The Complexity of Measuring Cloud’s Impact on Costs (IDEAS Insights)
How do you measure cloud’s total cost of ownership? Turns out there’s no easy answer.
Despite the name, total cost of ownership (TCO) is not the measure of “total cost,” as used by economists, but the measure of “accounting cost.” TCO calculations measure some costs and are useful for business decisions, yet these calculations always leave out other costs that inevitably only the user can define. Analysts and end users alike will benefit from recognizing that TCO calculates only the accounting cost and does not include the opportunity cost, which includes the cost of the “road not taken,” in a cost scenario. Opportunity cost needs to be included in a true analysis of total cost.
On February 11, GigaOM published a blog post claiming to show that Amazon Web Services (AWS) cost more than a self-hosted solution. In a responding post, Amazon retorted that the GigaOM post was wrong and listed a number of factors which it said GigaOM failed to take into account. This, in turn, prompted a clarification by GigaOM. What got lost in the exchange was whether the typical TCO analysis determines the total economic cost – accounting cost plus opportunity cost. The confusion comes from conflating accounting cost and total cost.
Clearly, there are tradeoffs in the risks of hosting computing resources on physical servers versus public clouds. For example, cloud may have hidden risks to cost, like inflation (with physical servers, users lock in a particular amount of computing capacity they purchase for a fixed amount of money, while that same amount of capacity in a cloud may gradually become more expensive if inflation starts to outpace the advances of Moore’s Law). On the other hand, physical equipment has more inventory risk, such as the possibility that the user bought too much stuff. After the accounting costs are tallied, a user needs to place monetary values on these different risks to determine the true cost of one solution versus another.
Another cost consideration related to cloud computing, which some have already called out, is opportunity cost, that is, the fallout from loss of alternatives as a result of choosing one path or another. For example, in one particular scenario, physical servers may prove cheaper than cumulative cloud costs over the lifecycle of the servers when only TCO is considered. However, the fact that the cloud allows costs to be delayed until the very moment resources are needed may allow money to be invested in the short term with initiatives that have a greater return over the long term, such as additional resources related to sales and marketing, or development of code leading to greater business differentiation down the road. These are all “opportunities” that would be lost by not choosing the cloud, even if TCO were ultimately lower when investing in on-premise physical infrastructure.
Whether a cloud service like Amazon AWS is more or less expensive than physical servers in the accounting ledger for different scenarios does not give users the full picture. In weighing a physical-versus-cloud solution, the user may place different value on a variety of options offered by cloud and physical hosting. In order to get a true total cost analysis, the value of those options needs to be added to the accounting cost. That point was missing in most of the discussion on GigaOM’s blog.
