Calculating TCO: Cloud or On-premise Infrastructure?

Businesses with products of all types have always been interested in maximizing efficiency. Therefore, it is not surprising that in the first quarter of the 20th century the concept of Total Cost Of Ownership (TCO) appeared, which is defined as the purchase price of an asset combined with the costs of its operation. In 1987, it was approved by the well-known consulting company Gartner Group.

In the late XX - early XXI centuries, the concept came in handy. Thanks to TCO, companies were able to more accurately analyze information technology products (software and hardware, as well as training to work with it) and calculate the financial consequences of their implementation during the entire life cycle of the product. As a result, with an idea of total costs, they can make more informed development decisions.

Migration to the cloud is one of the ubiquitous technologies of our time that is also being addressed with TCO. However, the not-so-simple cost calculations often slow down the decision-making process, and businesses miss out on time and money in the meantime.

To eliminate this problem, we have prepared illustrative lists of factors affecting the TCO of cloud and on-premise infrastructures.

TCO cost: cloud VS on-premises infrastructure

Buying physical hardware or using cloud infrastructure is a dilemma whether you are launching a new IT project or expanding your existing on-premises infrastructure for agile solutions.

In this situation, the most common factor influencing the decision is the short-term price of the product or, in other words, the purchase price. At the same time, buyers often overlook the long-term price, i.e. the total cost of ownership.

A proper TCO calculation helps you understand the long-term economic impact of owning physical infrastructure versus cloud services. It provides a broader picture of the product being brought to market and its value over time, long-term costs, and costs incurred over the product's lifetime and final disposition.

Factors affecting the calculation of TCO for on-premise infrastructure

TCO consists of both design and implementation costs (CAPEX) as well as maintenance, energy and other day-to-day costs.

Purchase of hardware and software infrastructure:

• Costs of purchasing servers.
• Software licenses (office suite, management, OS, database, antivirus, etc.).
• Payment for hosting in one or more data centers (data center).
• Security devices (crypto gateway, firewall, etc.).
• Data storage (SAN).
• Networking.
• Designing and implementing a backup plan.
• IP.
• From two server farms to implement disaster recovery plan.

Associated Costs:

• Cost and time costs of infrastructure design.
• Improvements and planned/emergency hardware upgrades.
• Energy consumption and continuous temperature monitoring.
• Maintenance.
• Technical support.
• Specialist recruitment and regular staff training.
• Disposal of hardware at end of life.
• Underutilization of infrastructure due to rough estimates at the design stage. Often purchased equipment is not used to its full capacity, sometimes reaching 60% of the planned capacity.

The costs listed can be divided into several cost categories:

• non-recurring (e.g., purchase of physical equipment),
• recurrent (e.g., accommodation, electricity),
• recurring, which are used throughout the entire period of use (e.g., salaries of maintenance staff).

To calculate TCO, it is better to take all these three categories in a time span of 3-5 years, as the life of physical equipment is considered to end after 5 years of use.

However, after 5 years, serious costs are again expected. In order to maintain a productive and modern efficient infrastructure, a new cycle is started at the end of this period: the current state is assessed and a budget is planned for the full cost of future purchase.

Factors affecting the calculation of TCO for cloud infrastructure

Costs:

• Pay-as-you-go, excluding capital expenditure (CAPEX).
• Recruitment of only end specialists who work directly with the products. There are no maintenance costs, as this part of the work is taken care of by the cloud provider.
• There are no infrastructure design, maintenance costs.

Benefits:

• A cloud service provider provides a ready-made infrastructure that allows you to quickly enter the market with a new product.
• One platform solves different tasks at the same time.
• You can easily and quickly scale resources when you need to downsize or expand.
• The cloud service provider provides 24/7 tech support.
• The infrastructure is built in a professional manner using Enterprise level hardware.
• The cloud provider also guarantees security and basic protection against DDoS attacks.

At 3 years, cloud migration can significantly reduce TCO by up to 20% compared to on-premises infrastructure. In the following years, this economic benefit will only increase.

You can put this statement to the test with our cloud infrastructure.