Cloud ready-reckoner: how to count the cost

Man typying on calculator and writing on paper in file

It’s not hard to understand why so many businesses are choosing cloud-based technology resources over their on-premise predecessors. The prospect of acquiring, and then maintaining, on-premise software and hardware has become progressively less appealing. And this is particularly the case as the range of accessible cloud alternatives (which promise to relieve you of these and other hassles) has grown.

But while it’s becoming easier to find and to implement cloud services to meet your business technology needs, it’s not getting easier to make an informed decision – and not just because there are so many options available to managers.

It's not just about the technology, however. Another big hurdle in the decision-making process is cost: working out how much you can expect to spend on various cloud and on-premise alternatives, or on maintaining the status quo, is complex.

“Calculating the price of a cloud-based solution is considerably easier to do, as it is provided as an all-inclusive monthly fee,” asserts Jeremy Roche, CEO of “In comparison, on-premise alternatives often have hidden costs which are initially forgotten, but still need to be accounted for,” he explains, giving examples such as the resources to keep hardware and software up-to date and secure.

What about comparing the cost of – a SaaS enterprise resource planning (ERP) system – with one of the other SaaS ERPs out there? Then things can become more complex. Cloud software tends to be easier to implement than on-premise software, but no two business scenarios, SaaS ERPs or implementations are identical – and the same is true for other types of software.

Identifying your needs and comparing these with multiple product and service offerings from multiple vendors could lead to some complicated spreadsheets before you even consider the costs. Behind the seemingly transparent ‘all-inclusive’ monthly fees of an individual SaaS provider lurk the multiple charging mechanisms of the many, with their assorted monthly and annual contracts and commitments.

Terms of reference

It doesn’t help that ‘cloud’ means different things to different people and providers. For example, what is your idea of cloud software? Is it something hosted in your own data centre? Is it something that a third party service provider will run for you? Will it be something licensed on boxes that belong to you? Will this be on a single or multi-tenant basis, this sentence merely hints at the complexity of the cost calculations in your future.

Some of the information you need is available from some software and service providers. "It is easy for potential users of Intuitive Dashboards to compare the cost of on-premise versus the cloud, since we publish a price list for both,” says Colin Stocker, channel account manager at Intuitive Business Intelligence. On-premise is charged as a typical up-front licence, hosted is charged monthly (similar to SaaS).

But costs don’t begin and end with the price of software and services, other factors must be considered. The more straightforward factors range from training and implementation to operating overheads such as floor space and electricity. Less straightforward factors range from the accounting implications of your decisions, to the speed with which technology (and the services based on it) is evolving.

Every variation on ‘cloud’ is associated with different types and levels of service, each with their own potential pros, cons and costs – all in a constant state of flux. “The complexity grows when you factor in changing software license models for cloud applications and the fast pace of infrastructure development,” says Martin Prendergast, CEO for software management specialist Concorde Solutions.

Beyond boxes

Cloud infrastructure resources are an area where it can be difficult to assess the service costs of a single provider (such as Amazon, Google or Microsoft), let alone make cross-vendor comparisons. The matrix of options and pricing schedules is vast and you will need to consider ‘non-traditional’ IT expense. These could include, for example, the consumption costs for different database instances and the amount of CPU time you are going to need.

Initial thoughts on cloud infrastructure costs often focus on the amount of data that will move onto cloud servers, but some business may also want to consider how much data they will need to pull off those servers. Many organisations will never exceed their cloud service provider’s free outbound monthly bandwidth allowance; others will need to factor project and seasonal demand-spikes into their cost estimates.

In-house bandwidth may also impact on the total cost of switching to cloud-based infrastructure. Organisational structure, workload, user numbers and their concurrent demands, and the processes not handled server-side (in the cloud) are among the factors that could determine if and when you need a bigger pipe – and the associated cost. So technology expertise is vital to the accuracy of your cost calculations.

The bottom line

If you really want to know what technology resources are going to cost you, get input from an accountant too. The CapEx versus OpEx debate is not as simple as you may think. “From an accounting point of view, the debate is more nuanced than ‘the cloud is good because it shifts capital expenditure to operating expenditure’,” says Richard Anning, IT faculty head of accounting organisation ICAEW.

Even the timing of a legacy hardware purchase affects its value and hence the ‘cost’ of moving to a public, private or ‘hybrid’ cloud alternative.

When you acquire an item of computer equipment, for accounting purposes it’s not an ‘expense’ but an ‘asset’ and a process of ‘depreciation’ is used to write-off the purchase cost over a number of years by claiming tax allowances, as CloudPro explains in more detail here.

As cost is clearly about more than up-front charges for software, hardware and services, taking a wider view is vital; less clear, is where to draw the line. You could also consider flexibility or rapid access to emerging technologies and their impact on productivity – you could even try to put a figure on the expected benefits. But before you can do this you will need to calculate the costs, and that’s not going to be easy.

Lesley Meall is a freelance journalist and editor. She has been writing about accountancy, business and technology for more years than she cares to remember, and before this, at some point in the dim and distant past, she used to be a software engineer.