The True Cost of The Cloud

By Sean Devenish, Collins SBA

As someone who embraces technological change and who is constantly looking at ways of improving practice efficiency, cloud services are regularly under consideration.

In the countless presentations I have attended which promote the real or imaginary benefits of ‘the cloud’, it is often suggested that cloud services are ‘cheaper’ than what we are currently paying for our technology needs. I beg to differ.

While the benefits of cloud services may be significant, the ‘real’ cost of the cloud is often significantly more than the old ‘desktop’ counterpart. I am going to go through a couple of common scenarios relevant to the SME market to illustrate how the cost argument does not stack up.

Scenario 1: The Humble Software Subscription

The bulk of our legacy software is still licensed through the old ‘ownership model’, one owns a license to the software as it stands and the only additional costs will be to pay for upgrades. Where these upgrades are minor and/or not needed, once the initial cost is incurred, there is very limited additional costs.

Cloud services by nature involve data storage, and are generally based on a subscription pricing model. I could use many examples in this category, but let’s use a common one, a subscription to the cloud Microsoft Office (Office 365) versus our old desktop licenses of essentially the same product.

In our practice, we upgrade Office every six years. The amortised cost of our current Office licenses over that time frame is significantly less than half of the annual subscription cost of Office 365. While granted we do not have to maintain Exchange, the cost benefit of removing this from our server is negligible. In my experience, cloud subscriptions versus licenses are only ever in the ballpark of being cheaper where you embrace every single software upgrade and update licenses as soon as possible.

There will of course be many variances to this scenario depending upon the product, vendor and the exact pricing model. For this reason it is essential to always compare the cost of the ‘alternative’ license ownership, based on your expected purchasing cycle, before concluding that an annual subscription is cheaper.

Scenario 2: The No-Server Scenario

The much-touted advantage of cloud services is that there are significant cost savings because you no longer need to maintain a server. All your providers do the hard work for you.

Except in very limited circumstances, I think this is a pipe dream. To truly eliminate the need for a server, a business needs to ensure every single business system and document is in the cloud.

The challenge; not every single piece of software is available in the cloud, and any system used by the business which doesn’t have a cloud solution can necessitate the need for a server. Further to this, not every business system works best in the cloud. A common pitfall is document storage. While there are cloud document storage systems available, if a business requires access to a reasonable amount of data, the speed of data transferring over the NAT cables in your wall will vastly outperform the speed over a business internet connection.

In the majority of cases, most businesses will still maintain a server, and any individual product change to the cloud will not change this.

Scenario 3: The Cloud Server

I am constantly being asked by those who have read the latest article on cloud computing, “How long until we move our server into the cloud?”

In our circumstances (and those of many of my clients) the costs do not stack up. The solutions offered invariably do not involve maintenance of the software and system (who would take that on at a discount!). Thus all we are doing is purchasing our hardware costs.

Basic Economics ensures that our cloud server provider will be making a margin on their cost of the hardware, thus the only way we can get a cost advantage is if the scale of their hardware installation results in a cheaper per user cost. Unfortunately the providers work with the added costs of their massive security infrastructure, redundancy and securing fast connection speeds. While arguably improving the overall reliability of the system versus the in-house server, I personally have not seen a server subscription model that beats our current amortised cost of hardware ownership.

Savings Scenarios

There are of course, situations where there may be cost savings, for example:

1. The micro business with one or two employees, limited data storage needs and no special-purpose desktop applications. This is one of the limited types of business that can get away with a ‘server-less’ environment, and thus save the costs of ownership and maintenance.

2. A business which is rapidly down-sizing. If a business is in the position of massive staff reductions, then subscription based cloud services will become cheaper relative to the sunk costs of losing all the investment in infrastructure and licenses required for a larger business.

However, as illustrated in the main examples in this article, I believe moving services to the cloud will generally result in added, not reduced, costs to the business.

Conclusions

I am all for adopting cloud technology for the benefits it provides, but like all good business decisions, we must never be blinded by apparent cost savings statements. In every case, the marginal cost of a decision to move to cloud must be analysed relative to the particular circumstances of the business.

In many cases the costs are significantly higher, in which case one can only hope that any decision to upgrade to the cloud will not be based on the hype of cloud and its contemporary popularity, but on the real and tangible benefits such a move will provide.

As one of Collins SBA principal accountants, Sean focuses on accounting and business strategies to make his clients better business people; helping businesses to increase profit, improve systems and grow. Sean is part of a ‘new generation’ of accountant that embraces the extensive use of technology to deliver better solutions to clients. In addition to advising clients and delivering technology solutions, Sean performs speaking engagements on the use of the latest accounting technology platforms and how they are impacting the profession.  www.collinssba.com.au

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