August 2, 2021 We Serve Information in a Simple Way

Your Own Hardware or Cloud – How to Calculate the Cost of Ownership

Which is cheaper: 1 kg of “iron” or 1 kg of “cloud”? The question may sound strange, but it can be answered. Only measurements need to be performed not in kilograms, but in GBs and processor time.

When it comes to discussing investments in new hardware and software solutions, multiple implementation models are often considered. The question arises, what to choose: on-premise infrastructure, cloud platform services, or a hybrid solution? As a rule, the calculations are very simple: they compare the prices for “their” equipment and the cost of services of cloud providers and then draw certain conclusions.

It would seem that everything is simple. However, this approach is wrong. To get an accurate answer to the question “how much does iron/cloud cost”, it is necessary to estimate all costs: both capital and operational. It is for this purpose that TCO was invented – the total cost of ownership. This concept includes all costs that are directly or indirectly related to the purchase, implementation, and operation of information systems (IS) or software and hardware complex (PAC).

That is, TCO is not only a specific amount. This is a complex value that covers the costs that the client has to bear from the moment he becomes the owner of the equipment until the moment it is completely disposed of.


Who Invented All This?

For the first time, the term TCO (Total cost of ownership) was coined by the research and consulting company Gartner Group in the late 80s. At that time, she began to use it in her research when calculating the financial costs of owning computers on the Wintel platform, and in 1987 she finally formulated and proposed the TCO concept to the market. In other words, the model for analyzing the financial side of the use of information technology emerged in the last century.

The generally accepted formula for calculating TCO is:

TCO = Capital Cost (CAPEX) + Operating Cost (OPEX)

Capital costs (they are one-time, fixed) actually relate only to the issue of purchasing and implementing IT systems. They are called capital for the reason that they are required once at the initial stages of creating an IP. At the same time, subsequent costs largely depend on the choice of strategy, hardware, and software platforms. Among them it is necessary to highlight:

  • Project development and implementation cost;
  • Cost of services of external consultants;
  • First purchase of basic software required;
  • First purchase of additional software;
  • First hardware purchase.

Operating costs arise at the stage of the functioning of IT systems. Among them it is necessary to highlight:

  • The cost of maintaining and upgrading the system (staff salaries, external consultants, outsourcing, training programs, obtaining certificates, etc.);
  • Costs for complex system management;
  • Costs associated with the active exploitation of IP by users.


What Are The Costs?

The method of analyzing the cost of owning equipment has become in demand for a reason. In addition to direct costs (for example, the cost of equipment and the salaries of employees who maintain it) there are also indirect costs. These include the salaries of managers who are not directly involved in working with the equipment (CIO, accountant), advertising costs, rent payments, and entertainment expenses. In addition, there is also such a thing as non-operating expenses. These are interest payments on loans and securities of the organization, financial losses due to the instability of currencies, penalties in the form of payments to counterparties, etc. They also need to be included in the total cost of ownership.

Let us emphasize that there is no universal method for calculating TCO! There are only general approaches to the calculation. TCO is usually calculated for 3 years and 5 years, taking into account future payments. And the value of lost profit is taken at the level of 12% (taking into account the minimum guaranteed profitability, inflation rate, risk premium).


TCO Calculation: What to Consider?

For clarity, let’s try to list what you need to consider if you decide to compare the cloud and on-premise, and calculate the total cost of ownership. First on the list will be the one-time hardware and software costs.

  • Server equipment;
  • Storage;
  • Virtualization platform;
  • IS equipment (crypto gateways, firewall, etc.);
  • Network hardware;
  • Backup system;
  • Internet (IP);
  • Software licenses (antivirus, Microsoft licenses, 1C, etc.);
  • Disaster resistance (duplication for 2 data centers, if required);
  • Accommodation in a data center / rent extra. areas.

And don’t forget about the associated costs. Including:

  • Infrastructure design (hiring a specialist);
  • Installation and commissioning;
  • Infrastructure maintenance costs (staff + consumables);
  • Lost profits.

It turns out that if we consider it in a complex way, then cloud solutions are not only comparable in price to on-premise but even cheaper. There are other arguments for clouds as well. The direct benefit is that the company saves money by eliminating one-time purchases of equipment, optimizes the tax base, gains instant scalability, and reduces the risks associated with owning and managing information assets.

Also, “clouds” are much more convenient and secure when working with personal data and heavy computations, but that’s a completely different story.

Keep visiting our blog for the latest information about technology trends.

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