Assessing Cloud Payback: Saugatuck ROI Framework and Cost Benefit Analysis

The Cloud cuts capital expense, sharply reduces IT costs, especially human resources, and shifts most responsibilities for managing and upgrading solutions to the provider.  Costs are pay-as-you-go, based on user needs.  Meanwhile, Cloud providers handle new releases, upgrades, ongoing platform and technology costs.

Saugatuck has developed a framework to assist clients in envisioning and developing useful, relevant models for cost comparison/ROI assessment of Cloud-based solutions versus more traditional on-premises software deployments. As with almost all ROI framework/models, this model is relatively static, and does not directly take into account various dynamic cost factors, including:

•  Flexibility: What types of business and IT flexibility does the Cloud solution in question enable, at what cost, and how do these affect the situation under consideration.

•  Provider changes over time: How will specific providers’ solutions, technologies, service levels, and licensing/subscription costs vary over the time period under consideration? 

•  Opportunity Cost and Time Value of Money: How will the benefits/returns on investments in specific solutions compare with alternative investments, at different rates of interest/costs of investment, over time?

The framework in this Strategic Perspective illustrates clearly how return on investment should be calculated, and payback understood, when assessing and presenting the value of deploying solutions to the Cloud. In presenting this framework we would emphasize there are three important things to understand: 1) Understanding how the Cloud delivers superior economic value, 2) Determining the relevant costs to include in the analysis and 3) Calculating the ROI realized from Cloud Solution deployments.

Cloud ROI is based on a formula that relates the value received, less the cost of investment, divided by the cost of investment. Logically, if there were no gain or a loss, the return would be negative. Positive gains create a fractional expression that can be expressed as a percentage of the original investment.

Cloud ROI may be calculated for any number of annual periods, but 3-year and 5-year analyses are typical.

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