The real cost of Cloud

Cloud is fashionable, but few business executives really understand its full implications, especially when it comes to measuring return on investment (ROI).

That's the conclusion offered by analyst firm Forrester Research in a new report: The ROI of Cloud Apps. Analyst and co-author of the report Liz Herbert cautions:

“As firms spend more and more of their closely guarded IT dollars on Cloud applications, sourcing executives must scrutinise the long-term value of these investments. Today’s Cloud investments represent millions of dollars of annual IT spend for some larger consumers of Cloud...sourcing executives should therefore cut through the fog of misinformation and objectively evaluate the financial impact on business when considering the adoption or avoidance of Cloud applications. ”

According to a methodology based on Forrester’s Total Economic ImpactTM (TEI) model, executives need to consider: How their company might benefit from Cloud applications. How their company will pay for the Cloud in hard costs and resources. How risks and uncertainties might change the total impact of Cloud applications on the business. How much flexibility is built into this investment to allow for future options for the company.

Forrester does not preclude the most notable benefits of Cloud applications, including:

Faster deployment speeds
Reduced support needs.
Simpler, more frequent upgrades.
Better end user adoption and utilisation.

But such benefits do come with a price tag and one that's not always immediately obvious perhaps. For example Forrester notes that Cloud applications often require greater focus on vendor management with often greater costs for multivendor orchestration and ongoing vendor management. The report notes:

“Cloud applications require more focus on contracting, SLAs, and performance management. Contracts can be anywhere from month-to-month to five years long; firms must focus more on contract renewals and negotiations than in on-premises cycles. Some technology solutions are emerging to help with vendor management of Cloud vendors, including performance management solutions like HP Cloud Assure and Gomez. However, these technology solutions come with a price tag as well. ”

There's also the question of mix and match of Cloud modules to create a complete end to end suite. While there are suite options on the market, such as NetSuite's One World, many Cloud vendors focus on a specific functional aspect, such as recruitment of goal management. The report cautions:

“This means that firms often face a fragmented, multiple application landscape as they move more and more technology to the Cloud. In a recent survey, we found that 26% of Cloud subscribers plan to increase the number of Cloud vendors they work with over the next year. This multivendor environment means additional costs for areas like integration, provisioning, end user support, upgrade management, testing, and workflow. ”

While vendors such as Salesforce.com and NetSuite are in their second decade, the relatively immature nature of the Cloud market does mean that risk management also needs to be factored into any procurement. The Cloud provider market has yet to stabilise and shake out, casting some inevitable doubt over vendor viability in some cases. Forrester notes:

“ Many Cloud startups can get going with a small team of coders — with little or no startup costs or venture capital. As a result, Cloud applications proliferate — but some may have a short life span, either because of failure or acquisition. While acquisition can sometimes be a benefit that adds stability and investment, it can also be a risk that leads to changes in contracts, changes in pricing, or even a shutdown of the acquired technolog. Overall, vendor viability risks are high as this early market moves at such a fast pace. ”

Finally as well as the broad sweep considerations cited above there will inevitably be application specific issues to be evaluated, such as ease of use. Forrester cites CRM products as having a high churn rate among users with a regular turnover of new users who need to get to grips with an application:

“ In these cases, usability is a significant factor that can materially reduce training time and cost and increase end user adoption, and thereby improve ROI. ”

Additionally the amount of application functionality will determine hardware and IT staff that can be retired or redeployed – resulting in cost savings, but the level of such savings will vary from case to case:

“ If the Cloud solution replaces a large on-premises application (such as an HR suite like Ultimate Software or a full ERP like NetSuite or Business ByDesign), organisations will save IT resource and support costs. But if the Cloud application is more of an add-on or replaces only a portion of a larger enterprise application, the reduction in hardware, support, and IT staff will be small. ”

The report ROI of Cloud Apps can be downloaded from Forrester Research.

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