Calculating IT Costs: Why Is It So Hard?


IT Business Edge offers a number of calculators designed to help folks determine and compare the costs of various IT products and services. Visit our Knowledge Network and you'll see one designed to help determine the total costs of operating a data center, one to help you figure how much your company can save by allowing employees to telecommute, and one for comparing costs of on-premise software to software-as-a-service, among others.


The latter question is one that gets bandied about quite a bit. Last week I wrote a post in which I shared the savings one company enjoyed by switching several of its key applications to SaaS. I thought it offered some good nuts-and-bolts numbers. But not all readers found the numbers compelling. A few commenters pointed out it's tough to make generalizations and that it's always best to run individual financial analyses. I agree. That's rarely a simple thing, however.


For an interesting illustration, I found a CIO.com item by Bernard Golden in which he discusses the difficulty of comparing the cost of Amazon's EC2 to on-premise resources. He makes the case that few IT organizations know the true costs of running their operations. Even outsourcing providers, whose business is based on being able to provide services for less, rarely know these costs, Golden contends.


A big part of the problem, he writes, is the plethora of indirect costs associated with providing IT services that are often not directly linked with those services but considered part of the overall costs of internal IT operations or possibly the broader company. Maybe this is why IT carries a reputation of being a cost center? Among the indirect costs he lists: internal personnel associated with managing procurement processes, and folks that manage all of the contracts and licensing agreements. Frustratingly enough, these kinds of costs generally don't go away with traditional outsourcing agreements. In fact, they may even increase.


Perhaps the biggest cost associated with running internal IT operations, says Golden, is the senior management time wasted worrying about it, time that could be spent on more strategic issues. He writes:

Every minute spent on reviewing an RFP for procuring another tranche of servers is a minute not devoted to how to use IT for competitive business advantage.

Spending lots of hours tending to routine operational stuff can cause CIOs to feel pretty unfulfilled. Yet it's hard to focus on strategy unless the routine, day-to-day operations are running smoothly, a point I made in a post about the CIO as "practical visionary."


That's exactly why it makes sense to provision cloud computing resources from a provider like Amazon, concludes Golden. Other reasons:


  • The pricing is fixed, which makes it easy to calculate costs.
  • It's also highly transparent, especially in regard to making any necessary changes. This certainly isn't the case with traditional outsourcing contracts, notes Golden.
  • Purchase is simple. No complicated RFPs required.
  • It's actually pretty cheap, considering the high costs of electricity in some parts of the country.


Golden also offers some handy tips for folks interested in giving the cloud a try:


  • Don't overprovision. Better to start small and upgrade if needed.
  • Choose your applications wisely. In particular, consider the cloud for temporary or transient apps. Golden offers the example of a client that needed to test a system with 100 simultaneous browser instances. It accomplished this over the course of three days, at a cost of $100.
  • Take a single, low-importance app and migrate it to the cloud. Then crunch the numbers and compare it to the cost of using internal resources. (As noted above, this may not be as easy as it seems. You want to look at the app in relation to the overall cost of delivering computing capability.)


Of course, maybe you're so confident that the cloud will save you money that, like General Electric with its internal SupportCentral network, you won't even see the need for a formal ROI analysis. I can't imagine too many companies in that position today.