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

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
Few enterprise IT professionals question the value
of moving to the cloud. However, many skip the
fundamental step of getting an accurate baseline
of their existing environment’s usage and costs
before starting to consider various cloud options.
This paper provides a step-by-step process for
determining your Total Cost of Ownership (TCO) - a
critical tool for evaluating and comparing various
sourcing alternatives and forecasting your IT costs
in the cloud.
The Roadma p t o
Tota l C ost of Owner s h ip
The Overview
The benefits of creating a mix of traditional IT
support with a cloud environment are great.
Whether looking for increased agility, reduced time
to market, improved productivity or accessibility,
organizations are eager to reap the benefits of
using cloud resources to create a more innovative
approach to providing services.
There are numerous technical options to be
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 won’t 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 What follows is a step-by-step process to help you
determine costs for your cloud business case.,
and support, communications, end-
along with a job aid to guide your efforts. Click on
user expenses and the opportunity
the link below to open the TCO workbook.
cost of downtime, training and
other productivity losses.”
- Gartner 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 STEP ONE: Assess the cost of
sources and determining complex algorithms to your current environment.
allocate shared costs. The ABC concept, applied
When compiling costs for the existing workload,
correctly, involves analysis of work activities,
there are three options to consider: dedicated
and the costs associated with each activity. The
server, stacked server (fixed instance), or
pressure to create more and more “accuracy” in
virtualized server. The natural starting point is to
the ABC model can make tracking and analyzing
compile the costs for the entire server operation.
costs very time-consuming.
From that point, the costs can be broken down
to represent the specific configuration where the
The key principle in TCO is capturing lifecycle
target workload is operating.
costs. TCO emphasizes considering costs of end-
to end operations from project inception, design,
Current operational costs to be included in
implementation, operation to decommissioning.
your assessment and hints on where to find the
In the past, business case financials were done
associated costs are defined in Table 1.
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
 C os t C a te gor y
Hardware
Software
Technical Support
Network and Connectivity
Power
Facilities
General administration costs
(including physical security, data
security, and disaster recovery
sites)
Future year costs should include
a factor for inflation/COLA
Table 1: Operational Costs
Wh ere t o F in d Co st s
Current procurement records, vendor price lists, contracts
Current procurement records, vendor price lists, contracts
Time entry records to determine level of effort are helpful but usually
not detailed enough in the operations area. Estimate number of FTE’s
and determine costs using average technical salary (fully loaded.)
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, WAN’s, Remote Access
charges, Leased lines
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.
Multiply square footage by cost per square foot, usually expressed as
an annual number.
Use average general expenses including IT technical training, office
supplies, travel, and management overhead. Include any shared costs
such as physical security, site security, and disaster recovery if not
included in facilities charges.
Estimate costs as a percent of total direct costs based on the total
operating budget.
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.

Pac kin g, sh ipping 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
There are some new type of functions and
costs which will result from a move to the Cloud
environment. The best way to estimate these costs
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
• Vendor invoice (If using public cloud)
• Administration of invoices from cloud vendor
• Staff to manage vendor and client relationships
STEP FIVE: Estimate public
cloud costs
A public cloud is normally billed on a usage basis
rather than a dedicated amount. There are some
public cloud providers which do offer reserved
(dedicated) instances. The variability and size
of the targeted workload will determine if this
option is preferred. Estimating the costs for the
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
information and published CSP rates. The results
can then be directly compared to the cost of the
current environment as determined in Step One.
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
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
cloud by combining prices from cloud service
providers with the projected workload usage.
• Capture actual usage for your current workload
• CPU
• Memory
• Storage
• Network
• Apply currently published cloud rates from
vendors
If your organization has not previously determined
rates for individual resources, you can still create
a credible estimate to compare to the estimated
Public costs. Using the total server costs from the
original TCO calculations, break the costs into the
categories of CPU, Memory, Storage, and Network
using a percentage.
• Total Cost $_________
• CPU 35%
• Memory 25%
• Storage 20%
Conclusion
With costs for the current environment and
estimated costs for the new environment,
comparisons can be performed for a variety of
options. Calculating Total Cost of Ownership does
not need to become “tedious collection overload.”
Accurate numbers are an important part of
your overall analysis of deployment to a cloud
environment. Knowing where to find numbers and
how the cloud pricing structures can be estimated
can make this effort straightforward.

• 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.
Penny Co llen 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 company’s
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)