When it comes to Cloud, the return on investment (ROI) is more likely to be calculated as the ratio between the ‘net financial gain’ compared to the ‘initial investment’.

The ‘initial investment’ includes both capital and operating expenses required to complete the transformation and migration to cloud. This category would include items like professional services, software licenses used during transformation, cost of cloud hosting services during transformation and costs of internal employees. All these costs added together would create an estimate of the initial investment.

Calculating the ‘net financial gain is a combination of increases in revenues or decreases in costs. Revenues are more difficult to predict, however could come from faster customer processing times or reduced timescales to get new products into the market. Decreases in costs should be easier to estimate as these will be largely based on known cost reductions or cost avoidance like capital expense (and depreciation) as well as operational cost reductions.

Business Case to move SAP to Cloud

Types of cost reductions include:

Hosting expenses – the costs of hosting IT either on-premises in IT cabinets/ server rooms or with a third-party colocation data centre provider – these should be thoroughly investigated in order to give a more meaningful comparison.

Power costs are significant and users should attempt to estimate the KWh consumption of their IT equipment and the price they pay. Colocation customers will often have certain power usage included eg 2KW per cabinet but pay excess charges on overages.

Bandwidth (as opposed to connection speeds) usage costs can also be significant. Colocation users should check with their DC provider – some will offer unlimited bandwidth, but many will charge based on average or peak bandwidth usage. Most public cloud vendors charge bandwidth as ‘egress’ costs monitoring the volume of data exported from the cloud, rather than the peak or average data rates.

Cooling costs on-premises can be difficult to estimate unless specific cooling equipment has been deployed to service the IT equipment.

Software licensing costs can also be a significant factor when moving to cloud. Licenses may apply at the application, operating system, database or virtualisation layers. Some cloud providers allow users to protect their investments with the ability to bring perpetual licenses with them to the cloud.

Application licenses are sometimes included, as part of the service, especially with Software as a Service (SaaS), for example. Some MSPs provide a managed Platform as a Service (PaaS) to give clients all the benefits of SaaS yet permit them to bring their own (BYO) SAP Application licenses.

Operating Systems like Microsoft Server licenses can often be provided by the MSP for a very small amount. Where costs are significant, organisations should look at the relevant vendor incentive plans. Microsoft offer an ‘Azure Hybrid Benefit’ for users to bring their Windows Server licenses with Software Assurance to the cloud to reduce Azure costs.

Database licenses like SQL or HANA may also be permitted to be moved to the cloud, or not required, dependent on the MSP. SAP HANA database costs, for example, may be covered as part of the SAP PaaS offering.

Virtualisation ongoing fees with vendors such as VmWare or Nutanix, may have elements of committed costs that cannot be reduced. However reduced usage on-premises of virtualisation might assist reductions in costs or be open to re-negotiation.

Business Continuity and Disaster Recovery services or costs

BC/DR is one of biggest potential savings to be realised when building a business case to move a critical system, like a company’s ERP or other core system to the cloud. A Business Continuity plan often involves switching the production environment to a second location to continue IT operations in the event of a disaster. Cloud will offer more cost-effective options for DR solutions than any on-premises models.

On-premises architectures will require and utilise additional equipment to use when a disaster is evoked. This could be old IT infra-structure, duplicated Production with replication or the re-purposing of other IT equipment to act as Production in a disaster, such as QA or Dev Test environments. The on-premises DR solution chosen is largely selected based on the costs and consideration to the RPO/RTO targets that are acceptable to the business.

Cloud vendors and MSPs however have the advantage to host and manage many clients and so can spread the costs of their systems resiliency and DR capabilities and processes across many users. Public cloud providers like Microsoft employ massive solutions to protect whole Data Centres with services such as Azure Site Recovery that can be provide to clients at a fraction of the cost. These solutions replicate their VMs to another other DC in the same or different region.

Note particular care should be taken with the system architecture and the application inter-dependencies with complex systems involving multiple VMs using real time databases. Most DR systems utilise some sort of VM replication which will not always ensure database integrity. However, to protect databases, users should employ specialised and recommended solutions only. SAP HANA, for example, requires specific certified database replication systems and techniques to ensure data is free from corruption in the event of needing to be deployed.

Other Equipment costs

There are numerous other costs that could be relevant to clients looking at moving their systems from on-premises to cloud. These could include equipment rentals, equipment replacement parts, equipment maintenance contracts and any other IT repair services.

Employee Headcount

If organisations move their workloads to the cloud, there is the potential to reduce the effort required from an organisation’s in-house IT team. However, this is not always the case, especially if there is a lack of in-house cloud skills and a self-managed cloud environments by inadequately trained staff will at best be time consuming and at worst be very expensive to run non-optimised systems.

Most organisations will use an MSP to manage their environments in their cloud platform of choice. A cloud-native MSP is likely to operate more efficiently than an individual organisation. As well as potentially being able to lower their costs, due to economies of scale, they will also have more knowledge on how to implement cost optimisation methods and features on the cloud platform with the ability to share their expertise and resources between multiple clients.

However, even when an MSP is utilised there will not necessarily be reductions in headcount. Often organisations will seize the opportunity to train their staff to be re-deployed on more valuable functions in their organisation.

Capital Expense reduction

Generally, this is driven by refresh cycles or data centre expansions. Assets are retired and replaced on a regular cycle (usually every three or five years). These cycles often coincide with asset lease cycles or the forecasted life span of equipment. When a refresh cycle hits, capital expense (Cap-Ex) will be required to purchase new equipment. Dependent on the organisations processes, there may be savings in the application or justification time and effort from moving to a cloud Operation Expenditure (Op-Ex) model.

Disposal of old equipment

There may also be financial implications with the old physical assets that could be recovered and need to be disposed of. Equipment with residual value on the used/refurbished market could or sold off for some additional income. Outdated equipment with no resale potential could be donated to worthy causes with some good publicity potential or might incur further costs with environmental appropriate disposal services.

We have prepared a guide to Getting the best from your SAP Applications as a Service and the benefits of different cloud options.

You can read more about the financial case for moving to Cloud from Gartner and Microsoft.