ROI Calculation for the Cloud: The Reality?ROI Calculation for the Cloud: The Reality?

The IT staff making the cloud recommendation should also present other compelling reasons besides cost reduction to justify the move to cloud services.

I saw an interesting statement in a recent piece from Information Week, in a special edition with an article, Cloud Calculations":

"The big problem with calculating the ROI of cloud projects is that IT departments aren't even able to do cost-based accounting for the services we already offer on premises. So how can we compare a new way of doing business?"

I think this may be true of many IT applications but is not true for Communications as a Service (CaaS) when compared to a PBX's cost. We do, in fact, have a basis for comparing the cost of a cloud-based PBX to a legacy premises-based PBX.

However, that Information Week statement is more valid when you look beyond just the PBX--unified communications is somewhat more difficult in terms of comparing a premises-based system to a UC cloud service, because most organizations do not have long-term financial experience with a UC premises implementation and operation.

Most IT projects, especially those that will change how work is performed, require the preparation of a Return on Investment (ROI) analysis. UC changes the way an enterprise operates. Justifying the implementation of UC is not the same as reducing the phone bill with a cheaper service.

It is common that executives look for a 12- to 18-month payback for an IT investment. Any longer and the perceived risks rise while the benefits appear less solid. The business case should contain ROI and TCO calculations if it is to be considered worth analyzing and approving. A brief recap:

Return On Investment (ROI)--The ROI defines implementation and operation costs and the time point when UC starts to deliver value that pays for the investment.

Total Cost of Ownership (TCO)--The TCO includes all costs to own implement, operate, and maintain the UC solution over a specific time period, e.g., 3 to 5 years.

What was interesting in the article was the waiting time considered for calculated ROI to be realized. With the rapid changes in product and service releases and enterprise deployment, waiting 3 to 5 years may never prove the calculation because of the changes that will occur during the 3 to 5 to years of operation: the costs and benefits will change.

Information Week also published "Cloud ROI Calculations", which is the report of a survey conducted with IT executives. Since IT now owns the communications function, these survey results can be interpreted for those considering UC cloud services. About 68% of those surveyed expressed the view that costs can be unpredictable when the cloud service is scaled up, due to errors, mismanagement, or attacks such as denial of service (DoS). This appears to indicate that the IT staff managing the cloud agreement should be constantly vigilant to quickly discover the cost changes that are unexpected.

One of the non-surprises is that the survey found that about half of the respondents did not go back and look at the ROI calculated to see if it was accurate. The 2012 respondents were slightly less likely than the 2010 respondents to review the ROI. I have polled attendees at my conference presentations and found the majority does not review the ROI and TCO predictions for their projects. I wonder if the ROI and TCO calculations are really for executive approval and that they have little value later. If you do not go back and analyze them, how do you know if you were correct in your ROI and TCO predictions?

An aspect that was not covered in the survey was the TCO. I think this would have shown that the breakeven point for the TCO of cloud vs. premise solution would have a cross-over point at about 3 to 3-1/2 years, with the premise solution looking better than the cloud solution after that point.

When the move to a cloud service is based primarily on cost reduction, the enterprise should be alert that the financial justification may not be satisfied. The IT staff making the cloud recommendation should also present other compelling reasons besides cost reduction to justify the move to cloud services.