It’s a commonly trotted out refrain that, when it comes to investing in cloud technology and infrastructure, the metric that you should care about is TCO, or total cost of ownership. But what does that mean in practice—particularly when we’re talking about something like a transportation management solution (TMS) or other supply chain software?
Another way to look at the question is to ask yourself how your overall operational costs will be impacted by a particular deployment over the course of that software’s lifecycle. What upfront and recurring costs will you have to deal with? What cost optimizations will the technology power? How much will you spend on maintenance? In this post, we’ll help you get a handle on those questions and more when it comes to cloud-based supply chain management.
First things first: how do you calculate TCO? For on-prem software deployments, it’s fairly straightforward (though there are plenty of hidden costs that businesses sometimes forget to account for):
Like we said: pretty straightforward. But, it’s important to note that most servers have a useful life of only 3-5 years, which means that you have to factor in the cost of replacements if you plan to keep using the same software solution after that amount of time. Likewise, you’ll want to think about whether you’ll ever need to scale your computing capacity up or down. Scale up, and you’ll not only need more servers, but more physical space in which to put them, which might quickly become expensive depending on what your physical space is like.
Since most of companies that move to the cloud are doing so from on-prem deployments (though migrations from one cloud-hosted solution to another or one cloud provider to another are becoming increasingly common), we’ll consider other operational costs (i.e. the costs that cloud technology has the power to reduce) outside what’s listed above to be your cost baseline; thus, cost optimizations usually don’t factor into your TCO calculation at this stage. That said, if you’re considering moving from one on-prem deployment to another, you can and should think about how the new solution will impact costs outside the realm of IT spending. For instance, if the new solution is designed to create a leaner supply chain with reduced capital commitments, your best estimates for savings can factor in your cost analysis.
Of course, when it comes to calculating TCO for the cloud, you don’t have to worry about all of the hardware and space costs that we listed above. For a SaaS solution, you just have to pay for software subscriptions on a monthly basis. Or, at least, that’s the usual line—in reality, it’s a little more complex than that.
Even if you’re just adopting a SaaS solution, there will be migration costs as you move data and workloads from existing servers into new IT environments. There might even be consulting costs involved if it’s a particularly complex ecosystem. Then, if you’re talking about something more like a full-scale cloud migration of your entire IT infrastructure, not only do you have to factor in significant labor costs, but also likely a higher monthly Azure or AWS bill during the early days when you’re still right-sizing your deployment. Plus, you’ll probably have to account for labor costs in the form of added IT support for users dealing with the new infrastructure for the first time.
The hidden costs of cloud solutions can impact your TCO—but the cloud also is more cost effective than on-prem technology in the vast majority of cases. Why? Because its agile, distributed nature has the power to generate cost optimizations up and down the value chain. For instance:
Naturally, some of the cost levers above will be easier to factor into your calculations than others. But the fact remains: if costs are a major consideration in your supply chain, cloud-based technology deserves strong consideration.