The cost model for cloud services is very different to more traditional in-house IT provision and there are implications for budgeting and cost management. Let’s have a look at the main ones. 

CapEx to OpEx 

Cloud services are accounted for through operational expenditure which is the day-to-day operating costs of a business. This is different to in-house IT costs of things like hardware and software which are capital expenditure items, meaning they’re treated differently for accounting purposes and need to be budgeted for differently. 

With cloud services there are no assets to purchase so there’s nothing that depreciates over time. And, because the model allows cloud resources to be scaled up or down to meet demand, it can be a very cost-effective way of managing IT services. 

There are also very few up-front costs in the cloud, although some providers allow pre-payment for some of their services. This means an organisation commits to consuming an agreed number of resources which they pay for regardless of whether they use them or not, generally at a discounted rate. This is still counted as operational expenditure. 

Fixed vs variable cost 

Because in-house IT infrastructures and services are set for a period of time to meet the IT strategy requirements, organisations know their fixed costs for things like running the data center, buying hardware and software, and ongoing systems maintenance. Then there are things like periodic technology refreshes, license upgrades and support fees. These costs are generally visible and predictable.  

Cloud services are different. Because of utility pricing and on-demand resources, monthly expenditure is variable and can fluctuate. If the services are for a ‘steady-state’ application – say a customer relationship management system – with a fairly static number of users and consistent usage, the cost can be pretty well anticipated and unlikely to change much. 

But, for applications where there’s a high variation in the number and frequency of users, the cost fluctuation will be much greater. However, cloud service providers publish price lists so it’s still possible to predict the likely costs based on forecast demand for the services. 

So, accurately costing complex cloud deployments can be difficult, but this has to be weighed against the benefits of on-demand services and cost reductions if service requirements decrease. 

Resource management 

With cloud services, it’s simple to provision and deploy resources. Because of this though, it’s easy to forget about unused resources which can, in effect, lie around doing nothing apart from incurring cost.  

This a real concern for cloud customers. Respondents to RightScale's 2019 State of the Cloud survey identified ‘Controlling and understanding costs’ as one of their highest priorities and estimated that, on average, their bill was 30% higher than it needed to be.  

So, the cloud is about having strong policies and processes in place to govern who can create resources, when they can create them and who needs to authorise their provision. Systems also need to be implemented to ensure that unutilised and underutilised resources are managed and ‘turned off’ when they’re not needed.