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On-Premise Data Centers or Cloud? Understanding Your Hidden IT Costs

Tco Migration Header Header Header V Blog Nov 2019

By Meghan Stiling, Jonathan Dexter

Does shifting your IT strategy away from operating your own data centers to the cloud reduce costs? Talk to a cloud service provider, and you'll hear an emphatic "yes." However, if you listen to IT leaders who have championed cloud migrations, you'll hear a more nuanced view, and stories about miscalculations that drove up expenses along the way. The truth is that details matter greatly when it comes to evaluating your options.

Companies report that the answers to the data center vs. cloud dilemma are often "skewed by the vested interests of whoever is coming up with the answers," says Gartner. Cloud firms naturally make their offerings appear more cost-effective while hardware purveyors take the opposite view. Additionally, internal politics can drive many decisions that envelop the issue, which results in solutions that aren't always the most cost-effective and efficient.

How to Determine Total Cost of Ownership

Ultimately, choosing the approach that's best for your company comes down to determining your total cost of ownership (TCO). Just keep in mind that on-premise systems and support models often obscure their actual costs. IT leaders must do more than compare on-premise hardware leases and software license costs against cloud costs. To accurately capture TCO, you should also consider:

Innovation, not maintenance: On-premise operations often require resources to focus on the routine tasks of operating a data center rather than more value-added strategic tasks. The opportunity cost of staffing a data center means you have fewer professionals creating technology solutions that generate value and profits for the company.

For instance, to operate a data center with Windows machines, a system administrator is needed to update servers whenever Microsoft releases server patches, which can occur frequently. According to a Grant Thornton survey, federal CIOs spend 73 percent of their IT budgets on maintenance, with the remainder going towards projects that focus on innovation. Cloud deployments allow companies to flip this ratio, resulting in 70 percent of the company's IT resources directed at projects and products that add differentiated business value, such as implementing new technologies or improving data analysis.

Hardware depreciation and maintenance: Replacing servers every three to five years can lead to a treadmill of capital expenditures. Additionally, you often have to buy two of everything to maintain redundancy in the event of a failure. In the cloud, hardware maintenance is owned by the vendor, resulting in more consistent and predictable costs to you.

For example, many cloud services include resiliency and high availability by default. This lets architects focus on the changing needs of the business, not on hardware procurement and long start-up cycles. What’s more, these redundancies often include features not generally accessible to midsize businesses such as replicating data across geographies and pre-built regulatory compliant options.

Organizational agility: Inflexible hardware procurement operations cannot keep up with how quickly the business must move to react to competitive threats, changing regulatory conditions and launching new initiatives. Moving to the cloud gives you the flexibility to only pay for the resources you need when you need them.

For example, companies often develop custom systems to carry out niche functions such as tracking, managing, and contacting customers. At some point, a hardware and software solution could give way to a cloud-based SaaS solution, which obviates the need for company-managed machines and storage.

There Are No Off-the-Shelf Answers

For Nerdery clients, the question of whether it's more cost-effective for a company to stay with its on-premise data center or migrate everything to the cloud isn't answered without the company first knowing the total cost of ownership of its existing infrastructure. Yes, it’s true that initially, cloud services can be more expensive than operating a data center. But as companies learn to operate more efficiently, the cloud becomes more cost-effective with time. (See figure 1 below)

Example TCO of Migration to Cloud IaaS Over Three Years
Figure 1. Over three years, a typical cloud migration reflects an initial surge in cloud costs, but a steady decline as companies learn to optimize the platform. © 2018 Gartner, Inc.

Research by IDC that quantified the business value of Amazon Web Services (AWS) determined the study's participants lowered their overall TCO by 64 percent. At the same time, no migration solves everything. Yes, moving to the cloud gives us new tools to manage our workload, but it doesn't instantly change the size or shape of the workload.

To achieve maximum cost savings in the cloud, workloads should be modernized into twelve-factor, cloud-native applications. These tools and practices could include a combination of Function-as-a-Service, queues, auto-scaling, elastic storage and more.

Popping the Cloud Migration Bubble

We call the temporary period of higher expenses as companies transition to a cloud environment the "cloud migration bubble." Because you're supporting both environments at once, costs temporarily increase. Moreover, maximum savings can't be achieved unless you transform your IT and operational processes while you migrate everything to the cloud. Migrating without transformation merely shifts problems.

The work that goes into transforming your processes, as well as an in-depth analysis of your needs and costs takes at least two to three years or more before you achieve an ideal efficiency level. Additionally, to maximize cost savings after the migration, you’ll need to employ cloud-native application designs such as event-based architectures.

To ease the pain of the migration bubble, some cloud providers are now experimenting with directly purchasing the hardware in your data center and leasing it back to you, returning capital for you to invest in accelerating your cloud migration. Over time the cloud provider also absorbs the maintenance contracts, ensuring your legacy vendors don’t try to tax you into yet another hardware refresh cycle when you’re midway through a transformative migration to the cloud.

Is the Cloud Right for Your Business?

Most organizations that spend time analyzing their needs and doing the math ultimately choose to migrate to the cloud. The business benefits of the cloud are too overwhelming to ignore: agility, high availability, scalability, security and more. Entering this journey with a planful migration strategy — including rebuilding, refactoring, and rehosting specific applications — is much better than a big-bang lift and shift approach.

If you’re ready to learn more about how Nerdery’s Cloud Services can help you create a sustainable competitive advantage while driving long-term cost savings and simplifying your IT infrastructure, let’s talk.

Published on 11.08.19