There Is No ROI in Cloud Computing

By | September 7, 2011

Return-on-Investment (ROI), perhaps the biggest crock-of-$%@& metric ever applied to the information technology industry. How does one measure return? If we use monetary return, then the question, “how much money did I make on my investment in a $10K server,” is relatively impossible to answer. One must consider the software run on that server, what role it’s playing in servicing customer value, etc. The answer is arbitrary; it’s a minute subcomponent of a complete capital expenditure plan directed at delivering a business service. Using an intangible metric is even more obtuse. “Gee, after we made that additional $10K investment in that server hardware the number of calls into the help desk seemingly decreased,” is bad Freakonomics at best.

ROI was created by management consultants to illustrate the relationship between investments and expenses on revenue. Then one of these quacks decided, “hey, vendors will love this tool as a means of explaining why IT management has to use their latest doohickey.” ROI is now a plague on the IT industry being used to show how spending more money now will save you money in the long run. To me this is akin to the US government paying citizens to shuck perfectly good working cars that were paid off for new working cars and additional consumer debt.

Okay, I’ll get to the point. Cloud computing is about an effective use of compute resources that provides agility and flexibility to my business in a cost-effective manner. I’m not investing in cloud computing, I’m consuming a service. Do you discuss the ROI on eating at McDonalds or having your car washed? Of course not, because there’s no ROI in using a service since using a service is not an investment. Using services is about effective use of cash flow relative as an alternative to using your own resources and assets.

You may ask, “but I’m investing in acquiring my own cloud computing infrastructure, and I’m expecting an ROI on that.” My answer, if you’re not a cloud service provider, good luck with that. Call the sales representative that sold that bill of goods to you and tell him Christmas gift will be paid for with the ROI on your new cloud infrastructure. I imagine you’ll break even on that investment just in time to need a technology refresh on those blades. If you’re investing in your own cloud infrastructure, I hope it’s because it will effectively allow you to scale certain processes that are not scaling well today and would be cost-ineffective to acquire dedicated hardware to support. Moreover, I would hope this investment is because you have some very rigid requirement that would not allow you to burst to an existing cloud service provider for that additional compute power when required.

Sorry Virginia, there is no ROI in cloud computing. If you want to compute the value of using cash to acquire a service versus doing it in-house, that would be a risk/reward or opportunity cost analysis, not an ROI. The only thing you are investing in with cloud computing is lining your cloud computing service provider’s pockets, which is okay as long as you applied the same resources and assets to an endeavor that will generate more revenue than you are spending on the service.

5 thoughts on “There Is No ROI in Cloud Computing

  1. Jeff Stewart

    Hogwash! I reject the basic premise of what and IT investment (or service expense) is. Any expenditure of cash or capital (cost) for a given purpose has a comparable value to an alternative – and that includes the cost of during nothing. The difference in cost or value gained is the return. This can be divided by the cost of the change. The ratio is return on investment. (regardless if it is a capital investment or cash expense)

    Think of it this way, imagine if your organization had no IT whatsoever. How would functions be performed without any computer automation or communications. Could it even be done with only human effort? Now compare the cost of those functions with the system you are proposing. This may be dramatic but it illustrates that their is always and alternative to compare to.

    I agree that components of a system, like more memory or cpu power, can be difficult to compare with the alternative. But perhaps the wrong question is being asked. The question could be what is the cost and value of the overall business function in the grand scheme of the organization. And then ask how those functions may be delivered with alternatives. Including SaaS with only rental costs. And of course, the relative cost of doing nothing.

    Reply
    1. JP Morgenthal

      Jeff,

      I don’t disagree with your assertion. I just think we need to focus on real, discernible metrics versus made up mumbo-jumbo from management consulting companies. The metrics you describe I discuss at the end of the piece. I’m all for doing opportunity costs analyses, risk/reward analyses, cash flow analyses (this one is important since cloud will continue to require subscription costs be paid on ongoing basis), etc. I just don’t believe in consuming a service you are investing in your business. You are making a cost tradeoff decision to outsource a function over doing it in-house either because you don’t have the resources or because you don’t want to apply the resources you have toward this end.

      JP

      Reply
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