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Embotics Cloud Management Blog

Cloud Cost Models

On your journey to Cloud Services you’ll eventually have to look at costs and chargeback, or at the very least a showback, as these are essential elements of the cloud computing paradigm.

As IT evolves into a service-based organization and IT services become more consumer driven, the pressure grows on you to change the way you do things today and to adopt more business-like processes and practices.

Simply put, IT services are products that need to be marketed and sold to end consumers. And like any other product in a consumer driven marketplace, IT Cloud Service providers have to ensure they are bringing the right products to the right market at the right time—and at the right price. Otherwise, consumers will go elsewhere to get what they need. The long sought after goal of “making IT behave more like a business” is upon us or, at the very least, knocking at the door.

This may sound like a daunting prospect, but fear not, for like everything else we’ve learned so far about Cloud, it’s all about the journey—and every journey starts with a single step.

So where do you start?

If every journey does start with a single step, then your organization may already have taken quite a few along this path.

Most IT organizations already track their IT costs in some manner, often based on asset acquisition and depreciation cycles, but these fail to take account of the other costs that go into providing an IT service.

A more sophisticated approach is to develop a Total Cost of Ownership (TCO) model for IT assets, based not only on acquisition costs but also on lifecycle management, maintenance and support costs. This is a step in the right direction, but still not the best approach to building a cost model for your Cloud Services.

It’s the internal IT “cost of service” technical point of view that often trips up those embarking on this journey. Trying to set up a costing solution that completely matches an ever-changing IT environment and that offers 100% recovery, will drive you insane very quickly. Instead, you need to consider the Cloud Service from a consumer point of view, a different thing indeed.

Consumers of Cloud Services are much more business driven. The service customer looks for consistent, predictable pricing that they can use to make a decision on whether or not to buy from you, or to compare against your competition, which is rapidly growing. In such a case, it’s less about what the service costs and more about what value it delivers. As consumers we have all experienced this: I want it, but is it worth the money?

Cost of providing the service is still a factor, but no longer the only one. A major benefit from this approach is to move the perennial discussion away from “IT is costing us too much,” to “What value is IT bringing to the table?”.

In developing a cost model for your Cloud Services, you should certainly start with what it costs to provide, but those numbers can and should be amalgamated to give you a baseline for costing and not an end result. You then refine your numbers based on other factors of which product development people are only too aware:

  • What is my market like?
  • What do my customers want?
  • How many will I sell over how long?
  • Who is my competition and how much are they charging?

The message here is not to get too tied up on bits, bytes, asset depreciation, or VM-to-Host density ratios, they mean little to the customer arriving at your portal to shop for Cloud Services. They want to know how much it costs and what they get for it. The nuts and bolts are your concern, but your customers do not need them or want to see them.

Topics: ROI Cost Management Chargeback & Showback