How to Understand, Calculate and Maximize Cloud ROI

As organizations increasingly embrace cloud environments for their IT needs, calculating cloud return on investment (ROI) has emerged as an important factor for making informed investment decisions and understanding the value of the cloud. This measurement helps organizations improve cost-efficiency, mitigate financial risks, reduce operational costs and make better strategic decisions and resource allocations.

Still, many business leaders find measuring their cloud ROI a challenging task, in large part because different stakeholders within an organization often have varying goals and priorities. For example, while a CTO might be quick to embrace the valuable operational benefits of cloud services, a CFO may be primarily concerned with the associated costs.

Let’s explore the key components of cloud ROI, how to overcome challenges in measuring it and the best practices organizations can adopt to ensure they are maximizing the value of the cloud.

Key Components of Cloud ROI

For organizations to identify the benefits of cloud adoption, they must understand the costs involved in their cloud investments and quantify both the tangible (like cost savings) and intangible benefits (like improved agility). Understanding these cost dynamics is essential to the process of identifying a reliable ROI calculation that reflects the real-world scenario of cloud usage.

Understanding Costs

Initial Costs: Most of the initial costs of cloud adoption are incurred during the setup, migration and training phases. These include the procurement of hardware, software licenses and consulting fees associated with planning and executing the migration process. 

Operational Costs: Ongoing operational costs include optimizing cloud infrastructure and services, maintenance, software updates, subscription fees and additional support from cloud providers.

Identifying Benefits

Direct Benefits: The direct advantages of embracing cloud are tangible results that impact business profitability. For most organizations, these consist of cost reduction, elimination of hardware investments, decreased downtime, disaster recovery features provided by cloud vendors and the optimization of IT resources to boost operational efficiency.

Indirect Benefits: Though more qualitative in nature, indirect benefits contribute to the overall agility, flexibility and resilience of businesses. These include the ability to scale infrastructure in response to fluctuating demand, operational agility gained through rapid provisioning and deployment of applications and enhanced security provided by cloud service providers.

Challenges in Measuring and Maximizing Cloud ROI

According to a recent IBM/HFS study, only 25% of organizations are able to track tangible returns on their cloud investments. This highlights a significant disconnect between business units and IT departments, emphasizing the necessity of cross-functional alignment and strategic measures to calculate and enhance cloud ROI. A few key challenges stand out in this process.

Cloud Cost Variability

Cloud cost variability arises from unpredictable expenses linked to fluctuating usage and scaling needs in cloud services. These may include upfront costs like migration and monthly fees, as well as additional hardware, software, staff training, management and potential downtime. Variable costs are also associated with pay-as-you-go models, which are based on resource use and scalability. Organizations must balance between over-scaling that leads to unnecessary expenses, and under-scaling that causes performance issues.

To tackle cloud cost variability, choose cloud platforms that leverage economies of scale and make them more cost-effective than on-premises solutions. The best practice is to consistently monitor and automate scaling to match business needs.

Quantifying Intangible Benefits

Though difficult to measure, quantifying the intangible benefits of cloud, such as business agility, scalability and market responsiveness, is essential to measuring true cloud ROI. For instance, when a software development firm migrates their workloads to the cloud, developers gain access to on-demand resources that can enhance development time and expedite time-to-market for a project. In this case, the cloud provides the benefit of substantially reducing the time required to scale infrastructure and accelerating the completion of projects leading to revenue growth.

Similarly, scalability can be assessed by a firm’s capability to accommodate demand fluctuations without investing in additional infrastructure, thereby assigning a monetary value to this benefit.

Detailed Steps to Calculate Cloud ROI

For an efficient cloud ROI analysis, companies need to evaluate critical factors including operational requirements and organizational readiness. The following steps provide a framework for correctly assessing the advantages of cloud computing.

Step 1: Gather Data

Collect comprehensive data that encompasses the full range of cloud costs and benefits. This should include detailed records of initial and ongoing expenses and quantitative and qualitative benefits observed or anticipated.

Step 2: Quantify Benefits

While the bottom-line value of tangible benefits is readily available, quantifying intangible benefits requires a systematic approach to assigning estimated monetary values or metrics. Some of the popular methods include:

• Productivity Gains: Determine how much time is saved in deploying applications with cloud services compared to previous methods. This will directly reflect the productivity enhancements resulting from cloud-enabled processes.
• Business Agility: This can be quantified by calculating the cost reduction or additional revenue generated from faster time-to-market for new products or services enabled by cloud agility.
• Enhanced Security: To understand the value of enhanced security, compare the cost of implementing and maintaining robust security measures in-house versus leveraging security given by the cloud provider.

Step 3: Apply the ROI Formula

The ROI formula is a standardized method for calculating and quantifying return on investment:

ROI = (Net Gain from Investment – Cost of Investment) / Cost of Investment

• Net Gain from Investment: Include total benefits (tangible and intangible) accrued from cloud adoption. Subtract the total cost of investment from this number to determine net gain.
• Cost of Investment (Initial + Ongoing): Include setup, migration, training, operational expenses and subscription fees.

Imagine a company invests $100,000 in moving its IT infrastructure to the cloud. After one year, the company realizes:

• $70,000 in savings from reduced hardware procurement, decreased IT maintenance costs and lower energy consumption.
• $40,000 in intangible benefits from increased productivity, improved business agility and better scalability.

Total Recognized Benefits: $70,000 + $40,000 = $110,000
Initial Investment: $100,000

ROI Calculation: ROI = (Total Benefits−Initial Investment) / Initial Investment
ROI = ($110,000−$100,000) = $10,000
Therefore, ROI = 0.1 or 10%

This ROI of 10% indicates a positive return on the cloud investment, demonstrating that the benefits have exceeded the initial costs. The positive ROI here reflects the financial gains from operational savings and the strategic advantages from enhanced capabilities, validating the effectiveness of the company’s cloud strategy.

Best Practices for Maximizing Cloud ROI

In addition to understanding how to quantify cloud ROI, organizations should adopt a few key practices to maximize the measurable value of their cloud computing investments.

Choose the Right Cloud Services

Before approaching a cloud service provider, assess organizational requirements around scalability, performance, security, compliance and cost. Opt for a provider that best aligns with the unique needs, goals and objectives of the business.

Monitor and Analyze Regularly

Track resource usage, performance and costs and leverage monitoring tools and proactive management strategies to ensure that cloud resources match actual demand and workload.

Leverage Automation

The automation of scaling and task monitoring enables more frequent feature testing and streamlined operations for dynamic workload adjustments. For security and regulatory compliance, organizations can utilize the cloud to facilitate automation of governance and compliance processes.

Frequently Asked Questions (FAQs) About Cloud ROI

1. What is the most challenging element of calculating cloud ROI?

Measuring intangible benefits like improved agility, scalability and security presents a significant challenge. While vital for long-term success, these benefits often lack immediate, tangible financial returns that are readily quantifiable.

2. What strategies can businesses employ to manage cloud cost variability?

To address variability in cloud costs, businesses should adopt a proactive monitoring strategy. This involves cloud cost management tools to track usage and expenses in real-time, enabling rapid adjustments to avoid exceeding budgets.

3. Do tools exist specifically for calculating cloud ROI?

Yes, numerous cloud service providers offer ROI calculators tailored to assist businesses in estimating the financial advantages of cloud adoption. These tools generally necessitate input on current infrastructure expenses, anticipated cloud usage and projections for business growth to furnish an ROI estimate.

4. How frequently should a company review its ROI on cloud computing?

A company should review its cloud computing ROI at least annually or whenever substantial changes occur in its business operations or the technology landscape. Regular reviews ensure alignment of the cloud strategy with company goals and verify performance expectations.

5. Do calculations in ROI vary among IaaS, PaaS and SaaS models?

ROI calculations vary significantly across different cloud service models due to differences in cost structure, management responsibilities and the scope of services offered. For instance, while IaaS may provide enhanced flexibility and control, SaaS delivers comprehensive software solutions. It’s essential to tailor ROI calculations to each specific cloud service type and match it with organizational goals.

Conclusion

Whether you’re currently migrating to the cloud or already using cloud solutions, establishing both costs and benefits is crucial to understand and maximize cloud ROI. By quantifying these factors and applying the ROI formula, businesses can make strategic decisions that improve their investment outcomes. For many businesses, cloud computing ROI may initially be negative due to significant upfront costs incurred in the first year. However, by adopting best practices, businesses can foster tangible and intangible benefits that build positive long-term ROI.

A negative or minimal ROI in the early stages is not a reason to abandon the cloud initiative. Instead, proactively monitor, analyze and refine your cloud strategies and get help from professional service providers who can optimize your cloud environment for better ROI. Material’s cloud experts can build tailored solutions for your business based on SRE, Observability and FinOps services. Reach out today for an expert consultation.