By Bill Tolson, Vice President, Marketing, Archive360
The question of whether moving to the cloud has cost advantages over that of staying on premises continues to be discussed in industry circles. Some industry analysts suggest that all things being equal, OpEx strategies should cost more than CapEx—but do they? Let’s first briefly explore the definitions of the two strategies and then dig deeper into the numbers that layout the true cost of ownership (TCO) when moving to the cloud.
CapEx (Capital Expenditures): Purchasing an asset (factory, computer system, company car) is considered a capital expenditure. It requires payment for the entire asset, and the cost becomes an entry on the company’s balance sheet, depreciated over some period of time. This asset strategy also includes other costs such as upkeep, insurance, and personnel tied to the assets used.
OpEx (Operational Expenditures): These expenditures are associated with purchasing services for a planned period of time — for example: 1-3 years. All OpEx payments during this period count against the income statement and do not directly affect the balance sheet. Some examples of operating expenditures include consulting services, building rental/lease, sales, utilities, cloud computing services, and rental car fees. Costs for these services usually cover all expenses associated with the services.
How Does CapEx/OpEx Relate to Enterprise Data Infrastructure and Services?
By maintaining on-premises computing and storage infrastructure, you are investing capital in an estimation of the computing assets that will be needed in the future. Companies choosing to stay on-premises face the possibility that if they do not invest enough, their computing capabilities will be limited. For example, search, storage, computing may not be robust enough for the computing environment, which in turn can cause business issues. If the organization invests too much and IT does not use the capabilities fully, they have then spent money on unused capabilities that could have been invested somewhere else. With a cloud-based Platform-as-a-Service (PaaS), organizations use and pay for exactly what they need. This reality by itself provides an obvious cost savings.
On-Premises versus the Cloud
A well-known cloud analyst characterizes calculating the total cost of ownership as “down and off,” arguing that one should always seek to reduce an application’s resources as much as possible so long as its functional and performance requirements are met. If an application, or other IT asset, is not used or used only sparingly, the application/asset should be shut down temporarily until its needed again, i.e., when additional demand later surfaces. However, this strategy is not cost-effective in larger organizations due to the complexities of modern enterprises and their ongoing cost of maintaining infrastructure and licenses for the applications.
The organizational complexity involved with ongoing enterprise infrastructure management (resource loading, SLAs, etc.) is so high that performing an OpEx vs. CapEx analysis must assume a fully-loaded operation of resources required at application peak load. The company can then use that peak load basis to evaluate the CapEx versus OpEx models. For most companies, it is simply too complex to evaluate in any other way.
The bottom line is that companies want to pay only for what they use—period. Cloud service providers allow organizations to adopt a “pay as they go” model (OpEx model) which enables companies to engage the resources and expertise of cloud hosting experts; take advantage of new capabilities faster without the needed investments; i.e. machine learning/AI; pay for what they use, and realize cost benefits throughout the year.
Calculating Total Cost of Ownership (TCO)
Calculating the TCO for cloud-based services versus that of remaining on-premises is straightforward—determine what capabilities your organization needs; storage, HSM, search, information management, higher security, and disaster recovery (among other items) and negotiate a contract with the cloud vendor.
On-premises TCO is a bit more complex. There are several key takeaways when looking at calculating on-premises IT versus cloud IT. Key takeaways include:
- Storage requirements are the most significant variable impacting overall total costs of ownership. However, there are many more that most companies do not consider
- Maintaining an on-premises infrastructure is usually more expensive and harder to budget for over time
- On-premises assets must be periodically replaced/upgraded
- Floor space and related utilities are not free
- The TCO for on-premises software applications is higher than for many cloud alternatives
However, to simplify the calculations, we can include additional expenses within the overall cost of hardware/software by fully loading the asset costs. For example, the fully loaded cost of storage would be much more than the basic cost of the actual disk drive. The fully loaded cost includes daily backups, additional personnel needed for operation, floor space, and disaster recovery/failover capabilities.
The following on premise example is calculated over three years and includes 50 TB of storage. Without going deeper into each individual calculation, you can see the charts below show an 89% cost savings. To perform your own “what if” analysis, visit the Azure TCO calculator.
CapEx versus OpEx
Circling back around to the original question around CapEx versus OpEx strategies, it is obvious that moving from an on-premises infrastructure to the cloud—from a CapEx strategy to an OpEx strategy—will save organizations a great deal of money. But be aware, your mileage may vary so it’s always a best practice to run the calculations yourself, depending on the specific circumstances.
Archiving to the Azure Cloud
Native Azure information management and archiving solutions that work hand in hand with the Azure Cloud providing organizations with a viable alternative to costly on-premises computing infrastructure. If your organization is pursuing a digital transformation strategy which includes moving data centers to the cloud, cloud-based archiving is the way to go.
About the Author
Bill Tolson currently serves as the vice president of marketing for Archive360 and is focused on the archiving, migration, governance, regulatory compliance and cloud-based storage of data. Bill has extensive experience in eDiscovery and archiving/information governance from both a marketing and customer perspective.