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How do I manage the cost impact of cloud applications?

Top Three recommendations/considerations:

1. Use cost calculator to help estimate the cost upfront.
2. Start on a low scale to check and confirm if the estimates match with the real costs.
3. Monitor the usage and billing on a monthly/quarterly basis.

With the increasing adoption of cloud-based software solutions, it is important to manage the financial implications of this trend. UIC IT personnel must work with business managers to determine and communicate how the shift to the cloud affects their IT operating budgets.  From an IT spending perspective, application software has seen the greatest move to the cloud of all major areas. It is estimated that forty percent of organizations’ applications spend will be in the cloud in the next few years. Most organizations have adopted or stumbled into a hybrid architecture — a loosely coupled mix of cloud and on-premises applications. While some functionality remains on-premises, the balance is increasingly shifting toward deployment of cloud services across a range of functional domains.

A move to the cloud is almost inevitable, as vendors are actively reducing the development of their on-premises products. The reality is that new functionality and innovation is being developed for their cloud products first. It may trickle down to their on-premises offerings at some point, but there will be a lag. Eventually, your on-premises applications will reach end of life and be superseded by cloud offerings. You must, therefore, predict when that move is likely to happen and work with your finance team to map the impacts of such a move on application spend.

Traditionally, organizations have purchased software from vendors, configured/customized it, deployed it and then supported it. From a financial standpoint, this meant the significant upfront costs were generally capitalized under applicable accounting standards and then amortized (expensed) over the life of the application. This approach meant the significant upfront costs were defrayed over the life of the software asset. This method was highly desirable for organizations where capital was preferred. This long-established model is typically embraced by most organizations and, in particular, their finance functions. In this model, an organization amortizes the asset over a period of time. This results in a repetitive cycle of reinvest and realize that requires an upgrade or replacement investment at some point.

In the new cloud model, the customer contracts to pay a service fee in exchange for a right to access the supplier’s application software for a specified term. Over time, cloud usage tends to increase, leading to additional costs in usage fees.

 Component  On-Premises  Cloud
 Hardware Typically purchased outright, sometimes leased  Owned and supplied by vendor, included in service contract
 Software Typically purchased or developed by unit Owned and supplied by vendor, included in service contract
 MaintenanceTypically provided by vendor as an annual feeOwned and supplied by vendor, included in service contract

We recommend that you use the cloud pricing calculators to get a good estimate on what the cost of any application you place in the cloud.  Save the estimate information and share it with your financial team.  Use the built in cost analysis tools provided by your cloud provider to help understand your ongoing opex costs for cloud applications.




Keywords:cloud, capex, opex, budget, cloud-based software   Doc ID:97915
Owner:Dean D.Group:University of Illinois at Chicago ACCC
Created:2020-02-13 12:21 CDTUpdated:2020-02-27 19:58 CDT
Sites:University of Illinois at Chicago ACCC
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