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Is McKinsey wrong on cloud ROI?

Posted on: April 17, 2009

McKinsey published a report this week claiming that their research shows that for organizations with revenues above $500 million using external cloud computing resources are more expensive than using their own datacenters: $366 a month per unit for cloud compared with $150 a month for traditional datacenter.

I had received quite a few emails with links to articles on this report (e.g. this or this) so I decided to post my opinion in this blog as well.

First of all, you don’t have to work for McKinsey to do a simple exercise: go to Amazon’s web site, see their EC2 pricing, multiply their, say, Windows/SQL server price by 24 hours by 365 days and learn that your costs can get as high as $28K a year.

Does this mean cloud computing is overly expensive? The answer is: it depends.

First of all, as Joe rightly mentions here, even if Amazon’s price seems way too high, you might actually be spending a lot internally as well – you just don’t realize that because a lot of companies don’t calculate these costs.

Secondly, just the costs of running the computers (or VMs) and pretending you are doing a comprehensive cloud computing analysis is a somewhat flawed approach. Of course, when we simply talk about computers, and the amount of compute power you need is constant (so you don’t need elasticity and can provision in advance) then owning is probably cheaper.

However, this does not mean that consuming services is more expensive than deploying and maintaining corresponding software implementation. Deploying, say, a modern messaging system such as Exchange following all the hardware a design guidelines can cost a fortune even to a medium-size business, for a lot of companies their SAP or PeopleSoft implementations are huge expensive projects, and desktop costs are probably higher than anything else.

Cloud computing means a lot of different things to different people and when we see costs analysis reports like that we often generalize and start comparing apples to oranges. Depending on what exactly you are planning to consume from the internet and what would be the on-premise alternative can make your mileage vary a lot.

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3 Responses to "Is McKinsey wrong on cloud ROI?"

Hi Dmitry,
I’m curious how you got $28K for a year’s worth of Amazon Windows/SQL usage. Specifically, what was your model? Large instance? Memory instance? Any S3 storage that was figured in and how much? Did bandwidth usage figure into it and how much?

In short, I’d like to know how you got that figure?
Thanks,
-Sam

I just took whatever was the price of (I think large) Windows Server instance with SQL and multiplied by the number of hours in year.

Since then the prices have somewhat gone down. However, this back of the envelope calculation does not take into the account administrative costs which you would have if you have separate instances per customer – and in my mind these will affect the bottom line of non-multitenant apps in a much bigger way.

Thanks for this post. The compelling business case for the cloud is realized by many IT professionals, but determining the return on investment of a technology such as cloud computing can prove to be difficult. Have you encountered the ITX (IT Cloud Transformation) ROI Calculator? It’s a free online service which will enable you to quickly estimate how much you stand to save in the cloud, versus on-premise. The program takes into account software applications, servers, data centers and back office functions and determines which would be cheaper with Web-based software applications and how long it would take to achieve ROI. For more info see http://bit.ly/bFsy7X

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The posts on this blog are provided “as is” with no warranties and confer no rights. The opinions expressed on this site are mine and mine alone, and do not necessarily represent those of my employer Jelastic or anyone else for that matter. All trademarks acknowledged.

© 2008-2012 Dmitry Sotnikov

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