Return on Investment (ROI) is the most often used measurement when making project investment decisions. It measures the rate of return versus the cost of the investment. Because ROI is a percentage, it is very easy to make quick comparisons when evaluating multiple options. There are only four ways to either increase revenues or lower costs, improving ROI numbers. The four financial levers are the following:

• Decrease investment
• Increase revenue
• Decrease costs associated with the activity
• Reduce the time required to attain revenue

Cloud computing can operate any of these levers but the simultaneous achievement of all four is impossible. The relationship between these factors is the most important aspect of cloud ROI, not the absolute values. For example, a project moving to a public cloud may resemble the following: initial investment decreases, operating costs may increase, revenue may remain flat, but margins may increase due to lower investment, and return may accelerate due to lower overall investment at higher return margins. Increasing revenue in this situation would accelerate the rate of return and shorten the time needed to attain revenue goal.

These financial dynamics change with every project, service model, and deployment model. Private deployments have completely different dynamics. In-house versus external, in-house versus in-house, each will have different return rates. ROI can be improved, or made worse, with strategy choices because of the relationships of revenue and speed of return. Revenue may increase by improving features and quality, commanding higher market values. Automation may help a business scale, driving greater revenues at controlled costs.

Cloud requires balance in its approach. Data-driven methodologies will help to define goals and expected outcomes, and identify ways to manage risk. A data-driven approach can guide the organization to optimal strategies and identify better choices. There are many data points and fundamental drivers that can impact cloud ROI numbers. Many data points are captured from related productivity, speed, scale, and quality measurements. Typical ROI calculations are straightforward: there is a cost for a given return. ROI for cloud is a bit different in that there are other factors, including efficiency improvements, opportunity costs, and investment patterns. When evaluating cloud versus traditional IT strategies, additional layers of data must also be considered, such as the following:

• Increased turnover and profits due to increased efficiencies
• Revenue loss due to the inability of existing systems to respond to dynamic demands
• Costs of managing a standalone and non-standardized environment
• Reduction or avoidance of capital cost related to the purchase, development, and deployment of new systems or services
• Success-based growth and investment, as needed
• Smaller increment investment for cloud versus larger capital investment for traditional models

The factors that drive ROI are the following:

• Productivity, which is enabled by utility-based services that provide on-demand provisioning that meets meet actual customer usage. Increased productivity can avoid infrastructure capital expenditures, avoid infrastructure investment opportunity cost, and improve customer satisfaction through better responsiveness.
• Resource utilization, which eliminates the practice of dedicating servers to specific functions or departments by using active management to size and handle peak loads that are underutilized at off-peak times.
• Usage-based pricing translates higher provider utilization into lower infrastructure costs for consumers. SaaS does this by reducing the traditional licensing cost associated with ownership, number of users, support, and maintenance costs:

• Specialization and scale that gives the CSP an ability to drives lower IT costs through skill specialization and economies of scale by amortizing costs over a larger user base:

• Increased speed in provisioning IT resources, which enables enterprises to acquire the resources they need faster. This model also increases visibility into resource configurations, which accelerates the choice when many options are available. This factor can dramatically cut the time to deployment of new products and services. Elastic provisioning creates a new way for enterprises to scale their IT to enable the business to expand. Rapid execution saves time and enables new business operating models:

• Faster execution of lifetime cost models through increased speed of execution. This factor positively impacts lifetime cost models by reducing the cost of a product or service as the depreciation cost of purchased assets decreases and efficiencies are realized. This higher rate of cost reduction means that profitability increases more quickly, giving shorter payback times and increased ROI:

Traditional rate of cost reduction versus that with cloud computing

• The IT asset management process accelerates reducing the risk of decoupling IT choices and its impact on long-term operations and maintenance IT service costs. This factor also enables the ability to select hardware, software, and services from defined design configurations to run in production environments. This reduces the design-time/runtime divide while simultaneously optimizing service performance:

Cloud computing is an economic innovation, not a technical one. Infrastructure is aging and is going to require significant funding to modernize. How can we optimize the ratio of spend to return across the entire asset portfolio? The same traditional deployments are going to lead to a traditional return. A change in model and economics is required to modernize. Cloud enables an enterprise to change economic models, achieving a faster, cost-effective asset management lifecycle for the entire IT portfolio. Designs can utilize current capabilities and components, optimizing runtime performance. Cloud services also lower entry cost with faster deployment time, quicker time to market, increased competitiveness, and more business and leads generated across a much larger operational scale. Additional high-value services are quickly and efficiently delivered to clients and customers through the use of cloud-based collaboration services for communication, information exchange, and virtual meetings.

Cloud economics is creating many new business opportunities that were not possible previously. Opportunity is often associated with the Long Tail shown in the preceding figure. The illustration shows as efficiencies improve, opportunities for a revenue increase and margins rise over time. Innovation driven by economics increases efficiency, lowers cost, and as a by-product creates additional opportunities for revenue. The revenue opportunities may be related to underserved markets that are now accessible. New segments and sectors may now be financially feasible that previously were considered economically undesirable. Opportunities that may have previously been undesirable from a risk point of view may now be interesting revenue opportunities as the lower costs and higher margins may offset perceived risk.

Interestingly, we see the same behavior in the IT infrastructure market. The cost of computing resources is dramatically dropping while the cost of managing traditional deployments is rapidly rising. This creates new opportunities within cloud-based ecosystems as well. We are seeing many new cloud service providers entering the market. Merger and acquisition activity has increased. Innovations driven by economics are always disruptive. These types of shifts create many opportunities for specialists and related enterprises to make big plays as new service providers or acquirers.

Because cloud innovation is economic and not technical, new revenue opportunities can be people-based and IT-based. Opportunities may be a new type of service or an existing service with a new economic model. Revenue opportunities may enhance the quality of existing services as reinvestment is now possible due to improved margins, increased scale, and larger scope for current operations. Cloud computing enables better utilization of resources and assets, increasing efficiency, and accelerating operations and delivery at lower cost. Cloud computing is disruptively influencing both buyers and sellers.

As available services, combinations of services, and pricing models continually change, the quality of the service must be considered. A recent performance comparison of a single server from a single service yielded some surprising data. The provider offered the same cloud service out of multiple locations. Two locations were chosen. The same instance type and same server configurations were chosen. The only difference was the location. Each server was benchmarked using the same CPU and memory test. Testing reported a 700% difference in performance within the same provider, with the only difference being location. When the benchmarking was run across multiple providers, using the same size of server with the same configuration, we noticed very different performance, with the price varying by more than 3,200% from low to high, for the same configurations. What is the difference? Why would the deviation be so high? Aren't all clouds equal? Cloud is cloud, correct? Not exactly.

Basic ROI calculations are pretty straightforward: cost versus expected return. As we examine the other surrounding benefits of utilizing the cloud, we are reminded of a few things:

• Cloud is an economic innovation
• Every benefit of the cloud has an economic impact
• Next-generation designers, architects, and IT leaders need a blended foundation that includes principles of business and strategy, general economics, and technology, as well as a good understanding of business risk and economic mitigation

Why would the same server vary 700% in performance and 3,200% in price for the same configuration? Other layers and benefits must be accounted for in our cloud ROI calculations. There are many metrics to consider; not all need to be used, for example, service level agreements (SLAs). SLAs are a simplified way to try and express a quality of service numerically. The higher the number, 99.999 versus 99.90, the higher the quality of service is perceived to be. What does the quality of service actually mean? This topic will be explored more throughout the book. Is the service redundant? How resilient is it? Is it delivered via cheap unknown white box machines out of a neighbor's garage or is it within an impenetrable fortress using a brand name, high performance, and the latest and greatest hardware? How is it supported? How up to date are patching and security? Is it hardened OS? Is there 24x7 support? What is the quality and level of the support engineering teams? Many things can contribute to pricing differences, including margin.

Cloud computing differentiation is not just through the provisioning of utility computing services, but also higher-level services that enhance and build customer value. These attributes are why there is rapid movement from technology-centric services to business-value-centric services. This change extends to nearly every service and every industry, with utility infrastructure services at one end and complete function and application business-centric services being provided by nearly every provider in the market.