ISACA identifies 5 hidden costs of cloud migration
By Asia Cloud Forum editors 08-Aug-2012
Global IT association ISACA last Wednesday released a new white paper on the hidden costs of cloud migration and the tips to calculate cloud return on investment.
The five hidden costs that enterprises may fail to anticipate when moving quickly to cloud-based services, according to the white paper, titled "Calculating cloud ROI: From the customer perspective," are:
- Cost of bringing services back in-house due to regulatory change (e.g., stricter data privacy laws);
- Cost of implementing and operating countermeasures to mitigate risk;
- Unexpected expenses involved in initial migration of systems;
- Loss of internal IT knowledge providing competitive differentiation; and
- Lock-in with specific cloud provider or proprietary service model, which may slow down future adoption of open standards-based services.
"According to the hype, cloud computing makes it easy to offer IT users the same self-service that people love when they turn on their lights or air-conditioning -- it's limitless, on-demand and pay as you go," says Marc Vael, international vice president of ISACA. "But in reality, cloud computing is like every other IT innovation. Security, cost and complexity don't disappear -- they just need to be managed and accounted for."
ROI, short for return on investment, is one of several financial metrics often used to estimate the financial outcome of business investments.
"[O]ne of the most important steps in calculating ROI is ensuring second-order costs are considered so there is a legitimate understanding of the complete cost of cloud and non-cloud options."
-- George Watt, vice president of strategy, CA Technologies
The formula to calculate simple ROI, as stated in ISACA's whitepaper, is expressed as:
ROI = (Gain From Investment - Cost of Investment)/ Cost of Investment
Where a ration greater than 0 (zero), meaning the return is greater than the cost, the investment may be considered beneficial.
An example of positive ROI as a result of cloud migration is CA Technologies, which uses a private cloud to enable resource pooling and on-demand and scheduled resource acquisition, and to support data center consolidation and standardization.
"Early in our deployment we consolidated 44 locations and were able to drive millions in real estate savings and in productivity gains, as well as a 25% reduction in budget," said George Watt, vice president of strategy, CA Technologies, who led the cloud deployment. "Yet, our newfound agility was the unsung hero. From our perspective, one of the most important steps in calculating ROI is ensuring second-order costs are considered so there is a legitimate understanding of the complete cost of cloud and non-cloud options."
12-step cloud evaluation process
ISACA's white paper also details a 12-step process that unravels the complexity of cloud computing options, and complements with a comprehensive list of guidance questions to for self-evaluation. The 12 steps are:
- Define high-level business (functional) requirements;
- Define initial/baseline cloud service model;
- Risk-assess initial/baseline cloud model;
- Estimate costs;
- Consider other cloud models;
- Reevaluate costs/benefits to align to optimal model;
- Estimate as-is costs and benefits;
- Perform (or review if one already exists) a risk assessment of the current service model;
- Estimate costs/benefits;
- Compare as-is and to-be costs and benefits;
- Calculate ROI; and
- Factor in intangibles;
Other financial metrics
ISACA reminds that ROI calculations do not help to predict the likelihood of realizing the return or the risk of investments. In considering whether to adopt cloud services, organizations should use multiple financial metrics such as TCO (total cost of investment), NPV (net present value), IRR (internal rate of return), and payback period.
To help more companies effectively calculate the ROI for their cloud initiatives, ISACA presents these tips in the "Calculating Cloud ROI" white paper:
- Balance the need to be accurate with the need to reach a decision. An overly complex ROI calculation can make it hard to understand why a decision was made or measure its effects. Do as thorough a job as possible, but don't let perfect be the enemy of good.
- Cloud is not right for every organizational need. The type of cloud service selected -- and the decision to use cloud computing services -- depends on the specific enterprise's risk appetite.
- ROI is a good start, but other financial indicators should also be calculated. ROI coupled with total cost of ownership (TCO), net present value (NPV), internal rate of return (IRR), or payback period will provide a more accurate financial picture across the life span of the cloud investment.
- It is far easier and less costly to change a decision when it is still on the drawing board. The time an enterprise spends considering the ROI of various options and selecting the best fit for its needs is time well spent.