In this post, I’m going to show you a very basic example to illustrate a cloud computing cost comparison. For the purpose of this example, let’s say you are a small business owner and you need two new servers. You will also need security, storage, and backups for those servers.
You consider four options for paying for these costs:
- Spend $31,000 up front for all the equipment and related costs. You own all the equipment and licenses outright.
- Sign up for a capital lease with a 12% interest rate and $830 monthly payment. At the end of a four-year period, you will own the equipment.
- Sign up for a 4-year operating lease with a $770 monthly payment. Your monthly payment is cheaper than the capital lease but you won’t own the equipment when the lease expires.
- Spend $1,000/month renting server space in the Cloud. Security, storage, and backups are built in to that cost.
This table illustrates the net cash flows in the first and 4th year total cash out (final year before redeploying new equipment). In each of these examples, we’ll factor in a 31% federal and state tax rate. In examples 1 and 2, we can expense the costs in section 179. As you can see, in example 2, your first year’s tax savings are actually more than your annual payments, putting $875 in your pocket. However, over the four year period, you spend over $27,000. You would spend the most amount with the Cloud, and the least amount by purchasing the equipment up front.
So buying up front and keeping the equipment in house is the way to go, right?
If you look at these numbers on the surface, cloud computing is the most expensive. But there are many other considerations that give cloud computing an edge:
- Lower operating and maintenance costs. If those servers aren’t in your building, then you’re not paying for the electricity and maintenance directly. Yes, you will pay some of those costs indirectly, but your cloud provider has better economies of scale for those costs.
- Strategic focus. You can move IT staff from an administrative role to a more strategic role, where they can focus on projects and other more profitable initiatives.
- Zero capital costs. If you’re starting a new business and you have limited capital funds, you can use those funds for marketing and other revenue-generating activities.
- Faster deployment. Deploying applications on site can take days. With the Cloud, there is still setup involved, but the deployment will be much quicker overall. We’re talking a matter of hours rather than a matter of days.
- Scalability. You don’t know what you’re going to need four years from now. With the cloud, it’s much easier to add and remove users, storage, and applications as needed.
- Resiliency and redundancy. Reputable Cloud providers typically provide systems that are much more robust and reliable than what you could afford to purchase in house.
Over the next couple of years, moving to the Cloud will continue to get easier and less expensive. Is your business ready to make the move?