A Ro adm a p to Tot al Cost of Own ersh ip

Building the Cost Basis for the Move to Cloud

A whi t e p ap e r
b y Pen n y C o lle n

The Roadmap t o
Tota l C ost of Owner s h ip

Getting a clear and complete financial picture of your existing IT environment

is a critical first step in your journey to the cloud.

Executive Summary

The Overview

Few enterprise IT professionals question the value

The benefits of creating a mix of traditional IT

of moving to the cloud. However, many skip the

support with a cloud environment are great.

fundamental step of getting an accurate baseline

Whether looking for increased agility, reduced time

of their existing environments usage and costs

to market, improved productivity or accessibility,

before starting to consider various cloud options.

organizations are eager to reap the benefits of

This paper provides a step-by-step process for

using cloud resources to create a more innovative

determining your Total Cost of Ownership (TCO) - a

approach to providing services.

critical tool for evaluating and comparing various

sourcing alternatives and forecasting your IT costs

There are numerous technical options to be

in the cloud.

considered when moving a workload to a

cloud environment. The operational staff or IT
architectural analysts will capture resource usage
and sizing information. IT Finance then must
tackle the challenge of costing both the existing
workload and preparing comparisons to one or
more sourcing alternatives. Even when doing a
pilot project using cloud, breaking out costs for
comparison can be challenging. First, costs for
the existing environment must be compiled. This
environment may include operating costs for a
dedicated server, a shared (stacked) server, or
a virtualized instance. The options from a cloud
perspective will include private, public, hybrid, or
community. The number of public cloud providers
abound. Each provider may have a unique pricing
structure, making estimating more complex.
Capturing relevant cost and usage data is critical
for producing a credible financial comparison.

The best financial comparisons used for your cloud

part of the base budget. With this amount in the

analysis will be based on Total Cost of Ownership

baseline, operations was thought to be covered.

(TCO). Using a consistent method of compiling

Sadly, contract increases and cost of living

costs will facilitate preparing your business case

adjustments were not included so after the second

for every workload analyzed. The TCO model

year, IT was scrambling to cover the on-going

also makes the complex process of determining

costs. TCO wont guarantee that those future year

benefits easier because you have exposed more

increases will be included in the budget process

cost data early in the analysis cycle.

but the TCO process does expose the future year

costs for anyone reviewing the business case.

For IT, TCO includes hardware and

software acquisition, management
and support, communications, enduser expenses and the opportunity
cost of downtime, training and
other productivity losses.
- Gartner

What follows is a step-by-step process to help you

determine costs for your cloud business case.,
along with a job aid to guide your efforts. Click on
the link below to open the TCO workbook.

DOWNLOAD
TCO TOOL

TCO is not Activity Based Costing (ABC). Many

people hear the term TCO and immediately cringe
at the idea of collecting costs from a myriad of
sources and determining complex algorithms to
allocate shared costs. The ABC concept, applied
correctly, involves analysis of work activities,
and the costs associated with each activity. The
pressure to create more and more accuracy in
the ABC model can make tracking and analyzing
costs very time-consuming.
The key principle in TCO is capturing lifecycle
costs. TCO emphasizes considering costs of endto end operations from project inception, design,
implementation, operation to decommissioning.
In the past, business case financials were done
completely but had more emphasis on the
incremental costs needed to bring a project to
production state. The first year of funding was
transferred to the IT operations group and became

STEP ONE: Assess the cost of

your current environment.
When compiling costs for the existing workload,
there are three options to consider: dedicated
server, stacked server (fixed instance), or
virtualized server. The natural starting point is to
compile the costs for the entire server operation.
From that point, the costs can be broken down
to represent the specific configuration where the
target workload is operating.
Current operational costs to be included in
your assessment and hints on where to find the
associated costs are defined in Table 1.

C os t C a te gor y

Wh ere to F in d Co st s

Hardware

Current procurement records, vendor price lists, contracts

Software

Current procurement records, vendor price lists, contracts

Technical Support

Time entry records to determine level of effort are helpful but usually
not detailed enough in the operations area. Estimate number of FTEs
and determine costs using average technical salary (fully loaded.)

Network and Connectivity

Network should include equipment costs (network devices, cables,

racks etc.) These costs may be expressed as a percentage of hardware
cost if actual costs are not available.
Connectivity should consider the costs of LANs, WANs, Remote Access
charges, Leased lines

Power

Vendors publish PUE (Power usage effectiveness) ratings for

equipment. These can be used along with utility costs to calculate
power. Creating a power ratio based on power costs compared to
total hardware or total IT spend can provide representative costs.

Facilities

Multiply square footage by cost per square foot, usually expressed as

an annual number.

General administration costs

Use average general expenses including IT technical training, office

(including physical security, data

supplies, travel, and management overhead. Include any shared costs

security, and disaster recovery

such as physical security, site security, and disaster recovery if not

sites)

included in facilities charges.

Estimate costs as a percent of total direct costs based on the total
operating budget.

Future year costs should include

a factor for inflation/COLA
Table 1: Operational Costs

Corporate Finance will provide this assumption

Figure 1: TCO Components

STEP TWO: Break down costs for the targeted workloads

Total operational costs for the configuration where the targeted workload is running have now been
determined. If the workload operating on a shared (stacked or virtualized) server, apply an appropriate
percentage to isolate costs for the workload. This is most often done by allocating costs based on the
number of cores used for the workload compared to the total cores in the configuration. Storage on SAN/
NAS equipment can be allocated using a similar process.

STEP THREE: Calculate one-time implementation costs

There are a number of activities to consider when moving a workload to the cloud. Be sure to calculate
these one-time implementation costs (see Table 2). In some cases, the move may provide the priority
to clean up areas which have been neglected due to lack of funding or resources. Do not over burden
the cloud move with these types of costs. In addition to the costs for establishing the new environment,
determine costs to decommission the existing environment.

A c tivity

Wh ere to f in d co sts

Design

Consult the project plan for estimated hours

Architecture

Consult the project plan for estimated hours

Data migration, porting

Consult the project plan for LOE. Vendor selection may impact this
estimate

Data cleansing, archiving

Consider changes in process for the business units using or

supporting the new environment

User training

Consider changes in process for the business units using or

supporting the new environment

Technical support training

Technical skills may need to be adapted to include new technical

skills as well as vendor relationship skills

Standardization, upgrading and

Consult the project plan and architecture design

customization of applications
Penalties for early termination

Check hardware and software contract terms.

Expenses to write off assets if

This first action is to redeploy assets to other workloads. However,

not redeployed

in some cases, the equipment may be junked. Check with the

corporate asset management team for any net book value remaining,
along with policies on writing off assets.

Staff costs to wipe hard drives The IT group responsible for asset disposal can provide an estimate
and disks

of time required.

Packing, shipping and junking

The IT group responsible for asset disposal can provide an estimate

of costs.

Table 2: One-time Costs

STEP FOUR: Estimate new

recurring costs

public cloud option is best based on using usage

information captured at the resource level. The
invoice costs can be estimated based on the usage

There are some new type of functions and

information and published CSP rates. The results

costs which will result from a move to the Cloud

can then be directly compared to the cost of the

environment. The best way to estimate these costs

current environment as determined in Step One.

is to run a cloud pilot using data from the existing

environment as the base. The pilot goals should
be carefully defined in advance, with timelines and
measureable success criteria.
If a public cloud is included in the final solution,
keep in mind that the invoice received monthly
will be an operating expense rather than a capital
expense.
Cost impacts from a cloud environment usually
include

Expanded network capacity

Unfortunately, each type of platform has unique

usage units. When comparing platforms, this wide
array of usage units makes direct comparisons
extremely difficult. The best way to deal with this
issue is to reduce the comparisons to the three or
four units which all share. Those units are normally
CPU, Memory, and Storage. Reducing the large
variety of units to a limited number of common
units makes usage and financial analysis more
feasible.
The best way to estimate the cost of moving to
a public cloud is to capture actual usage from
the existing environment. The most common

Vendor invoice (If using public cloud)

Administration of invoices from cloud vendor

Staff to manage vendor and client relationships

resources priced are CPU, Memory, Storage (GB),

and Network. When anticipating a move to a public
cloud, usage collection tools should be installed
on the current hardware to capture actual usage
levels. Once the actual usage is available, the
usage can be used to estimate the cost of a public

STEP FIVE: Estimate public

cloud costs

cloud by combining prices from cloud service

providers with the projected workload usage.

A public cloud is normally billed on a usage basis

Capture actual usage for your current workload

CPU

Memory

(dedicated) instances. The variability and size

Storage

of the targeted workload will determine if this

Network

rather than a dedicated amount. There are some

public cloud providers which do offer reserved

option is preferred. Estimating the costs for the

Apply currently published cloud rates from

vendors

If your organization has not previously determined

Conclusion

rates for individual resources, you can still create

a credible estimate to compare to the estimated

With costs for the current environment and

Public costs. Using the total server costs from the

estimated costs for the new environment,

original TCO calculations, break the costs into the

comparisons can be performed for a variety of

categories of CPU, Memory, Storage, and Network

options. Calculating Total Cost of Ownership does

using a percentage.

not need to become tedious collection overload.

Accurate numbers are an important part of

Total Cost $_________

CPU 35%

environment. Knowing where to find numbers and

Memory 25%

how the cloud pricing structures can be estimated

Storage 20%

Network 20%

The resulting amounts will offer a relative range

of costs which can be compared to the CSP cost
estimate.
A final item to check before ending your collection
of public cloud costs is cancellation terms. Review
the contract terms from the selected cloud
provider. Be fully aware if there are any potential
penalties if you leave the provider on short notice.
These costs would be included in the final year of
your analysis if applicable.

STEP SIX: Estimate the costs to

build a private cloud
Building a private cloud is essentially the same
process as used to provision any new environment
within your data center. Again, if actual usage has
been collected for the targeted workload, sizing
the private cloud will be much easier. Follow the
process for estimating the costs of the current
workload as explained in Step One.

your overall analysis of deployment to a cloud

can make this effort straightforward.

Penny Collen

Penny Collen is the Financial Solutions Architect for Cloud

Cruiser, Inc. Her work in operations and development provides
a foundation for business process analysis across a broad
spectrum of disciplines, including asset management, service
pricing, software capitalization and activity-based cost models
for hybrid IT. Ms. Collen is sought as trusted advisor on IT
financial processes and shares her knowledge through Web
lectures, seminars, workshops, interviews, blogs and articles.
Ms. Collen holds a BS in Business Administration from the
University of Nebraska Omaha; an MBA from Creighton
University. The IT Financial Management Association recently
named her Educator of the Decade.

Clo ud Cr u iser

Founded in 2010 and headquartered in Silicon Valley,

California, Cloud Cruiser offers an innovative IT financial
management solution that was built from the ground up
to support hybrid IT environments, including traditional,
virtualized, public, and private cloud platforms. It maximizes
freedom of choice for enterprises and service providers by
providing dynamic financial intelligence, chargeback, and
billing across heterogeneous IT environments. The companys
key strategic partners include: Microsoft, HP, Cisco, VMware,
Amazon, and Openstack.

www.cloudcruiser.com
info@cloudcruiser.com
+1 844-223-9737 (USA)
+316250-66-463 (Netherlands)