The Real Costs of Cloud Computing

A recent survey asked business leaders to rank their their top technology priorities within the organization’s budget for fiscal year 2020. It found that security (51%) and cloud services (45%) remain top IT budget priorities for 2020. Additionally, priorities for internal hardware and software purchases, digitalization, employee training, and mobile tech and app development are increasing.

These results may signify a shift from the 2019 survey results where 63% of respondents said security was the top concern, 48% said internal hardware purchases were the top priority, and 48% said cloud was the most important investment.

If this becomes a trend, we may see less emphasis on internal hardware purchases with an increased focus on security and cloud services. This could represent an overall increase in outsourcing and use of the cloud applications for everyday business needs. This variance is significant as it occurs at the end of support for several Microsoft products including Windows, Server, and Office products. This may indeed indicate the shift to cloud services that providers like Microsoft have been hoping for.

The survey also found that 76% of businesses reported their IT budgets comprised 10% or less of their organizations’ total budgetary spending. At the same time, the majority of survey respondents also stated that IT was the primary source of recommendations for what went into the IT budget.

What is surprising is the context of the two sets of questions. While security and cloud services remain high priorities for the organization, most businesses report only fractional spending on those priorities in relation to their total budgets.

There appears to be a dichotomy between business priorities and budgetary spending. What’s missing here?

If priorities are high for a given category, we might expect spending to almost mirror those needs. If they do not appear to match, there might be other reasons for the apparent discrepancy. Those might include very low actual costs for delivering those services, they might suggest incomplete accounting of all actual costs associated with delivering those services, or they might simply represent inaccurate responses based on expectations instead of confirmed spending.

Historically, spending on IT projects and services has been low due in large part to the perception that IT is not necessary to the business or does not add value to the customers. That may still be true to some degree for some organizations who have yet not learned how to use technology to enhance their competitive advantage. This might help to explain some respondents who might have provided incomplete information in the survey.

If businesses expect that costs are actually lower due to the use of cloud services, they might be wise to investigate the spending more thoroughly. Although many common cloud services are touted as less expensive due to the expected reduction in support staff and initial hardware investments, the reality is somewhat different. Hardware investments can often be reduced or eliminated, but internal IT staffing is not necessarily reduced. Those people are usually retained as important assets to the business.

In fact, several studies of long term costs associated with cloud services versus similar on-premises products find that cost expectations may be amiss. Costs for on-premises solutions include initial investments in hardware are one-time purchases that are often depreciated over several years, but supporting staff is not usually increased as part of the given project. In comparison, recurring costs for cloud services continue every year, even after a normal depreciation period.

In many cases, the promise of lower costs for cloud services begins to fade as businesses realize the ongoing and recurring costs can far exceed those of a similar on-premises solution. The result is a waning long-term value for the company and increasing unjustified operating expenses.

Additionally, many common cloud services to not add significant value to the business or its customers by way of increased knowledge, skills, flexibility, or unique strengths. In contrast, with on-premises systems, many skills can be gained, knowledge base increased, and flexibility can be increased due to the ownership nature of the locally installed systems. All these incrementally add value to the business and its ability to meet changing customer demands.

The promotion of cloud-based systems to businesses in the last few years has been especially strong. The quest for shifting customers from single-purchase products to subscription models is seen as a win for major cloud vendors like Microsoft and Adobe. Unfortunately, this does not always translate to a winning strategy for businesses, and hidden costs can mask the true cost to the business for shifting their in-house systems to the cloud.

Every business must analyze the cost benefit ratio for themselves, and consider which options relate closest with their overall IT strategy toward meeting the company’s long term goals. Many small businesses do not have IT staff or business-focused technology experts on hand for insight and recommendations in these areas. That lack of insight can make the decision difficult or risky.

Engage Business Solutions LLC has the knowledge, the experience, the business acumen, and the technical understanding to help you address these complex issues. We can help you compare solutions, provide insightful direction, and develop the best strategic direction for your small business.

Give us a call today at (260) 383-4084 or email us for a FREE, confidential, initial consultation. Lets start the conversation that moves your business forward.