Cloud ROI is a metric that measures the return on investment, or ROI, for a cloud computing project. In other words, it is used to determine whether or not a particular cloud computing initiative is likely to be beneficial to an organization in terms of cost savings or other benefits.
 
Why should you measure cloud ROI?
Without measuring ROI, it's impossible to manage a cloud project and understand how it will affect the bottom line over time. The money invested in migrating to the cloud often pays off in terms of increased efficiency, cost savings, and scalability. When business owners and decision makers see that the cloud investment is paying off, they will be more willing to greenlight future cloud endeavors.
 
Determining the cloud ROI also enables businesses to identify areas in which they need to focus their attention to drive the most value from their investment. This may include optimizing cloud resources, improving automation and performance, mitigating management complexity, and more. Ultimately, maximizing your cloud ROI will allow you to effectively compete in today's fast-paced business landscape. With that in mind, it is essential that businesses carefully evaluate their ROI in order to fully leverage all of the benefits that the cloud has to offer.
What is TCO, and why should you compute it?
But before that, it’s important to compute the total cost of ownership (TCO) of your in-house server infrastructure. The TCO factors in both operational and hidden expenses for maintaining your infrastructure.
 
Determining your TCO can help you view your current economic losses, which will be eliminated once you switch to a cloud system. Understanding the expenses of your on-premises server infrastructure can help you calculate how much cloud migration will cost you, as well as provide more accurate estimates of the expenses and the ROI for cloud computing.
 
Here are some of the expenses to consider when determining the TCO:
 
●     Servers and software licensing: Aside from expenses made when purchasing or replacing servers, you should also consider payments for software and tailor-made solutions (whether owned or outsourced) when computing the TCO.
●     Asset management and maintenance: Having a big server infrastructure means your IT team needs to spend more time monitoring and maintaining it. The costs to purchase and support your hardware and other assets should be reflected in the TCO.
●     Staff investment: When comparing on-premises infrastructure with cloud computing, you should consider the cost of potentially hiring temporary or permanent staff who would help maintain or update your server infrastructure. It's also essential to factor in the learning curve and needed training for the new platform that may take up your staff's time and other resources.
●     Miscellaneous fees: Having on-premises servers can increase your energy consumption and require you to secure ample physical space to store them. You need to account for the impact of your servers' activity on these and add it to the TCO.
 
Doing these calculations will enable you to compare the expenses related to an on-premises server infrastructure and those you'd have if you migrated to the cloud. You've now taken one important step toward computing your cloud ROI.
 
How do you compute cloud ROI?
Before you can compute your cloud ROI, you need to understand the investment you're making. You can do this by considering three major costs associated with cloud computing:
 
●     Cloud fees: The cost of cloud services varies, depending on the subscription model you choose. You can subscribe to a service for a fixed price, per user, or per activity.
●     Licensing: If you move your business to the cloud, you will either have to purchase new software licenses or get rid of the ones you own but don't need anymore.
●     Internal resources: Not only will cloud migration require money, but it will also consume the time and effort of your IT team and any other staff member involved. And to make the change as smooth as possible, you might also want to consider outsourcing some of the work to cloud engineers.
 
Now that you know how much you need to invest in your cloud migration, you can compute your ROI using this formula:
 
(Profit from investment − investment) / (investment) = ROI
 
The "profit from investment" is what you save when switching to the cloud, which you can calculate by subtracting your cloud migration costs from the TCO. For example, if your on-premises system costs $50,000 but switching to the cloud costs $30,000, you'd make a net profit of $20,000.
 
Using the formula above, you might notice that the ROI is negative:
 
($20,000 − $30,000) / $30,000 = −0.3
 
A negative ROI does not necessarily mean that you shouldn't move to the cloud. Remember that the computed ROI is based on the costs during the period it was computed. So if $50,000 is your TCO for the year, this means the −0.3 ROI applies to one year. Though it may not seem ideal, understand that new technologies rarely have amazing ROI within the first year.
 
The on-premises server infrastructure life cycle is usually three to five years, so measuring cloud ROI for a similar duration may show how substantial the payback can be for cloud investments. Keeping this in mind, this is what you might expect if you set a three-year cloud computing strategy:
 
($60,000 − $30,000) / $30,000 = 1
 
You can see that your profit is shown to increase threefold when you consider a three-year time span rather than just on a single year. With the given figures in the example above, you can also see that the cloud ROI improves substantially. Over time, cloud computing pays for itself, so the longer you commit to it, the greater your return on investment will be.
 
Though it may seem daunting to make the switch to a cloud solution, once you understand how to measure your ROI, you can feel confident that you will see a big return on your investment. And with so many benefits, there’s really no reason not to make the switch. Contact us today if you need help choosing the best cloud solution for your business. Our team of experts at SimplyClouds would be happy to assist you in finding a solution that fits both your budget and your needs.