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Actian Blog / Why Total Cost of Ownership is the Wrong KPI for a Cloud Data Warehouse

Why Total Cost of Ownership is the Wrong KPI for a Cloud Data Warehouse

Kpi Key Performance Indicator For Business Concept

Total Cost of Ownership (TCO) has been an essential Key Performance Indicator (KPI) for the IT industry for many decades – and rightfully so. Large scale capital expenditures for IT infrastructure and data center resources were incurred at the onset of a project, allocated to different business functions and amortized (along with maintenance and upgrade costs)  over the expected useful life of the hardware. CIOs and finance leaders needed a tool for understanding the fully-loaded costs of IT investments to determine ROI for the company.  TCO gave them that.

Data warehouse systems were significant investments for most companies – often the most expensive single system the IT department managed.  The hardware was expensive, the software was expensive, the storage needs grew year after year, and maintaining acceptable performance for users meant a constant upgrade cycle.  For a big-ticket budget item like this, measuring TCO was necessary because the costs incurred this year would support business value for many years in the future.

The introduction of a cloud data warehouse changes everything.

How can you measure TCO if you don’t own the systems?

The concept of “ownership” of IT systems doesn’t make sense in a world of cloud services, outsourced infrastructure, and BYOD.  Ten years ago, most companies owned over 80% of the IT systems their employees used.  Today many companies are finding they own less than half of their IT systems, and some companies are inching closer to Zero.  This raises the question; how can you measure the total cost of ownership of something you don’t own?

Over the past 5 years, most IT departments have begun shifting from a capital outlay cost model to an operational expense (OpEx) model.  Software as a Service (SaaS) adoption, subscription licensing of installed software, leased infrastructure for things like networks and phone systems, and the shift to cloud services for Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) have all helped this trend accelerate. In this OpEx model, the company isn’t making a bunch of one-time, big-ticket IT purchases – they are paying as they go for the things that they need.  This leads to more efficient use of IT resources and more significant financial control over IT investments.

Moving away from TCO towards Total Cost of Utilization (TCU)

TCO makes sense for long time horizons where business needs are predictable, solutions are stable, and costs are easy to forecast.  Business agility, cloud-scale efficiencies, and the accelerating pace of technology change undermine both the ability to calculate TCO and the usefulness of the KPI in driving informed decisions.  IT environments are changing so fast, calculating TCO has become nothing more than a guess.   IT and finance leaders understand this, and that’s why many are moving away from long-term planning exercises towards near-term ROI optimization based on fewer assumptions and more accurate data.  The TCO metric is being replaced with a Total Cost of Usage (TCU) metric that better aligns with the way modern IT works.

Why TCU makes sense for a cloud data warehouse

Nowhere in your IT ecosystem does the shift from TCO to TCU make more sense than your data warehouse.  A cloud data warehouse eliminates the up-front capital expense for hardware acquisition and the perpetual upgrade and maintenance cycle for storage, compute and software, replacing it with a utilization-based cost model where you pay for the resources and performance that you need.  With traditional on-premise data warehouse solutions, TCO was needed to reconcile linear costs with non-linear usage.  With a cloud data warehouse, you don’t need to do that anymore.  Your cost and benefit periods are aligned, and calculating ROI is much easier.

Instead of calculating a long-term TCO, you can use TCU to help you evaluate different solution alternatives (private, public, multi-cloud, and hybrid deployments).  You can also look at the relationship between value growth and cost growth of your cloud solutions compared to legacy data warehouses to help you determine what to migrate to the cloud, when and how quickly for cost optimization.  Instead of going through theoretical mathematical exercises based on hypothetical data about some ambiguous future, your IT leaders and finance teams can focus on the cost and benefit numbers that drive real business value that your company can harvest today.

Actian Avalanche is the leading provider of modern cloud data warehouse solutions, supporting on-premise, cloud, multi-cloud, and hybrid implementations.

To learn more about how to leverage the TCU metric for managing your cloud data warehouse solutions, download the Early Adopter Research white paper, “Total Cost of Usage: The key to understanding the true costs of a cloud data warehouse.”