To answer this question better, we need to divide cloud adoption costs into three:

1. Upfront Capital Costs

2. Operational costs [Traditional and non-cloud]

3. Operational costs [in the Cloud environment]

The behavior of these three cost functions will determine "What difference does Cloud make compared to having in-house IT".

Of these the reduction of the first cost - Upfront Capital Costs -  is a reality. When computing moves from an ownership platform (in-house) to an utilization platform (cloud), the upfront CAPEX does come down.

Coming to the second one - Operational costs [Traditional and non-cloud] -  unless conscious efforts are taken in systematically reducing the non-cloud operating expenses, the gains of  CAPEX reduction will amount to nothing. What it implies is that when higher cloud adoption happens, there has to be a conscious effort to trim down the traditional in-house operating costs as a strategic initiative. This doesn't happen on its own. Some of the cost elements that have to be brought down consciously and aggressively are maintenance costs, training costs, IT staff salary costs, utilities cost, supervisory staff salary costs, hiring costs, band width costs and a host of other associated costs. I recommend that these cost cutting decisions should not be left to the IT department since they are more users than policy makers. There are systematic ‘people and process’ transformations required to cut costs and gain the full benefits of cloud computing.

Coming to the last one - Operational costs [in the Cloud environment] - this introduces the dimension of unknown risk components associated with cloud adoption. the modelling of this cost will be a function of how well we understand, segment and monetize the nebulous unknown risks associated with Cloud Adoption.

The attached paper would probably help.

Thank you Professor Easwar, a very detailed answer. I will read your paper and Iwill be back.

Hi Almabruk,

To compare the cost of In-housed IT vs Cloud costs, it is good to compare total cost of ownership (TCO) for a period of time e.g. 60  months which include all the capex & opex when In-housed IT is continued or switch to cloud at a point in time. 

If the current setup is In-housed IT, one can draw up the TCO for 60 months - very likely it will be TCO growing year by year gradually.  But when cloud is introduced at a point in time - the capex can be high initially due to cloud infra & apps setup, adjustment of IT processes, train / recruit IT staff with the right skill set etc., but after the cloud project implementation is completed, the cloud opex can be low due to Cloud outcomes like automation, very fast provisioning / de-provisioning, IT staff headcount reduction, pay per use, elasticity, optimized use of pooled resources (no over-ordered of unused IT hardware / software resources) etc.  However, other new costs due to cloud needs to be included as well e.g. further security, compliance, audit etc.

So comparing these 2 costs (In-housed IT vs Cloud for a period of time) can help you understand which has lower TCO for adoption. Of course future cost with NPV treatment as well as quantify some intangible costs into tangible values needs to be performed for TCO computation.  If merely comparing initial months with normal In-housed IT cost vs new cloud implementation costs, cloud might be perceived to be very expensive & kill the business case.  If comparing in long run, cloud TCO might be lower than in-housed IT TCO.

Regards,

Fung

I  think the colleagues before me have already covered the economic and financial aspects in detail; and there is also quite a bit of literature on those aspects. Corporate and IT managers also consider other aspects when making the decision between the Cloud and in-house IT infrastructure and personnel. The answers usually depend on the company and the sector, for example, are the quality of the external cloud service provider's resources better than the in-house resources, and can those help us serve our customers better (and increase satisfaction and retention)? Or, by cutting IT costs, can we direct company funds to other departments and focus on our core business? For example, can we outsource certain IT functions, and focus more on designing and launching new products? These are some of the ideas that the second link below tries to look at. Then, if you want to look at this from the society's perspective, there have been many sources that have suggested that cloud computing is more environmentally friendly and energy efficient (better located, concentrated, and managed data centers vs many local ones). In other words, many think that the Cloud is also related to Green Computing. Thank you for asking this contemporary and important question. 

http://www.boozallen.com/media/file/Economics-of-Cloud-Computing.pdf

https://www.vmware.com/files/pdf/accelerate/VMware_Business_Agility_and_the_True_Economics_of_Cloud_Computing_White_Paper.pdf

http://www.greenbiz.com/blog/2011/07/27/4-reasons-why-cloud-computing-also-green-solution

Thank you Emre, don't you think that the reduction of in-house IT  would mean reducing the IT staff too in this case? Or Maybe directing them?