A cloud computing cost analysis from Infosys, the big outsourcing provider based in India, came up with interesting results. In the first year, the on-premise system appears much more costly than the hosted cloud-based system. By the third year, the cost gap between the two is not substantial. By the fifth year, the on-premise system actually looks better. However, when you figure the costs for license renewal and a hardware upgrade that fifth year, the on-premise system will lose its cost advantage.

A McKinsey report in 2009 also looked at the payback from cloud computing and, according to a review of the report by Bernard Golden, came to the opposite conclusion: that cloud computing is more expensive. Golden’s interesting analysis is here.

The truth is that every organization will come up with different result when it plugs its own data into a business case for cloud. To figure out whether cloud computing is right for your organization, wiredFINANCE suggests evaluating three areas in both quantitative and qualitative terms.

Cloud computing offerings are so varied that it is unlikely that any organization will go through this kind of analysis just once. Most organizations will likely end up with a mix of cloud and on-premise systems, periodically altering that mix as the business situation and/or technology changes.

Here three key areas to consider:

Data security: In a cloud scenario, your data will most likely reside off premise. Will you be comfortable with that? Will your auditors and compliance people? Some GRC obligations may require different or additional steps with regard to data security in the cloud. There are practices and technology to ensure that your data in the cloud is as secure and compliant as when it resides on premise. Also, you should make sure to assess how secure your data actually is on premise; you might be surprised.

Use case: This looks at which data, systems, and applications are best candidates for the cloud. Some, such as data backup, are straightforward. Others, such as CRM, may be more problematic. Here you need to assess how you are doing it today and what you don’t like about it. You also will want to model how your related business processes will need to change as you put various pieces in the cloud.

ROI economics: Now you start crunching the costs. In general, cloud computing shifts on-premise expenses, a mix of CAPEX and OPEX, to primarily OPEX. Reduced, although not completely gone, are investments in on-premise computer systems and the people required to support them. In the cloud, you will have recurring fees based on usage or subscription. In addition, you may have a variety of network and resource charges and fees based on the movement and volume of data. For a large organization with many users and large volumes of data going in and out, these costs can add up fast. Also, make sure to consider ongoing on-premise costs for integration with remaining systems, office productivity tools deployment, and management of the mixed on-premise/cloud infrastructure.

Ultimately, you may find that the benefits of cloud computing have less to do with cost savings and more to do with flexibility, speed, and focus. ###