure items that go along with your hardware, allowing you to pay for the infrastructure along with the hardware, in one regular payment.

Shifting IT Operations capabilities to an outside vendor

When purchasing infrastructure to use on premises, you as the purchaser are responsible for all IT Operations management capabilities, including backups, operating system upgrades, and repairs. In a CapEx environment, you need to provide these capabilities. All IT Operations capabilities remain with you as the buyer. In a hosted OpEx environment, you can include these items in your contract, so that the cloud service provider will handle them as part of your monthly service.

Sizing for now and later

Purchasing a capital item requires a certain amount of forecasting. Infrastructure may be purchased on a four-year lifecycle, with the intent being to replace or upgrade the equipment every four years. That means when you purchase the infrastructure you would need to buy it with all the capabilities you believe you’ll need for a number of years into the future. You either need to overbuy the infrastructure with capabilities you may not use until the fourth year or you’ll have to purchase additional capabilities as you need them. If you have a cyclical business such as retail where you have significantly busier months than others (think Christmas rush), then you must size your machine to have the capability to always run at peak performance, even during the slow times of your year. With OpEx based cloud hosting, you may be able to contract for additional CPU and memory on an as needed basis and run with lower capabilities the rest of the year, possibly reducing your costs.

Control over your hardware 

In a CapEx situation, you own the hardware and have total control over its use, location, and disposition. If you are procuring infrastructure as an operating expense item in the cloud, you are dependent on the hardware, operating system software, and maintenance the cloud provider is providing. You may have problems if your cloud provider has an outage, doesn’t have sufficient capability to meet your needs, is unable to meet your service level agreements, or goes out of business. In OpEx situations (especially with cloud providers), you introduce a third-party into the provisioning of your IT capabilities, which can affect your performance and deliverables.

What are the problems with CapEx in todays business environment?

There are three significant issues that continually get raised with CapEx models in IT.

  1. High cost items require well-forecast budget estimates and long processes for approval, which can slow down the whole purpose of purchasing the equipment.

  2. Age is a significant factor. Once you own the hardware or software, you’re likely stuck with it for a long time, in order to extend its ROI.

  3. Estimating future capacity needs for static hardware or software can be tricky and complicated.

For further information or just to get in touch you can reach us at team@informed.io or 1300 912 918

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