IT Spending & Cloud

Understanding IT

Over 65 % of SMBs are expected to make significant purchases of IT equipment this year. Computer Manufactures are expecting 1 in every 4 office PCs. While the purchase price of a new powerful computer is now more discounted then ever that’s only part of the true cost. If you look at the overall costs for the life span of that discounted purchase you’d be rather surprised. What we really need to focus on is the Total Cost of Ownership or TCO.

Regardless of if it’s a copier, PC, Server, Phone System, etc. purchasing the wrong size device can cost your business significantly. With today’s increasingly tight budgets, it’s easy to look at two devices and say the cheapest one has enough features to do what I need. However, if that cheaper item isn’t meant to handle “business grade” work loads or doesn’t have the same reliability you may end up costing your business much more than what the more expensive option was initially. In addition, newer cloud services give you the ability to change the cost model into an operational service instead of a large initial capital purchase. This can make a big difference to your business’ budgeting, Cash on Hand, and taxes.

So What is TCO?

Total Cost of Ownership not only encompasses any initial setup or capital expenditures, but also ancillary costs to maintain and support the device after the initial purchase. Gartner, an industry expert, defines TCO as the total cost of using and maintaining an IT investment over it’s entire lifespan. TCO calculations include direct costs and indirect costs (end-user training / operation and loss of revenue from down time). So that sounds clear as mud right? Direct costs are those such as hardware, software, and support; items that are easily linked to the initial purchase. Indirect costs are ones that are little more removed, such as training on how to use the new device and the loss of revenue caused when that device goes down. That last part can be key if the wrong purchase was made and it fails frequently.

Frequent Support and Maintenance

Many incorrectly believe the largest cost item factored into TCO is the initial purchase price. Computers for example typically the base purchase price only accounts for 20% of the TCO. The remaining 80% is ancillary costs for labor, support, warranties, software, malware protection and removal, etc. These after purchase costs represent the largest percentage of the total cost yet get the smallest scrutiny in SMBs. Think about your last computer purchase, did you focus more on the initial purchase price, or the cost to install Microsoft Office and Anti-Virus?

A business computer network requires frequent support and maintenance. If left ignored significant problems develop over time until something significant enough causes an outage and disrupts your business’ day to day operations. Costs for proactive monitoring and maintenance may seem like a luxury reserved for the enterprise but the loss of revenue from an outage, or worse the damage done during a compromise, are far more expensive than the average support agreement.

What Should My Business
Spend on IT?

According to Gartner the average SMB spends just under 8% of it’s annual revenue on IT expenses. Of that expenditure 80% of total IT costs come after the initial purchase. The average unmanaged or poorly managed desktop PC has an annual cost of $5,000. Yes, five thousand dollars per year. Again that’s direct and indirect costs. However, in factoring the average network with switches, routers, printers, servers, etc, that costs actually moves up to over $8,500. If you have a small 10-person office that’s $85,000 per year!

In practice this can have major benefits to a business. Lets look at a 25 user environment for example. A well priced desktop from a major manufacturer is roughly $1,200 with a three year warranty. Add in Office, Anti-Virus, Patch Management Software, etc, you’re at a year cost of about $1,600. The network switches, routers, etc. costs on average $4,000 per year with maintenance from the vendor. The servers and storage are another $6,500. Without Labor we’re already over $60,000.

Even if you don’t have a dedicated IT person to run everything and use 20% of an office manager’s time that’s approximately another $9,000. So we’re effectively at an annual cost of $70,000.

The Case For Cloud

Cloud removes much of the initial purchase price and distributes the operational costs into factional payments over time. We can do this through several benefits.

First is virtualization. Virtualization allows the cloud provider to buy larger hardware and partition it’s resources out against multiple customers. Even though multiple customers may be on single piece of hardware everything is portioned and walled off so no single entity can see another. Security has been a focus for virtualization from day 1. This also provides volume, buying in bulk is normally cheaper right?

Second is life cycle differences. Remember earlier when we talked about “business grade” equipment? Well Cloud Provider’s go beyond this and use Enterprise or Carrier grade equipment. This is a higher standard that has many built in quality controls to not only eliminate but also tolerate and work around a failure should they happen. Any discussions with a cloud provider should always include the topic of redundancy. So more redundancy from higher grade equipment boils down to longer refresh cycles. So that desktop PC that needs to be replaced every 3 years, becomes server technology that gets replaced every 5-7 years. This allows us to reduce the indirect costs and spread the direct costs out over a longer period of time.

Benefits for Business

In practice this can have major benefits to a business. Lets look at a 25 user environment for example. A well priced desktop from a major manufacturer is roughly $1,200 with a three year warranty. Add in Office, Anti-Virus, Patch Management Software, etc, you’re at a year cost of about $1,600. The network switches, routers, etc. costs on average $4,000 per year with maintenance from the vendor. The servers and storage are another $6,500. Without Labor we’re already over $60,000. Even if you don’t have a dedicated IT person to run everything and use 20% of an office manager’s time that’s approximately another $9,000. So we’re effectively at an annual cost of $70,000.

Using a hosted desktop cloud model we shift those costs to almost entirely operational. That $1,200 desktop becomes a $450 terminal. In cloud we don’t purchase network or server hardware, it’s all part of your monthly service agreement. For these 25 users the monthly costs including support and software licensing would average around $3,000 per month. If we split the terminal costs over the 3 year period and factor in our $3,000 monthly that same business is now spending just over $37,000 per year. This company nearly cut their TCO in half! Plus that office manager who was spending 20% of their time doing IT administration now has nearly their entire capacity available by shifting helpdesk and support to the Cloud Provider.

Why isn’t everyone moving to the cloud?

With the cost savings above this is the next logical question. There’s a multitude of reasons. First is lack of awareness. Most of today’s cloud providers are public clouds such as AWS or Microsoft Azure. These offer a great name from a companies you know you can trust, but they offer little to no support for SMBs with limited IT expertise on staff.

Second, not every workload is right for cloud. Today’s video processing capabilities are still limited in a virtual environment. While this is nothing to be concerned of for most users, those that do Graphic Design, Architecture / Engineering work in CAD, or GIS Mapping don’t fit well within most Cloud Capabilities yet.

Third is the sense of control. By not having data stored on servers the business owner can see some fear that they’re loosing control of their IT resources by moving to the cloud. While this is an understandable perception, in reality most business needs are moving to a service based model. Cloud has been around for long time in our personal lives. We may not understand it or in some cases be aware of it, but our smart phones store most of our pictures and data in the cloud today. With Private Cloud you get the benefits of Cloud but still maintain full control over your data.

How do I know if my business can save money moving to the cloud?

Glad you asked. The short answer is most businesses can. Stratus can sit down with your business management or existing IT staff and determine if your work flows can benefit from the cost savings and reliability of cloud. Contact us today and one of our trusted advisors will help you investigate your options thoroughly.

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