What Is Cloud Computing TCO (Total Cost of Ownership)?

The total cost of ownership (TCO) in cloud computing represents the cumulative cost of adopting and using cloud technology over its lifetime. It encompasses all deployment, management, maintenance, and upgrades expenses. This holistic cost calculation approach ensures businesses evaluate the true financial impact of cloud adoption beyond cloud provider bills.

Understanding cloud TCO requires considering direct costs, such as hardware and software, and indirect costs, including downtime and training. Considering cloud costs relative to the TCO of on-premises or other alternative systems is also critical.

This is part of a series of articles about cloud cost optimization.

In this article:

• Why Is Cloud TCO Important?
• What Are the Factors That Affect Cloud TCO?
• Steps for Calculating Cloud TCO
• 5 Ways to Reduce Cloud TCO

Why Is Cloud TCO Important? 

Cloud TCO helps organizations accurately assess the cost-effectiveness of cloud solutions. It allows for comparison of the long-term financial impacts of different cloud strategies, ensuring efficient resource allocation. This consideration helps identify hidden costs that could significantly affect total expenditure. It can also help evaluate whether shifting to the cloud from an on-premises environment is a financially viable option.

A thorough TCO analysis promotes transparency and prepares businesses for future expenses, reducing the likelihood of unexpected costs. It supports strategic planning and helps justify cloud investments to stakeholders by highlighting potential savings and operational efficiencies.

What Are the Factors That Affect Cloud TCO? 

When evaluating the TCO of a cloud setup, it’s important to consider the following factors.

Type of Business

The nature and scale of a business significantly influence cloud TCO. Large enterprises often face higher initial costs due to complex systems and migration processes. However, the scalability of cloud services can eventually lead to cost savings.

 

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For small businesses, the cloud presents an opportunity to access advanced technology without hefty upfront investments, positively affecting TCO. However, other accompanying charges, such as resource consumption fees, can contribute to the overall cost in the long term. A business’s specific needs and operational scale play a critical role in determining cloud expenses.

 

How cloud cost visibility can help Granular cloud visibility helps you understand spending factors in your Kubernetes environment. To gain this insight, use a cloud cost optimization tool that visualizes your infrastructure, tracks costs like cost per customer, and clarifies changes in your setup and finances.

Type of Application

Application complexity and compatibility can also affect the cloud TCO. Legacy systems might require extensive reconfiguration or redevelopment for cloud environments, increasing costs. Conversely, cloud-native applications can significantly reduce TCO through optimized performance and lower maintenance requirements.

Adopting software as a service (SaaS) models or developing custom solutions also impacts TCO. While SaaS can offer cost-effectiveness and ease of use, tailored applications might align better with business goals, affecting long-term returns.

Physical Infrastructure of the Cloud Service

The chosen cloud service provider’s infrastructure directly impacts its TCO. Providers with modern, efficient data centers may offer better pricing and reliability, decreasing overall costs. The geographic location of these data centers also affects data transfer rates and latency, influencing performance and cost.

Infrastructure choices like renewable energy sources can affect operational costs and sustainability goals. Businesses must consider these factors when calculating cloud TCO to ensure a balance between performance, cost, and ethical considerations.

Type of Cloud Resources

There are three main types of cloud deployments, each with a different impact on TCO:

• Infrastructure as a service (IaaS): Allows organizations to rent servers, storage, and networking resources from IaaS providers, who also manage the physical data centers. This eliminates capital investment in physical infrastructure, shifting expenses to an operational cost model. Examples of IaaS services include Amazon EC2, Azure Virtual Machines, and Google Compute Engine.
• Platform as a service (PaaS): A cloud-based framework developers can build upon and use to create customized applications. Unlike IaaS, PaaS includes software frameworks and platform management services. Examples of PaaS include Google App Engine, AWS Elastic Beanstalk, and Microsoft Azure App Services. 
• Software as a Service (SaaS): Delivers software applications over the internet, on a subscription basis. This model allows businesses to use software without installing and maintaining it, reducing IT responsibilities and hardware requirements. Examples include Google Workspace, Salesforce, Dropbox, and Microsoft Office 365.

Additionally, the choice between cloud pricing models, such as on-demand, reserved instances, or spot instances, significantly impacts cost. Reserved instances offer savings for predictable workloads in exchange for a long-term commitment. In contrast, spot instances provide very deep discounts but may be interrupted by the cloud provider at short notice.

Steps for Calculating Cloud TCO 

Here is an overview of calculating the total cost of ownership in the cloud.

1. Calculate Existing Infrastructure Costs

Assessing current infrastructure costs involves quantifying hardware, software, and networking expenses. This requires a detailed inventory of all physical and virtual assets contributing to the current IT setup, including servers, storage devices, and network infrastructure. It’s crucial to include maintenance and energy consumption costs to establish a baseline for comparison with cloud alternatives.

Example:

A mid-sized company might find it has 50 servers with an average cost of $8,000 per server, amounting to $400,000 in hardware expenses. Software licenses for operating systems, databases, and applications add $100,000. Networking equipment and infrastructure might cost another $50,000. This setup’s annual maintenance and energy consumption could be roughly $75,000. Thus, the total existing infrastructure cost comes to $550,000 in capital expenses and $75,000 in annual operating expenses.

2. Calculate the Existing System’s Intangible Costs

Intangible costs for a cloud deployment include loss of productivity during system downtimes, training expenses for staff to adapt to new technologies, and the impact of system performance on customer satisfaction. Although not directly quantifiable, like hardware or software expenses, intangible costs can significantly influence the total cost of ownership (TCO) in cloud computing.

Example:

Consider a company that experiences frequent server downtimes with its current on-premises infrastructure. This results in an average of 5 hours of lost productivity per month. Assuming the average hourly revenue loss during these downtimes is $2,000, the indirect cost of productivity loss is $10,000 monthly. Additionally, if the company invests another $10,000 monthly for its IT staff to manage and troubleshoot the system, the intangible costs are $20,000 per month, adding to the TCO.

3. Calculate Migration Costs

Migration costs include expenses related to moving data and applications to the cloud. This encompasses labor costs for planning and executing the migration and potential downtime during the transition.

Example:

Consider a business that decides to migrate a set of applications to the cloud. It might need to hire a cloud consulting firm for the planning phase, costing around $30,000. The migration process, including labor for IT staff and potential temporary hires, might add another $70,000. If the migration leads to 6 hours of downtime, for $5,000 per hour, the total downtime cost would be $30,000. Therefore, total migration costs could be estimated at $130,000.

4. Calculate Cloud Monthly Charges

Cloud services typically involve ongoing monthly charges based on usage. This includes costs for storage, processing power, data transfer, and additional services. Predicting these charges requires understanding the cloud pricing models and projected usage patterns.

Example:

Consider a cloud provider that charges $0.02 per GB/month for storage, with the company requiring 50 TB, leading to a charge of $1,024 per month. For compute resources, if the company requires 400 vCPUs at a rate of $0.05 per hour, and these vCPUs run for 700 hours a month, the cost would be $14,000. Data transfer costs might add another $1,000 monthly. Thus, the projected monthly cloud charges would total approximately $16,024.

5. Compare Cloud TCO vs. On-Premises TCO

After considering the primary TCO elements described above, follow this process to compare cloud vs. on-premises TCO:

• Calculate upfront costs for both scenarios: Start by summing up the total costs for the cloud and on-premises environments. This includes hardware, software, networking for on-premises, monthly charges, migration costs, and any other relevant expenses for cloud setups.
• Include migration expenses: If moving from an on-premises to a cloud environment, include migration costs in the cloud TCO.
• Calculate operational costs: Calculate ongoing operational expenses for both setups. This includes maintenance, energy consumption, and IT staff salaries for on-premises. For the cloud, consider monthly service charges and management costs..
• Include intangible costs: Factor in intangible costs of on-premise deployments, such as productivity loss during downtimes and the impact of limited performance on customer satisfaction.
• Consider scalability and flexibility: While on-premises environments may require significant upfront investment for expansion, cloud services allow for easier scaling, leading to cost savings in fluctuating demand scenarios.
• Perform a break-even analysis: Determine how the cloud investment would break even with the on-premises setup. This involves calculating when the cumulative cost savings from the cloud equal the initial and ongoing costs of maintaining an on-premises infrastructure.

Related content: Read our guide to cloud observability.

5 Ways to Reduce Cloud TCO 

Equipped with an understanding of the factors contributing to the total cost of ownership, it is possible to take measures to reduce costs in the cloud. Here are some steps involved in managing and reducing the cloud TCO.

1. Monitor Resource Usage

Monitoring resource usage is essential for controlling cloud costs. Tools and services that offer real-time visibility into resource consumption help identify underutilized or unnecessary resources, allowing for adjustments and cost savings.

Regular monitoring facilitates proactive management of cloud resources, ensuring they align with actual needs. This optimization can significantly reduce monthly charges, positively impacting cloud TCO.

2. Choose the Right Pricing Model

Selecting the appropriate pricing model can help minimize the cloud TCO. Cloud providers offer various options, including reserved instances for predictable workloads and spot instances for fault-tolerant workloads, which can offer substantial discounts compared to on-demand pricing.

Understanding and leveraging these pricing models based on usage patterns can significantly reduce costs. Businesses should periodically review and adjust their choices to match changing needs and usage, optimizing costs.

 

The importance of historical usage data Your previous data costs can guide ways to cut down on cloud waste efficiently. Following this, a cloud provider can recommend the most cost-effective pricing models for cloud services customized to the business’s unique requirements.

 

3. Optimize Storage Costs

Efficient storage management reduces costs. Strategies include deleting unnecessary data, compressing files, and leveraging lower-cost storage options for infrequently accessed data.

By optimizing storage, businesses can significantly lower their cloud TCO. Regular audits of storage usage and implementing policies for data lifecycle management are effective ways to manage storage costs efficiently.

4. Leverage Serverless Architectures

A serverless architecture can significantly reduce costs by eliminating the need for continuous server provisioning and management. This model allows businesses to pay only for their computing time, potentially lowering operational expenses.

A serverless architecture simplifies development and operational processes, contributing to lower cloud TCO. It offers scalability and efficiency, particularly for applications with variable demand.

 

How third-party monitoring can help  Automating your cloud’s performance and costs can offer personalized insights delaying performance. Look for a provider to give you a complete rundown on cutting operation costs.

5. Optimize Data Transfer Costs

Data transfer costs can be a significant component of cloud TCO, especially for businesses that rely heavily on moving large volumes of data into and out of the cloud. To manage and reduce these costs, it’s essential to understand the pricing models for data transfer and to leverage optimization techniques. 

For example, using content delivery networks (CDNs) can reduce data transfer costs by caching data closer to end-users, minimizing the amount of data that needs to be transferred from the cloud provider’s central servers. Additionally, consolidating and scheduling data transfers during off-peak hours can take advantage of lower rates if offered by the cloud provider.

Minimize Cloud TCO with Anodot

Anodot can provide automated, real-time analytics to streamline the calculation process. It can help accurately calculate infrastructure costs by identifying hidden or overlooked expenses and comparing cloud TCO vs. on-premises TCO by providing detailed analytics on usage and cost patterns.

Anodot gives you the visibility you need to gain a complete understanding of multicloud and Kubernetes spend, and to control costs across all your cloud accounts:

• Track inventory, cost, usage, and performance data across all resource types
• Build trust with accurate data — normalized and adjusted for discounts, credits, and amortization — that’s refreshed every few hours
• Best-in-class granularity (hourly, daily, weekly, quarterly) and data retention (18 to 24 months, regardless of granularity)

Anodot offers business mapping, a capability that empowers you to:

• Classify and divide cloud costs by business structures 
• Intelligently allocate 100% of their cloud spend using Anodot’s advanced business mapping capabilities
• Accurately map spending data to relevant business dimensions without overlap, assign shared costs equitably, and report cloud spend in a way that suits your organization.

Learn more about Anodot’s cloud cost management platform