The cloud computing model can help companies conserve cash and focus limited resources on the business, instead of reacting to IT infrastructure-related fire drills. In the cloud computing model, vendors provide Web-based access to applications as a service, through a subscription pricing model. This eliminates the need for customers to buy, deploy and manage IT infrastructure and solutions. Vendors take responsibility for everything: the servers, storage, operating system, database, business software, updates, migration, power and cooling, data center space, and support services. As a result, cloud computing shifts the IT burden from the customer to the cloud computing application vendor.

Cloud computing vendors can provide these benefits because they've built their solutions as Web-based services from the ground up. Instead of building their solutions to run in-house, as a separate, individual instances for each customer, they architect their solutions for a one-to-many, or multi-tenant model. This means that they can run thousands of customers on a single instance of the database and application software. By optimising their business solutions for this shared environment, they can achieve efficiencies throughout the solution lifecycle that would be difficult for on-premise vendors to achieve.

Lean and mean IT

Headquartered in Slovakia, the U.S. division of this security software firm has grown from 1 to 135 employees over the past 10 years. The division had began by using multiple brands of packaged software for accounting, contact management and reporting functions. But as it grew, the organisation wanted tighter integration across functions, better reporting, and an easier way to provide access to an increasing number of remote employees. It also wanted to keep upfront capital and ongoing support costs low. "The fact that there was little or no infrastructure or internal support required drove us to a software-as-service solution," according the firm's Business Systems Director. Since deploying NetSuite in 2006, the company has kept IT "lean and mean", and "the single system, real-time view of customers helps our sales and support teams to offer better service to customers".

Why does TCO matter?

In the IT industry, Total Cost of Ownership (TCO) is used to calculate the total cost of purchasing (or in the case of cloud computing, subscribing to), and of operating a technology solution over its useful life. TCO provides a realistic and holistic measure of the long-term costs required to acquire and operate technology solutions. Return on investment (ROI) is another method to evaluate and prioritise technology investments in a company. This measure is typically used to compare investments that uncover new top line revenue and growth opportunities. However, ROI tends to be more subjective in nature than TCO, because ROI looks at business benefits, which often cannot be measured as objectively as costs.

Hurwitz & Associates views TCO as a preferred method to compare technology investments when two solutions provide roughly equivalent benefits over the solution lifecycle, but have different types of costs associated with acquisition, maintenance and operation. For these reasons, a TCO comparison offers a more tangible assessment of the total costs involved in deploying cloud-based SaaS and on-premise business solutions.