It is generally good practice, in business as well as in life, to make decisions based on what will benefit you long-term. It is unwise to invest in something that may not give you a significant return over time. In regard to technology, which so rapidly changes, it can be daunting and a bit tricky to determine what to invest in.
Think of the cloud, for example. It may seem like everyone else is using the cloud these days, but how can you be sure of its level of security? How can you know for certain whether or not cloud solutions are a worthwhile investment? At first glance, it may seem a bit overwhelming to attempt to determine the ROI of cloud-based IT solutions.
Don’t stress! In this blog post, we will outline a four-step process to calculate an ROI for cloud-based solutions. This process, developed by Annese subject matter experts, will ensure that you will tackle this topic with ease and ultimately make a worthwhile investment.
The four step process is as follows:
Define the time period for measurement.
Calculate the Total Cost of Ownership (TCO) during that period.
Calculate the return (the value of expected benefits resulting from the investment) during that same period.
Plug the numbers into the ROI formula: ROI = (Return – TCO) / TCO. This should be expressed as a percentage.
These four simple steps, if followed correctly, will help your business better understand its ROI on cloud-based IT solutions. Let’s break down each of these steps a little further.
1. Define the time period for measurement.
Defining a time period for measurement, such as three or five years, will give your ROI calculation realistic boundaries. It will also allow for you to tangibly see the benefits of cloud-based solutions working for your business throughout various periods of time. Objectives should be measurable and achievable; attaching a time frame to your business goal is a great way to make it more attainable.
2. Next, calculate the Total Cost of Ownership (TCO).
You should calculate the TCO based on the time period you have allotted above. This step should not be too difficult, as long as you are comprehensive in your approach. When calculating the TCO, you should consider the cost of equipment, the projected lifespan of that equipment, and the cost of capital. More specifically, you should consider the cost of servers, storage, the network, the power, and the cooling. Also, keep in mind labor costs for operating and maintaining the hardware and software. When calculating the TCO, it is wise to be as thorough as possible, as this will allow for the most accurate ROI estimate.
3. Calculate the return in the same period.
The “return” refers to the value of expected benefits resulting from the investment. This step may be a little difficult due to the fact that there are different types of benefits that go along with the various types of on-premises and cloud solutions. Annese’s Chief Technology Architect, Rus Healy, puts it this way: “When you compile the list of benefits of each solution, you realize that you have two very different lists-with overlapping core benefits, of course. This is because on-premises and cloud are not two different ways to do the same thing.” With this in mind, calculating the return is a critical part of determine the total ROI of cloud-based IT solutions.
4. Finally plug the numbers into the ROI formula: ROI = (Return – TCO) / TCO (expressed as a percentage).
Although this formula may seem a bit daunting, it is actually quite simple. Once each individual part of the formula has been determined, namely the TCO and Return, plugging the numbers into the formula should be easy. For example, a $100,000 TCO and a $300,000 Return will result in a 200% ROI over the measurement period. Simple, right?
This formula is a great first step in determining the ROI your company will see on cloud-based IT solutions. For a deeper look into this formula, as well as a comprehensive overview of the cloud and what it entails, download our cloud white paper.