How Cloud Computing Impacts Business Return on Investment

Instructor: Marco Comuzzi
Why is cloud computing usually a good investment? In this lecture, we first define return on investment (ROI) to measure the efficiency of an investment. Then, we discuss the characteristics of cloud computing that make it an efficient investment.

ROI and Cloud Computing

Return on investment (ROI) is the ratio between net profit and the cost of investing in resources. ROI is usually evaluated over a given period of time. Therefore, ROI can be increased by decreasing the investment, increasing profits, or realizing the profits sooner. It is used as a measure to evaluate the efficiency of an investment and also as a way to compare the efficiencies of several investments. Naturally, companies prefer investments characterized by higher ROI.

Cloud computing is an information technology paradigm enabling client organizations to access shared pools of configurable hardware and software resources and higher-level services over a set of standard Internet protocols. These can be rapidly provisioned by service providers with minimal management effort. Cloud computing has gained tremendous popularity in the last 15 years. It provides a range of benefits for small and large enterprises, such as low capital investment, elasticity, and scalability (in the provisioning of hardware and software resources), as well as flexible payment schemes.

The popularity of cloud computing derives from both its effectiveness as a flexible information technology paradigm and its efficiency as an investment. Cloud computing, in fact, is often a very effective choice for a company to get access to computing (hardware and software resources) resources that they cannot otherwise afford (or technically implement internally). It is also often a very efficient (high ROI) investment, because of a variety of factors that we discuss in depth below.

Factors Characterizing ROI of Cloud Computing

The ROI of a cloud computing investment can be understood along two fundamental dimensions. First, cloud computing enables better utilization of computing capacity when compared to traditional hardware acquisition. Second, cloud computing allows for more flexible payment schemes that are much more economically efficient than traditional software licenses.

Increasing ROI with Optimized Capacity Utilization

Cloud computing impacts the ROI by reducing opportunity costs and the cost of lost opportunities. Opportunity costs, in particular, can be seen as the additional returns that might have been realized via a more lucrative option that was not chosen.

Figure 1 shows the capacity-utilization curve utilized by Amazon to demonstrate the higher ROI of cloud computing investments compared to traditional hardware acquisition. Traditionally, a company acquires a certain amount of computing resources (servers, desktops etc.) to be installed and run in-house. With in-house acquisition, the amount of resources to buy is normally determined by peak levels of operation. For instance, an online shop would need to acquire enough hardware resources to meet the typical peak load in the weeks before Christmas or Black Friday. In this case, unfortunately, the shop will face high opportunity costs, because most of the time (outside the peak load period), this amount of hardware resources will be much higher than needed. Alternatively, a company may decide to buy only hardware resources to meet their average peak load. In this case, however, they will likely incur lost opportunities during peak periods, because they will not have enough hardware capacity to handle all the requests of potential customers.

Figure 1: Capacity-utilization curve of cloud computing
Optimized capacity with cloud computing

Cloud computing allows more spontaneously determined hardware and software resources (flexibly and on-demand). Companies may decide dynamically, even on a daily or hourly basis, how much in the way of resources they need to acquire and purchase. As such, cloud computing allows a dramatic decrease in both opportunity costs and lost opportunities - by allowing companies to acquire only what they really need during a particular period. The online shop, for instance, can simply acquire more hardware resources in the weeks before Christmas and Black Friday, and release these resources when they are no longer needed. The more a company can accurately predict their future demand and, consequently, computing capacity requirements, the higher the ROI that can be realized through dynamic acquisition of cloud computing resources.

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