Modernization and Cloud Adoption: Cloud Migration and Return on Investment

One of the benefits of cloud migration is transformation, but transformation is difficult to measure in cost savings. Traditionally, when IT leaders discussed the Return on Investment (ROI) for new technology, they mostly considered the financial benefits, such as reduced operating and maintenance (O&M) costs. Until a few years ago, the value of cloud computing was defined in terms of operational expenses (OPEX), such as physical servers and not capital expenses (CAPEX), such as computing as a service. Today, most experts define the value of cloud in terms of agility. Unfortunately, there is no simple mathematical formula to calculate cloud computing ROI in terms of agility.

Most government entities have outdated IT infrastructures that consist of disparate, complex systems that require 80% of their IT budgets to operate and maintain. This outdated IT infrastructure makes it difficult for government entities to obtain the cost savings of full utilization by scaling up and down to support agility. In addition, most government entities spend more on computing and storage than is required due to low hardware utilization rates. Cloud agility provides the ability to rapidly change IT infrastructures to keep up with business needs that are constantly evolving.

According to the ISACA (Information Systems Audit and Control Association), 68% of companies it interviewed calculated ROI before initiating any cloud implementation. Most of these companies used a hybrid method to calculate ROI that included both quantitative and qualitative factors, including operational, capital, staffing, and business impact expenses. For 32% of these companies, ROI on cloud was higher than anticipated because more time savings for employees was achieved. Another 30% said ROI was lower because operational and transition expenses were higher than expected.

Shift in ROI Paradigm in Government Agencies

Even though most government agencies do not generate profits, the public continues to require more accountability in the expenditure of public funds. In public-sector agencies, Elyon has observed a shift in paradigm from activity-based to results-based accountability. One state client that Elyon worked with did not justify moving to the cloud based on ROI. Part of their digital transformation included going from paper processes to digital processes, and it was difficult to get baseline metrics to measure tangible benefits.

In terms of intangible benefits, the cloud migration resulted in decreased staff frustration and increased morale. This state client worked with a vendor to train staff to use the cloud-based document repository to digitally create, store, and access documents. This saved the client significant time because they were able to respond to customer inquiries much faster. In this instance, Elyon observed that this state client made more efficient use of taxpayer funds by migrating a manual process to the cloud and transforming it to a digital process, which enabled the state agency to be more agile in responding to the needs and demands of the citizens it serves.

How State Government Entities View ROI

According to other state clients that Elyon helped to facilitate on their cloud migration journey, ROI is hard to determine, and its value is not always measured financially. Traditional ROI is “nebulous” and is better measured in terms of different parameters, such as time, value, and more accurate processes. Instead of measuring ROI in terms of dollars and cents, it should be based on the length of the procurement cycle. The faster new environments can be up and running in the cloud, the better the ROI. Another way to view ROI is from the Return on Value (ROV) perspective. If justification of a cloud transition is based strictly on ROI, many beneficiary equations that speak to value would be missed. For example, significant value is provided to the organization if employees spend less time on administrative activities after transitioning to the cloud and are able to respond faster to citizen inquiries, which equates to faster time to market in the traditional sense.

Roadmap to Develop Your Unique ROI Calculation

Cloud migration is meant to transform, and transformation can make it difficult to prove cost savings, which in turn makes it difficult to calculate ROI. Most cloud ROI calculations focus on IT cost saving and do not include savings based on increased agility or the costs of poorly utilized hardware. In addition, the value of agility is not the same for every government entity; it can vary widely. Meaning there are many possible ways to estimate cloud ROI and the actual payoff will be different for each entity. 

Before you begin your cloud migration journey, you should determine your objectives, including agility objectives, and assess the financial implications of each objective. In addition to comparing your future cloud costs to current costs, Elyon recommends that you determine the financial impact on your O&M expense budget and estimate on-going operational costs, such as the cost of storage and applications. As far as costing goes, cloud computing is billed differently, i.e., renting time, and it’s expensive to continuously run applications. However, the cloud provides the ability to adjust capacity to meet demand as a way to control costs.

Based on your organization’s approach to preparing and assessing business cases, determine the actual agility value for each business case while taking into consideration the key business drivers for migrating to the cloud. To build a business case for moving systems to the cloud, you first need to understand what your existing infrastructure actually costs. While developing your cloud agility business cases, Elyon recommends keeping in mind that agility is self-sustaining, not self-consuming. If your systems are over agile, resources will be underutilized and not cost efficient. Likewise, if your systems are under agile, you will not be able to respond timely to business process changes, which can also increase your costs.

One important item to keep in mind as you develop your unique ROI formula is that cost savings may not be experienced immediately after cloud migration due to one-time setup costs. There may also be other hidden costs, such as training costs and disruption costs as software and solutions are migrated to the cloud.

As your organization prepares a business case, develops its unique ROI, and makes decisions to allocate funds, you should also develop a process to determine if the funds were allocated efficiently and achieve maximum agility results. By focusing on results, your organization can align your cloud migration investment to the desired organizational outcomes outlined in the business case and achieve cloud agility that will enable you to adapt to constantly evolving citizen needs.

About Elyon

Elyon Enterprise Strategies, Inc. is a management consulting firm specializing in business design. Our purpose is to lessen executive burdens, increase organization order, and provide organizations with more hope and success while meeting human needs. We are each client’s most trusted advisor and inspire our clients to transform complexity into enterprise success.