11/17/22, 11:24 AM How to Calculate Cloud Computing Costs

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Tutorials > Cloud Computing

How to Calculate Cloud

Computing Costs
By David Scott Brown
| Last updated:
May 26, 2020

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11/17/22, 11:24 AM How to Calculate Cloud Computing Costs

Source: Kinsei-TGS/iStockphoto

Introduction
Determining the potential costs of cloud computing can be as complex as the technology
itself. Not only are you faced with the different pricing structures of cloud providers, you
must find a reasonable way to estimate the resources that you will need in the future.
And despite your best efforts, there is no guarantee that your calculations will be correct.
That’s because of the variable cost architecture of the cloud.

Of course, you want it to be more than a guessing game.

One way to estimate future usage is to look at what you’ve used in the past. For example,
if you can look at your electric bills for the past year, you can get a pretty good idea what
your expenses will be over the next few months. That presupposes that you are not
making any drastic changes in your electricity usage.

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Herein lies the problem. Suppose that you have a website that markets a certain product.
Because you have hit the market at the right time with excellent promotion, the website
takes off. Thanks to the scalability of the cloud, sufficient resources are automatically
ramped up to meet the increased demand. This is good, because the more popular your
site becomes, the more sales are completed. On the other hand, your cloud computing
costs may go through the roof.

Anticipating the need for resources is the key to calculating cloud computing costs. Those
resources include compute, storage, and network. You may find that your cloud
computing budget needs to be as flexible as the cloud resources that you are using.

From CAPEX to OPEX

There are plenty of models and methods out there for budgeting projects and managing
cost centers. Unless you manage a cost center yourself, you may never have had to deal
with the financials related to information technology. IT professionals have enough to do
to keep up with the latest practices in their particular areas of expertise. But as careers
develop, even the best of us find that we have become wrapped up in matters of budget
and finance. Rather than espousing a particular financial method, let’s look at tech
budgeting in broad strokes.

The traditional computing model was dependent on significant capital expenditures

(CAPEX). The one-time purchase of hardware, software and licenses meant that
companies had to squeeze as much work out of these resources as possible throughout
the life cycle of these platforms. There was always a strong focus on the maintenance and
configuration of proprietary machines. This meant that vendor support was essential to
keeping systems current and healthy.

Just as a reminder, capital expenses related to the traditional data center include:
servers, switches, routers, firewalls, storage, load balancers, software and licenses. The
technical expertise required for installation and maintenance of these systems also costs
money in terms of salary, wages and subcontracting expenses.

The advent of the cloud changes all that. The cloud allows businesses to focus on services
rather than the underlying technologies. That means that IT budgeting moves away from
CAPEX and pays for the cloud as a recurring operating expense (OPEX). In fact, many IT
costs become difficult to track because they move to other cost centers. For instance,
cloud financial services may now be covered by a company’s finance department. What
were once considered IT services in the old data center model have become known by the
functions that they are addressing rather than the technology that runs them.

So who pays for cloud services? It could be the sales department, or finance, or
operations. Increasingly IT departments may play a lesser role.
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Cost Centers in the Cloud

The three cost centers of the cloud – compute, storage, and network – provide the outline
for the calculation of cloud costs. Author Joe Palian of Expedient addresses these three
areas in answer to the question “How Do Cloud Providers Decide How Much to Charge?”
But these broad areas don’t account for everything. The options and variables related to
cloud usage can make predicting costs something of a guessing game. But the main
components give us something to work with.

Compute

The costs for compute depend entirely on what you’re going to do with it. How much
processing power is required for your computing projects? A common way to deal with
computing capability has been to purchase more than you need. Better to have too much
than too little, as they say.

But the scalability of cloud computing means that you can take a much different
approach. If you have a temporary project that is entirely contingent upon the response
of website visitors, you can use cloud computing to scale up automatically and scale back
down just as quickly. The computing systems that you set up with cloud providers can
purchase for on-demand usage or for a fixed period of time.

The parameters involved in selecting a CPU include the operating system and the
expected usage (in percent). Cloud providers will then calculate the cost of CPU based on
their cost per gigabyte (GB) of virtual RAM.

Storage

Advancements in storage technology have brought down prices considerably. It is no

longer necessary to have dedicated hardware for each client or project. Virtual disks have
replaced their physical counterparts. The same scalability in the compute sphere applies
to storage as well. Storage is calculated in units of GB of virtual disk.

Network

This area is generally measured in GB of data transfer. But bandwidth is also calculated in
terabytes (TB) or petabytes (PB).

While these are the main cost centers, not everything that a cloud provider offers will fit
neatly in these three categories. Each provider packages their offerings in different ways.
It might even seem like comparing apples to oranges when putting one service up against
another.

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Multicloud Infrastructure
A further complication in calculating cloud computing costs is the fact that most
companies are turning to multiple providers to handle their cloud computing needs. The
research firm IDC found that 84 percent of IT executives expect to use multiple clouds
from different providers. It’s not enough to determine what your favorite cloud company
charges if you are going to spread out your cloud presence to more than one company.

Kip Compton of Cisco blogged about the complexities of the multicloud. And he suggested
several questions to ask. How will you manage the different providers? How will you keep
everything secure? How will you balance cloud resources with those you have on
premises? But the real question that many companies will want to know is this: How
much will it cost?

The three biggest cloud providers, according to Gartner, are Amazon Web Services
(AWS), Microsoft and Google. But there are plenty of other players in the game.

Companies like Cisco and Nutanix offer support for the management of a multicloud
strategy. They can even use automated processes to redirect traffic to more efficient or
economical resources – even if it means dynamically moving to another cloud provider.

Using the Calculators

Despite your best efforts, you may have a hard time estimating cloud costs using your
spreadsheet or other bookkeeping tools. You’ll be happy to know that the cloud providers
have done the work for you. Here are some calculators taken from a list compiled by
TechTarget:

Amazon Web Services: AWS Total Cost of Ownership (TCO) Calculator

Google Cloud: Google Cloud Platform Pricing Calculator

IBM Bluemix: IBM Cloud Pricing Sheet

Microsoft Azure: Microsoft Azure Pricing Calculator

VMware vCloud: VMware vCloud Air Pricing Calculator

CenturyLink Cloud: CenturyLink Cloud Price Estimator

Red Hat: Red Hat Infrastructure ROI TCO Calculator

Profit Bricks: ProfitBricks Virtual Data Center Calculator

Interoute: Interoute Pricing

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Rackspace: Rackspace Cloud Calculator

Cloudops and Workloads

In an article for InfoWorld, author David Linthicum suggests another approach to
calculating cloud costs. He talks about the new buzzword “cloudops,” which he defines as
“the ability to operate workloads, including both applications and data, once they get to
the public cloud.” He proposed what he called a simple formula:

Cloudops Cost Per Year = ((NW*CW)*COM)+((NW*CW)*SR)+((NW*CW)*MR)

The variables include number of workloads (NW), complexity of workloads (CW), security
requirements (SR), monitoring requirements (MR), and a cloudops multiplier (COM).
Whether you consider this formula simple probably depends on your own mathematical
abilities. Filling in the variables could be a challenge.

But Linthicum tries to ease the minds of his readers:

Don’t worry about this specific formula; its general nature will likely result in an
incorrect calculation when you first use it. Instead, consider it a starting point, then
customize the formula and your definition of the correct values over time to end up
with a formula you can wield with assurance.

Everybody’s cloud computing needs will be different. Linthicum thinks you should come
up with your own formula.

This is where the variable cost architecture comes in. The variables in the formulas above
are left for the cloud user to determine. A cloud provider can tell you how much they
might charge for a certain number of gigabytes of data. But they won’t tell you what that
number should be. That’s up to you and your project designers. The provider won’t be
able tell you how many servers to request, which type, or how many GB of virtual data
you might consume. Likewise, they can quote you a price per GB of data transfer, but it is
not their place to say how much that should be.

In determining your potential resource usage, you might want to put together your best
technical minds into a room with your best financial personnel. And you may have to
change your way of thinking. You are no longer purchasing data center hardware and
software. You are matching your IT requirements with a flexible and scalable cloud
architecture. If you only think in terms of hardware and software, you may never be able
crunch the numbers properly.

There are some strategies that might help. Rather than searching for a precise number,
what about creating a possible price range? What’s the highest price you could live with?
What do you think would be the minimum required? Perhaps setting high, medium and
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low usage points would be beneficial. And of course starting small in any migration to the
cloud is generally a good idea.

Moving to the Cloud

If you’ve never managed cloud resources before, it can be a bit intimidating. Techopedia
addressed the transition in an article called "What Moving an Idea to the Cloud Actually
Entails." There are checklists and strategies and lots to think about. The whole concept of
a data center has been transformed in recent years.

When calculating costs, you will have to determine how your current IT infrastructure
matches resources in a cloud environment. Will you try to move everything at once, or
will you take a gradual approach? It’s better to start small.

Even so, it might be difficult to predict cloud costs based on how things worked in the
data center. Remember, cloud computing has changed the orientation from system
maintenance to application assurance. The apps you run on the cloud are agnostic about
the infrastructure that runs beneath them.

Controlling Cloud Costs

Some of us are old enough to remember what was known as the “energy crisis” back in
the 1970s. Because of a complex set of international issues, gasoline stations ran out of
fuel as drivers tried to fill up their tanks. The U.S. government put regulations on
thermostats for the heating and cooling of government buildings. And the speed limit on
national highways was limited to 55 mph. Sometimes controlling usage is the most
important thing.

That principle applies to the usage of cloud resources. Unless you have an unlimited
budget (which no one does), you will need to find ways to keep costs down by capping
usage where necessary. The pay-as-you-go nature of cloud computing requires sound
financial management. Particularly when starting out, you will want to keep a close eye
on what resources you are using.

The good thing is that it is possible to configure cloud devices to shut down automatically
when not in use. Are your cloud resources not needed after hours or on the weekend? You
can set up your virtual servers and network to operate at specified hours.

Techopedia has addressed the subject in detail in a white paper called Controlling Costs in
the Cloud: 8 Things Every CIO Must Consider. It would be a good document for anyone
interested in cloud costs to download and review.

Total Cost of Ownership

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One mistake that IT managers might make when dealing with infrastructure is to ignore
the concept of total cost of ownership (TCO). Calculating TCO is not just about one-time
costs. You need to think about what the expenses will be over time.

Cloud providers offer discounts for long-term commitments. On-demand or as-needed

services give you plenty of flexibility, but they may not give you the best cloud prices.
Commitments for one, two or three years will help you lock down prices and make your
costs more manageable. Such arrangements can give you discounts of 70 percent or
more.

The thing about cloud computing TCO is that you no longer have to worry about the life
cycles of equipment or other data center infrastructure matters. In fact, you may only
need cloud services for a short-term project – in which case, you’ll be happy to use
usage-based resources rather than a purchased infrastructure. One company recently had
such a project. The manager reported how they were easily able to scale up to meet
resource demands and come right down as the needs diminished.

Let’s face it: So much of the work done in information technology is project based. Even
those things that might be considered routine maintenance procedures, when viewed
through the eyes of a project manager, share many of the same characteristics of any
other project. When calculating the costs associated with your cloud computing needs,
you should establish a plan that encompasses all aspects of your cloud project. And that
goes beyond projecting gigabytes of virtual RAM.

When defining scope, you should brainstorm anything that might be needed, such as:

Time
People
Equipment
Administration
Fees
Licensing
Supplies

What about the technical expertise to implement and manage your cloud resources? Do
you have those in-house, or will you be working with contractors? How many hours of
work will be required from those personnel, and at what pay rate? Will you need to pay
for licenses for software that may be installed on the cloud? Are there other fees
involved? What about your own salary and expenses while on the project?

Conclusion

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In the end, your final calculation for anticipated cloud computing use might be considered
nothing more than an educated guess. Along with determining costs, you will need to find
ways to save money where you can. This means looking for possible discounts, turning off
cloud devices when not in use, or making longer commitments when it makes sense. And
your method for calculating total cloud costs may be one that you develop on your own.
You know the variables better than anyone. Whether you come up with your own complex
algorithm or develop robust accounting worksheets, you will have to keep a close eye on
these costs. Better to control them now than to let them spiral out of control down the
road.

Tags

Cloud Computing
IT Business Alignment

Written by
David Scott Brown

David Scott Brown has more than 15 years experience as a freelance network engineer. He
has worked in both fixed line and wireless environments across a wide variety of
technologies in Europe and America. David is an avid reader and an experienced writer.

Read David Scott Brown’s bio

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