8 Cloud Computing Return on Investment (ROI)

Until recently business viewed Cloud Computing ROI through capacity-utilization lens primarily because it wanted to avoid the cost impact of over-provisioning and under-provisioning. The on-demand service model and ability to pay-as-you-go enables business to provision for the service just when they required it (without worrying about the fixed cost and up-front investment cost). To a large extent, the Capacity vs. Utilization model sufficed for a practical ROI model as it focused on operational efficiency.

As the industry matured, business realized that there could be other drivers to measure the ROI. In addition to operational efficiency, performance efficiency is another critical aspect they cannot overlook. Not all cloud computing service providers provide the same level of Quality of Service (QoS). Hence business has starting pushing service providers to add stringent Service Level Agreements (SLA) to the service agreements/contracts. A common QoS Key Performance Indicator (KPI) used is Availability and Recovery SLA – an indicator of availability performance compared to current service levels.

The next driver of ROI is the security assurance. For business involved in sensitive data management (e.g. financial services, healthcare industry), data security and risk management is critical component of their business. They are willing to pay more for a service if they are assured that their data would be protected and not compromised with.

Depending on the nature of the business and its requirements/expectations from cloud service providers, organizations use a plethora of combinations of KPIs and ROI models to measure the cloud ROI. The key ROI drivers are still a continuation of traditional IT drivers – time, cost, quality, and profitability. Based on the specific need of the business, parameters such as compliance, risk management, sustainability, etc. are added.

The Open Group Cloud Computing Work Group introduced a key approach to measure Cloud computing ROI by giving an overview of Cloud KPIs and metrics. Figure and table below show an overview of its Cloud Computing ROI models and KPIs.

Figure – Cloud Computing ROI Models and KPIs

Table below describes each of these indicators:

Availability versus recovery SLA

Indicator of availability performance compared to current service levels

Workload – predictable costs

Indicator of CAPEX cost on-premise ownership versus Cloud

Workload – variable costs

Indicator of OPEX cost for on-premise ownership versus Cloud; indicator of burst cost

CAPEX versus OPEX costs

Indicator of on-premise physical asset TCO versus Cloud TCO

Workload versus utilization %

Indicator of cost-effective Cloud workload utilization

Workload type allocations

Workload size versus memory/processor distribution; indicator of % IT asset workloads using Cloud

Instance to asset ratio

Indicator of % and cost of rationalization/consolidation of IT assets; degree of complexity reduction

Ecosystem – optionality

Indicator of number of commodity assets, APIs, catalog items, self service

Timeliness

The degree of service responsiveness; An indicator of the type of service choice determination

Throughput

The latency of transactions; The volume per unit of time throughput; An indicator of the workload efficiency

Periodicity

The frequency of demand and supply activity; The amplitude of the demand and supply activity

Temporal

The event frequency to real-time action and outcome result

Experiential

The quality of perceived user experience; The quality of User Interface (UI) design and interaction – ease-of-use

SLA response error rate

Frequency of defective responses

Intelligent automation

The level of automation response (agent)

Revenue efficiencies

Ability to generate margin increase/budget efficiency per margin; Rate of annuity revenue

Market disruption rate

Rate of revenue growth; Rate of new market acquisition

Speed of time reduction

Compression of time reduction by Cloud adoption; Rate of change of TCO reduction by Cloud adoption

Optimizing time to deliver/execution

Increase in provisioning speed; Speed of multi-sourcing

Speed of cost reduction

Compression of cost reduction by Cloud adoption; Rate of change of TCO reduction by Cloud adoption

Optimizing cost of capacity

Aligning cost with usage, CAPEX to OPEX utilization pay-as-you-go savings from Cloud adoption; Elastic scaling cost improvements

Optimizing ownership use

Portfolio TCO, license cost reduction from Cloud adoption; Open Source adoption; SOA re-use adoption

Green costs of Cloud

Green sustainability

Optimizing time to deliver/execution

Increase in provisioning speed; Reduced supply chain costs; Speed of multi-sourcing; flexibility/choice

Optimizing margin

Increase in revenue/profit margin from Cloud adoption