What is Cloud TCO? | VMware Glossary (2024)

Cloud TCO is a formula from Cloud Economics used to calculate all costs and benefits related to a cloud computing project. It is used to determine the true, all-in costs which then can be compared to alternatives.

Although some cloud providers offer a TCO calculator, organizations should perform their own evaluations, since each cloud deployment is different, and gaining an understanding of the costs savings realized by a cloud project can be equally elusive.

Factors that can impact the total cost of ownership include the type of business, the functions and processes supported by the cloud, cost of training and education, impact on facilities expenses including power and cooling, regulatory impacts, cloud risk management and improvements due to a cloud project such as increased efficiency, faster decision-making, or reduced capital expenditures.

When defining a cloud TCO model existing and future infrastructure must be accounted for. Some attributes of a TCO model should include:

• Actual cost of operating cloud services as load changes due to demand
• Migration costs to rehost applications on cloud platforms including code changes and refactoring to support cloud or hybrid environments
• Sunk costs due to retiring existing on-premises infrastructure, including facilities costs if data center is no longer needed
• Costs to alleviate compliance risks created by migrating off-premises, such as potential HIPAA or GDPR violation costs
• Human costs involved in retraining or hiring new staff to ensure the proper skillsets for managing cloud solutions
• Potential value of eliminating capital expenditures with a cloud migration
• Potential value of increased agility in terms of meeting changing market demand, speeding time to market, and spinning up new cloud applications once a cloud platform has been adopted

Keep in mind that a TCO model is just that – a model – and should be adjusted over time as new factors and attributes are exposed. Every organization will have its very own TCO model since no two organizations have the same starting and ending points when it comes to cloud migration.

Calculating lifetime TCO for software must include not only the cost of the software itself but also the costs relating to the infrastructure that software runs on.

Thus, a comprehensive on-premises ERP solution would include the costs of:

• Servers and storage and their maintenance and upgrades
• Datacenter acquisition, rental, and maintenance
• Electricity, heating, air conditioning, and other utilities
• Human capital dedicated to maintaining physical data center and infrastructure

Whereas a cloud-based ERP solution would take into account the costs of the software either as a purchase or license cost plus

• Cost of hosting on cloud platform
• Human capital to migrate and maintain application functionality
• Potential data egress charges incurred by cloud provider

A lower TCO simply indicates a lower total cost for the useful lifetime of a given project or asset.

Some methods of lowering TCO include

• Reducing capital expenditures
• Speeding up migration and deployment of new functionality
• Increasing employee flexibility for work from home with mobility tools
• Increasing uptime to raise productivity

When it comes to lowering Cloud TCO, factors to consider include

• Assessing which cloud provider delivers the best value for a given project
• Lowering security risk by ensuring cloud and on-premises security is in sync
• Migrating backup, archival, and business continuity to cloud providers
• Eliminate on-premises maintenance by migrating to cloud providers

Although cloud migrations can lower overall TCO, your mileage may vary. Every organization must evaluate its unique business configuration and make its own assessment.

Every existing on-premises asset’s TCO must be considered before Cloud TCO can be evaluated. Some costs that will disappear when migrating an application to the cloud include

• Server upgrades and replacement, typically done every 3-5 years.
• Ancillary equipment including racks, networking gear, load balancing equipment, storage devices, and the support, maintenance, and replacement of these over time
• OS, database, middleware, and application license fees
• Utility costs for electricity, heating, and cooling
• Waste due to the need to overprovision servers to meet peak demands
• Physical real estate or rental costs for data center equipment
• Inventory and asset management
• Project Risk
• Time and effort to switch from one platform to another.

These costs can be compared to the predictable monthly costs incurred by shifting operations to a cloud provider and can reliably be used to calculate the TCO for both on-premises and cloud-based solutions.