Switching to the Cloud: TCO Calculations

In my last blog entry, I covered the cost benefits of moving to the cloud – the time and effort saved from eliminating hardware and the gains from using world-class IT services in the cloud. But the best way to quantify the cloud versus on-premises total cost of ownership benefits for yourself is to use a total cost of ownership (TCO) calculator. Here are two excellent online tools that you can use to do exactly this:

Both calculators offer a nice way to organize your thoughts and help you make an informed comparison between cloud and premises-based financials. The Software Advice tool offers many factors to consider in your TCO calculation and explains why you incur such costs, then shows the sum of these costs over ten years. The Nucleus Research tool is a rapid TCO comparison so it takes fewer TCO factors into consideration. However, it takes into account depreciation and taxes to show TCO as your cumulative cash flow over 6 years. Take a look at both calculators to determine which one you prefer.

After using the calculators you will see that in most cases cloud costs less today as well as over time (even without taking into consideration the time value of money, where a dollar spent today costs you more than a dollar spent in the future). The low upfront costs of a cloud subscription are always favorable from a TCO perspective in comparison to the high upfront costs of an on-premises deployment.

You’ll get a lot of value from these calculators because they do not tip the scales in an obvious way towards the cloud. In fact, the calculators let you add future nonrecurring costs to your cloud TCO assessment, so you can have a conservative model that accounts for unknown cloud costs. However, you probably won’t have any unexpected or one-time cloud costs in the future that are as significant as the cost (and time) involved with a major upgrade to an on-premises system. In fact, a subscription to a cloud financial solution like Intacct is known for delivering a predictable, recurring, operating expense instead of unpredictable, periodic large capital expenditures that require special budgets and reserves to upgrade outdated or failing hardware.

To keep things simple and straightforward, the calculators do not consider all the possible costs and benefits. They are free tools, after all. However, I’ve come up with a few additional factors that you may want to include in your TCO calculations.

1. Adaptability of the system
  • The calculators do not quantify the costs of organizational change on your system. For example, if your organization grows and you add a new entity to your structure, you will probably need help from an IT expert to add the new entity in most finance applications, as opposed to adding a new entity in Intacct by yourself in less than an hour.
  • You will likely need customization for an on-premises solution on day one, whereas a cloud solution lets you configure your preferences with a few clicks, making it faster for an organization to get up to speed on the new system.
  • A hidden future cost of on-premises solutions is that your customizations may “break” during future software, hardware, or operating system upgrades that are not compatible with your custom programming.
2. Hardware and software
  • With cloud, the infrastructure is offsite, so you don’t have to purchase and manage things like power, cooling, and rack space for your hardware; process servers to handle peak capacity computing; or backup hardware and software.
  • As I mentioned last time, with an on-premises system you will need to implement physical security best practices to secure your server area from human intrusions and natural disasters.
  • In the “Other Costs” section of the calculator, consider monitoring software to keep your system performing at a high level. You also need to consider how you will handle secure remote access and mobility – firewall, VPN, security scanning software, etc.
After using these free online TCO calculators, it should be clear that the cloud is the best way to reduce your total cost of owning a finance and accounting solution. Here are some specific reasons why Intacct dramatically reduces your TCO:
  • Intacct runs, maintains, and upgrades the software for you on our own secure, high-performance hardware, eliminating many upfront and ongoing costs.
  • Economies of scale allow Intacct to provide high system availability, backups, and disaster recovery at low cost.
  • Intacct’s Buy With Confidence guarantee assures you of world class-service levels for system availability, disaster recovery, and response time from our support organization.
  • The Intacct cloud provides controlled permissions and access, firewalls, scanning, and data encryption to protect your business.
I’m interested to hear about your experience with these calculators (or another calculator that you use) and what your cloud TCO looks like, so please leave a comment and share with the community!

Next time we’ll continue covering the quantitative benefits of switching to the cloud with a look at the economics of cloud financials.

Be sure to follow me on Twitter (@markgervase) and Intacct on all our social media channels, including Facebook, Twitter, and LinkedIn. To network with other people interested in cloud financial applications, be sure to join the Intacct Cloud Accounting group and the CFOInsights group on LinkedIn.

Image courtesy of FreeDigitalPhotos.net

1 comments:

Philipp Suchan said...

One limitation that I noticed from both tools is their lack of consideration of time value of money. Time value of money is an extremely important factor in calculating the financial attractiveness of switching to a subscription based IT service, especially for growth companies with high costs of capital!
For example taking the Software Advice TCO calculation with a 10 year comparison and a $25k subscription fee, the $25k spend in year 10 discounted back to year 0 at a cost of capital of 7% costs only $13k or 50% less in present value terms. This is compared to an on-premise solution where most of the expenses are occurred in year 0.

As a result both tools overstate the TCO of subscription based SaaS solutions versus on-premise solutions in present value terms and thus if you plan to use them for calculating the benefits of SaaS over on-premise should make sure to include the time value of money in their analysis.

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