Analyzing the Benefits of Cloud Transformation
You need to further analyze the financial revenues of cloud transformation based on the previously determined objectives and calculate the ROI of the project. This can help managers make strategic decisions. The following evaluates the financial revenues based on the seven recommended objectives. You can put them together to obtain the total revenue of the entire cloud transformation project.
- Improved service system SLO
An improved SLO can reduce system downtime, thereby reducing revenue losses. Therefore, you can calculate the financial revenue of this metric based on the system's downtime loss per hour. Assume that a service system suffers a loss of USD0.1 million per hour due to downtime. Since the SLO before and after cloud transformation is 99% and 99.95%, the annual downtime loss is USD8.76 million (USD0.1 million per hour × 87.6 hours) and USD0.438 million (USD0.1 million per hour × 4.38 hours), respectively. Then, the annual financial revenue is USD8.322 million.
- Short time to market (TTM) of new products or versions
After cloud transformation, enterprises can use DevOps tool chains, application modernization, and elastic compute resources provided by the cloud platform to greatly shorten the TTM of new products and accelerate iteration of existing products. If the TTM of a new product is shortened from six months to three months, and the new product generates USD2 million in revenue per month, launching the product three months earlier will bring an additional revenue of USD6 million. For an existing product, if the version iteration cycle is shortened from three months to one month, and a new version can bring USD1 million in revenue per month, launching the new version two months ahead of schedule will bring an additional revenue of USD2 million.
- Low economic losses caused by non-compliance and security incidents
After cloud transformation, enterprises can leverage the all-round security protection measures, compliance audit tools, and automated compliance reports provided by cloud service providers to significantly enhance security and compliance. If there are five security and non-compliance incidents, rather than the previous 20, each year, and each incident causes an average loss of USD0.2 million, the total economic loss can be reduced by USD3 million per year.
- Reduced TCO of IT infrastructure
In traditional self-built data centers, enterprises provision IT resources such as hardware and software based on forecasted peak service demand. However, the actual workload typically stays at an average level over the long term, which results in low resource utilization and a huge waste of costs. In the cloud, enterprises provision resources on demand and pay only for what they use, which significantly reduces IT infrastructure costs. There are many different cost items involved in calculating the TCO for traditional data centers and the cloud. In traditional data centers, you must account for the cost of building and maintaining data centers, whereas in the cloud, these costs are absent because they are already included in the price of cloud services. The following table lists the costs for traditional data centers, which can be divided into capital expenditure (CapEx) and operating expense (OpEx).
Table 1 Costs for traditional data centers Category
Item
Description
CapEx
Hardware cost
Costs for purchasing servers, storage devices, and network devices (such as routers, switches, and firewalls)
Software cost
License costs for software such as operating systems, virtualization software, databases, and middleware
Data center cost
Costs for building self-built data centers and for installing the security system (including video surveillance devices and access control devices), power supply system, and cooling system in data centers
Implementation cost
One-off costs for system integration, testing, deployment, and others
OpEx
Labor cost
Labor costs for data center and IT maintenance and security, including expenses for salaries, benefits, and training
Hardware maintenance cost
Costs for maintaining, repairing, and replacing hardware devices
Software maintenance cost
Costs for software updates, patches, technical support, and others
Data center maintenance cost
Costs for maintaining systems (including security system, power supply system, and cooling system) that ensure the normal running of data centers
Energy cost
Costs for energy and electricity that are used to run the entire data center
Rack leasing cost
Costs for leasing IDC racks
Bandwidth cost
Internet access bandwidth costs
After cloud transformation, enterprises mainly incur OpEx, as listed in the table below.
Table 2 Costs for the cloud Type
Item
Description
OpEx
Compute resource cost
Costs for VMs, containers, serverless computing, and others. Generally, these services are billed by use time, CPU, and memory.
Storage resource cost
Costs for services such as object storage, block storage, and file storage. Generally, these services are billed by storage space, number of requests, and data transmitted.
Network resource cost
Costs for network services such as Internet bandwidth, public IP addresses, NAT gateways, load balancers, and VPNs
Database cost
Costs for services such as relational databases and NoSQL databases. Generally, these services are billed by instance specifications, storage space, and number of requests.
Security operation cost
Costs for using security services, such as network firewalls, application firewalls, and data security protection
Other service cost
Costs for other cloud services such as middleware, big data, AI, and IoT
Cloud management cost
Costs for cloud management services such as monitoring, logging, O&M, auditing, and governance
Cloud migration cost
One-off costs for cloud migration, resource deployment, and integration testing
Technical support cost
Costs for support plans
Labor cost
Salaries, benefits, and training costs for IT O&M (mainly application O&M) personnel
For traditional data centers, depreciation of IT devices also needs to be considered. Generally, IT devices need to be upgraded or replaced every three to five years. Therefore, the TCOs for traditional data centers and the cloud should be compared based on the depreciation period (three to five years) of IT devices.
Calculating costs is complex. First, the prices of IT devices and cloud services change dynamically. For example, cloud service providers frequently adjust the prices of cloud services. You can refer to the price calculator and commercial discounts provided by Huawei Cloud when calculating the cost of cloud services. Second, the prices of the same IT devices and cloud services vary depending on the countries and regions. Also, the electricity costs and labor wages differ significantly between different locations. Third, you need to obtain the quantity and configuration specifications of current IT resources, and then map them to cloud resources with different specifications one by one. You can then accurately estimate the TCOs. Huawei Cloud provides an Excel template for you to easily compare the TCOs for traditional data centers and the cloud. You can contact your sales personnel to obtain the template. In addition, when calculating the labor cost, you need to consider the IT O&M cost saved by improving the IT O&M efficiency. For details, see the last point "Improved IT O&M efficiency".
According to the reports and cloud migration practices of many enterprises, cloud transformation can reduce the IT infrastructure TCO by 10% to 30%. If the 3-year IT infrastructure TCO of a traditional data center amounts to USD80 million, the TCO is expected to decrease by USD8 million to USD24 million after cloud transformation.
- New revenues from business innovations and market expansion
After cloud transformation, enterprises can innovate products, services, and business models with the advanced technologies of cloud platforms and quickly enter the global market based on the global layout of cloud service providers. If business innovations and market expansion can bring 500,000 active users to an enterprise, and each user contributes an average of USD60 per year, an additional revenue of USD30 million can be generated for the enterprise per year.
- Reduced carbon emissions
Thanks to the economies of scale and more efficient energy utilization of large cloud data centers, as well as the extensive use of renewable energy by cloud service providers, enterprises can greatly reduce energy consumption and carbon emissions after cloud transformation. Calculating carbon emissions involves many factors. You can use the carbon emission calculator provided by cloud service providers. If the annual carbon emissions are reduced by 50% (from 10,000 tons to 5,000 tons) after cloud transformation and the carbon transaction price is USD100 per ton, the annual revenue from carbon emission reduction is USD500,000.
- Improved IT O&M efficiency
After cloud transformation, enterprises do not need to manage IT infrastructure. Besides, they can use the intelligent monitoring system and automatic O&M tools provided by cloud service providers to greatly improve IT O&M efficiency. If the number of servers that each O&M engineer can manage doubles from 100 to 200, the annual salary of each O&M engineer is USD0.2 million, and an enterprise has a total of 2,000 servers, then the O&M cost can be reduced by USD2 million each year. You should note that this revenue is included in the revenue generated by reducing the TCO of IT infrastructure.
The preceding benefits are just estimates. These benefits cover cost saving, loss reduction, and revenue increase, but do not include indirect benefits such as brand value improvement from improved system availability, improved security and compliance, and reduced carbon emissions. By taking the aforementioned benefits into consideration, you can get the total benefits of a cloud transformation project. You can then calculate ROI based on the total benefits and the total investment to help managers make strategic decisions.
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