When the time comes to get in line to ask the chief financial officer (CFO) for budget money for cloud services, will you be ready to compete with everyone else in the organisation who also has their hand out? Financial managers want to see return on investment, and a written guide now out entitled “Calculating Cloud ROI: From the Customer Perspective” gives you step-by-step advice on how to do the math to argue for cloud-based services, whether public or private.
Published by ISACA, the membership organisation for IT security and audit professionals, the Cloud ROI guide gets right to the point to say it’s calculated using return on investment cost to estimate financial outcome. “This calculation considers both the costs of an investment and its expected gains, and yields an estimate of how favorable the investment will be,” the guide points out.
The formula is expressed as:
ROI = (Gain from Investment – Cost of Investment)
Cost of Investment
In other words, says one of the Cloud ROI’s authors, Marc Vael, head of internal audit at Brussels-based IT company Smals and president of ISACA’s Belgium chapter, it’s expected that anyone using the Cloud ROI calculation should define “gain from investment.” By way of example, if there’s an estimated $900,000 gain in cost savings and new revenue over a specific period of time, minus the cost of the investment, which might be $600,000, divided again by the cost, then the ROI would be said to equal 50%.
This “gain from investment” variable can include things such as “not having the infrastructure or maintenance people” that might otherwise be needed for a traditional enterprise network. It could also include the prospect of “new revenue” because the cloud provider may have a service and application that “will give you access to other markets” and “a broader global reach” than you might not otherwise have, Vael points out. This is one reason why IT professionals should always be carrying on discussions with business unit managers about cloud-based options.
The ISACA Cloud ROI guide also has long list of likely expenditures associated with cloud, such as upfront, recurring and termination cost items that anyone considering cloud service should think about. Not only might there be a question of “technical readiness” to deal with cloud use, there are various fees that might be overlooked, such as change and vendor management. There is also the question of “termination costs” to revert to an on-premises model or switch to another provider.
Some of this detailed financial information will be readily available in cloud-provider contracts, but there will also likely be times you’ll need to pry this out of them, Vael acknowledges. The guide also covers “business challenges” that focus on possible negative aspects of cloud, such as “incompatibility” with corporate IT infrastructure that has to be integrated, or security and compliance issues, or fear of vendor lock-in.
The ISACA Cloud ROI guide is intended to cover service models that include infrastructure as a service, platform as a service and software as a service. It defines several characteristics, as well as deployment models defined as private, community, public and hybrid.
The other key financial concepts applied to cloud are “total cost of ownership” (intended to “uncover the lifetime costs of acquiring, operating and maintaining something”) and “net present value,” defined as a calculation of “the present value of an investment by the discounted sum of cash flow disbursements over a period of time,” plus “internal rate of return.” The ISACA guide gives these formulas, too.
While all this financial calculation may strike some as excessive, the thing to remember is that when the IT department or any business unit goes in front of the enterprise CFO or executive management to ask for money, this is exactly the type of discussion they want to hear, with numbers ready to defend ideas about spending corporate dollars on technology, says Vael. One other idea he offers is to try and find a “neutral party” in the organisation to make sure everyone asking for budget dollars is counting everything in the same fashion, so it’s fair and even playing field.