What is cloud ROI? How to calculate

Cloud providers help guide their businesses from the traditional model of self-hosting their IT infrastructure towards the flexible model of virtualization and cloud services. Companies are inclined towards cloud investments only when they discern tangible benefits for their operations. Embracing cloud technology offers numerous avenues for boosting returns on investment (ROI). Choosing the right cloud provider includes following best practices and developing the right cloud strategy tailored to your specific business needs. While ROI traditionally denotes financial success in transactions, cloud computing is not solely a technical infrastructure upgrade.

The broader impact of technology on business outcomes should not be overlooked. The value proposition of the cloud extends beyond financial performance to include customer satisfaction, corporate identity, and market reputation. This article delves into the concept of cloud computing ROI, the advantages of measuring it, and strategies for leveraging it to drive business growth. Additionally, we examine the key factors influencing cloud ROI and offer insights into calculating cloud ROI.

What is cloud ROI?

Cloud ROI is a metric that evaluates the financial benefits an organization reaps from adopting cloud-based solutions compared to the initial and ongoing costs associated with them. It’s essentially a way to measure the value proposition of cloud migration or cloud-native development.

Formula to calculate cloud ROI

Cloud ROI can be calculated with the following formula:

Cloud ROI = (Total benefits from the cloud investment – cost of the cloud investment) / total cost of cloud investment

Let’s see this formula in action with a hypothetical scenario:

A company migrates its on-premises servers to the cloud, resulting in:

• Annual cost savings of $100,000 in hardware maintenance and electricity bills.
• Increased developer productivity leading to $50,000 in annual revenue growth.
• Cloud service fees totaling $75,000 per year.

Total benefits from cloud investment: $100,000 (cost savings) + $50,000 (revenue growth) = $150,000

Total cost of cloud investment: $75,000 (cloud service fees)

Cloud ROI calculation: ($150,000 - $75,000) / $75,000 = 0.75 or 75%

In this example, the cloud ROI is 75%, indicating a significant return on the cloud investment for this organization. They’re not only saving on costs but also experiencing revenue growth due to increased developer productivity.

Why is it important to measure cloud ROI?

ROI is important for cloud computing because it helps you justify and optimize your cloud strategy. Cloud computing can offer many benefits, such as scalability, flexibility, security, innovation, efficiency, and cost savings.

However, it also involves additional costs, such as subscription fees, migration expenses, training, and maintenance. By measuring the ROI of cloud computing, you can assess whether the benefits outweigh the costs, and how you can improve your cloud performance and savings.

Key factors impacting cloud ROI

The benefits of cloud adoption include both quantitative and qualitative value. While ROI and Total Cost of Ownership (TCO) quantify the former, realizing the latter requires a comprehensive approach. Some of the factors affecting cloud ROI are:

1. Evaluating downtime

Downtime and network latency across IT systems is a significant factor influencing ROI. It impacts both customers and internal stakeholders. Public cloud service providers, leveraging extensive experience, have markedly reduced downtime stemming from hardware infrastructure.

Additionally, application infrastructure is the second major contributor to incidents. Cloud service providers have abstracted application infrastructure, offering managed services for various components such as web servers, application servers, and container management. This comprehensive approach has reduced downtime hours, increasing ROI through both hardware and application infrastructure improvements.

2. Assessing agility

The capacity to swiftly adapt to business environment shifts is crucial. Cloud computing drastically reduces infrastructure scaling time, expediting revenue-generating projects. Cloud-native businesses can efficiently access, configure, and deploy software, fostering innovation. Cloud automation optimizes agility by swiftly provisioning compute engines and implementing security policies.

3. Optimizing pay-as-you-go model

Traditional self-hosting data center models suffer from idle resources and budgetary inflexibility. A cloud provider eliminates underutilization and over-provisioning issues, providing automated resource management and cloud cost optimization. Pay-as-you-go models ensure resources align with usage, overcoming the constraints of traditional capital expenditure models and boosting overall ROI.

4. Implementing cloud risk management

Assessing project failure, infrastructure outages, and natural disaster costs, while devising disaster recovery solutions, is important in cloud risk management. Proactive risk mitigation strategies safeguard against potential disruptions, ensuring business continuity and minimizing financial losses, potentially boosting ROI.

5. Addressing technology depreciation

Continuous technological advancements yield cost reductions and capacity improvements. Upgrading technology in traditional data center environments incurs substantial costs and lengthy processes. Conversely, public cloud service providers streamline technology adoption, simplifying proof of concept, pilot, and production phases.

Benefits of measuring cloud ROI

It’s important to understand your cloud bill, grasp the financial benefits of utilizing cloud services, and know how to measure their impact on your organization. According to the 2024 State of Cloud Report, about 51% of respondents are optimizing cloud costs and evaluating the ROI for their cloud projects, while only 20% of companies indicate that they are not measuring the benefits of cloud computing.

Here are a few key benefits of measuring cloud ROI:

• Data-driven decision making: Quantifying the impact of cloud migration allows you to make informed choices about future cloud investments.
• Cost optimization: Measuring ROI helps identify areas for cost savings within your cloud usage. You can then adjust resource allocation or service tiers to maximize efficiency.
• Improved resource allocation: By understanding the value delivered by cloud services, you can strategically allocate resources to support critical business functions.
• Justification for future cloud projects: A solid ROI assessment strengthens your case for future cloud initiatives, securing buy-in from stakeholders.
• Benchmarking performance: Measuring ROI allows you to compare your cloud performance against industry benchmarks, identifying areas for improvement.

Steps to calculate your cloud ROI

To effectively calculate cloud ROI, businesses assess key factors such as basic operational needs, regulatory compliance, and organizational maturity. This approach allows for a comprehensive analysis of the costs and benefits of cloud computing. 08202922079

1. Determine total cost of ownership

This step includes not only the direct expenses of cloud services but also migration, integration, and ongoing management costs. Multiple elements contribute to the overall cost structure—ranging from business intricacies to technical considerations.

Understanding TCO ensures a precise evaluation of cloud service ROI. Calculate your cloud TCO and learn best practices to lower your cloud TCO to improve your cloud ROI.

2. Identify Key Performance Indicators (KPIs)

Identifying Key Performance Indicators (KPIs) is crucial in assessing cloud service ROI. Before evaluation, pinpoint relevant Objectives and Key Results (OKRs) such as cost savings, time to market, revenue growth, and customer satisfaction. Clear goals enable you to establish an effective ROI measurement framework for cloud services.

3. Consider intangible benefits

Beyond financial gains, consider intangible benefits like heightened agility, scalability, and security. Though challenging to measure precisely, these factors influence the overall ROI of cloud services.

4. Draw insights from real-world case studies

Evaluating successful cloud service deployments through real-world case studies offers valuable insights into potential financial gains and organizational impacts. By dissecting these cases, organizations can glean actionable data to inform strategic decisions and maximize their ROI from cloud investments. Look for case studies on cloud provider sites (hyperscalers and other providers including DigitalOcean customer stories) or industry research reports (Gartner, Forrester) for a better understanding.

5. Monitor and evaluate continuously

Evaluating cloud service ROI should be an iterative process, aligning with the changing nature of your business. Continuous cloud monitoring, leveraging analytics, helps to ensure ongoing value.

Strategies to increase your cloud ROI

According to a report by HFS, organizations adopting cloud computing face challenges, notably in proving ROI. Only 25% can demonstrate tangible ROI, often resorting to indirect or extended calculations. This underscores a crucial gap in collaboration between business units and IT departments, emphasizing the need for strategic approaches to improve cloud ROI.

Here are some strategies to increase your cloud ROI:

1. Right-size your cloud resources

Right-sizing aligns computing resources precisely with operational needs, eliminating wasteful expenditure on unused capacity. It involves both downsizing over-provisioned resources and upsizing those nearing capacity, boosting cost efficiency.

• Assessment of workloads. Thoroughly evaluate workloads, considering performance requirements and usage patterns. This analysis forms the basis for efficient resource optimization.
• Configuration testing. Experiment with diverse instance sizes and types to identify the optimal fit for each workload. This ensures the selection of the most cost-effective configurations.
• Utilization of heatmaps. Leverage heatmaps for visualizing computing demand trends over time. By discerning patterns within the heatmap, you can pinpoint cost centers and adjust resource allocations accordingly.
• Integration of load balancing. Implement load balancing mechanisms to evenly distribute workloads across resources. This prevents resource overuse or underuse, maximizing resource efficiency and minimizing unnecessary costs.
• Continuous review and adjustment. Maintain an ongoing review process, regularly reassessing resource allocations in response to workload changes. In the process, you ensure sustained cost savings and optimal resource utilization in the long term.

2. Enable automated scaling

Automated scaling offers an advantage in cloud-centric organizations, mitigating the complexities of manual scalability and curbing over-provisioning-induced costs. Auto-scaling enables real-time modification of computing resources, aligning capacity with actual demand. This feature is particularly beneficial for managing unpredictable and mission-critical workloads.

Instead of maintaining idle resources during low-demand periods or encountering capacity constraints during peaks, Auto scaling ensures precise resource allocation, maximizing efficiency throughout varying usage scenarios.

3. Optimize workload scheduling

Effective cloud cost management and measuring cloud ROI depends on optimizing workload scheduling. Continuous assessment and analysis of cloud usage will often reveal opportunities to improve efficiency and reduce expenditure. The primary sources of wasted spending—idle resources, and oversized capacities,—require precise workload optimization and dependency mapping.

Understanding workloads helps you avoid unnecessary expenses by eliminating unused cloud assets and right-sizing instances. By identifying unattached volumes and terminating redundant assets, organizations can optimize cloud spending effectively.

4. Use spot instances

Spot instances offer an opportunity to procure unused cloud capacity at a substantial discount compared to on-demand instances. While subject to potential interruption, they prove cost-effective for flexible, non-critical workloads when managed efficiently.

• Monitoring spot instance prices. Regularly track spot instance prices, leveraging third-party tools to stay informed about pricing trends and facilitate informed decision-making.
• Identifying suitable use cases. Evaluate stateless applications, development environments, and other non-critical workloads as prime candidates for spot instances, given their flexibility and tolerance for interruptions.
• Integration with load balancers. Integrate spot instances with load balancers to evenly distribute workloads, minimizing the impact of individual instance interruptions on overall performance.
• Establishing fallback strategies. Develop contingency plans to seamlessly transition to on-demand instances in the event of spot instance reclamation, ensuring uninterrupted operation and mitigating potential disruptions.

5. Select a cloud provider with predictable pricing

From AWS bill shock to Azure hidden costs, choosing cloud providers with complex pricing structures can lead to unforeseen expenses and budgetary challenges. Opt for providers offering transparent and predictable pricing to improve your cost management and have better control over cloud expenditures.

Look for detailed usage breakdowns to identify optimization opportunities and ensure budget adherence. Consistent and transparent pricing structures instill confidence and peace of mind.

Maximize your cloud ROI with DigitalOcean

DigitalOcean stands out as a strategic choice for optimizing cloud expenditures, particularly tailored to cater to the requirements of small to medium-sized businesses. With a commitment to simplicity and financial efficiency, DigitalOcean offers a suite of services to reduce monthly outlays without intricate cost-saving methods.

• Simplified pricing model. DigitalOcean has transparent pricing, charging a flat rate of $0.01 per GB for data transfer.
• Ample bandwidth allocations. Businesses stand to benefit from generous monthly outbound bandwidth allowances ranging from 500 GiB to 11,000 GiB, contingent upon the selected Droplet plan. Bandwidth resources are pooled across Droplets, accommodating businesses of varied sizes with diverse networking requirements.
• Competitive overage rates. In scenarios where data transfer requirements surpass the allocated allowances, DigitalOcean imposes a competitive flat rate of $0.01 per GiB for additional outbound data transfer over the public network.
• Mitigation of vendor lock-in. Addressing the challenge posed by high egress fees and vendor lock-in, DigitalOcean offers low and predictable egress pricing, facilitating seamless data transfer and provider migrations without incurring exorbitant expenses.
• Bandwidth pooling. Through the operation of multiple Droplets, DigitalOcean consolidates bandwidth allowances. Scaling up the deployment of virtual machines augments the collective bandwidth cap, providing more flexibility and potential cost savings.
• Free internal data transfer. Internal data transfers among DigitalOcean Droplets via a virtual private network are uninhibited by bandwidth allowances or additional charges, benefiting businesses with substantial internal data traffic.
• Advanced offerings. DigitalOcean provides Premium CPU-Optimized virtual machines tailored for CPU-intensive applications, alongside Managed Kubernetes, Managed Databases, and a range of storage options—all competitively priced.
• Support and resources. DigitalOcean extends SMB-friendly customer support, comprehensive documentation, and tutorials, helping users navigate cloud computing.

By leveraging the suite of offerings provided by DigitalOcean, businesses can efficiently manage and optimize their cloud expenditures while gaining access to reliable services and support customized to their needs.

Sign up for DigitalOcean today.