Aalto University School of Electrical Engineering
Department of Communications and Networking
27.6.2017
Cost analysis of cloud
based converged
infrastructure for a small
sized enterprise
Author: Christine Böckelman
Supervisor: Prof. Heikki Hämmäinen
Oy Teknocalor Ab
Outline

Background and problem statement

Theoretic framework
 Total Cost of Ownership (TCO)
 Customer-Provider Strategic Alignment Maturity (CPSAM)

Case Study

Methods

Main results

Conclusions and future work
Background and Problem
Statement

Studies a dispersed IT architecture for a small sized
enterprise versus a cloud based converged IT
architecture


Cloud computing traits that are appealing for small sized
companies include:


The scenarios are studied in terms of total cost of ownership
and customer-provider strategic alignment maturity
Flexibility, modularity, ease of use and the “pay-as-you-go”
model
Research question: What are the benefits of a converged
versus a dispersed cloud solution for a small sized
enterprise?

Which solution is most cost efficient?

Can the proposed solution meet the current needs and solve
the issues of the outsourcing strategy?
Theoretic Framework - TCO
 Total Cost of Ownership – takes into account “all
costs associated with acquisition, use and
maintenance of an item”
 According to Gartner it is the industry standard for
financial analysis of IT costs
 Used for:
 What-if scenarios
 Comparative analysis
 Provider selection
 Measuring and understanding cost and performance
 “Big picture” approach which can become
complex
Continued - TCO


TCO models share
similarities in
implementation
processes, however differ
in terms of cost
component
characterizations
Gartner: Direct vs.
Indirect


Develop chart of
accounts
Gather cost
information
Evaluate chart
Characterization based
in relation to cost
activity
Ellram: Pre-transaction,
transaction and posttransaction costs

Identify domain
& develop
process flow
chart
Characterization based
on occurrence in
purchasing cycle
Analyze result
Continued - TCO

Cost Grouping strategies:
 Ellram: Management, Delivery, Service, Communication,
Price, and Quality
 Gartner: Cost to Implement, Cost to Operate, Cost to
Support & Maintain, Cost to Enhance and Extend, and
Cost to Decommission

Ellram presents three approaches for determining TCO
 Dollar-based direct costs and Dollar-based formula focus
on gathering actual cost data and determining what to
include based on relevance and significance
 Value-based: cost data is combined with performance
data, transforming qualitative data to quantitative data
Theoretic Framework CPSAM

Customer-Provider Strategic Alignment Maturity model
bases on earlier maturity models, such as the
Capability Maturity model and the Strategic
Alignment Maturity model

Assesses the maturity of the alignment of customer
and provider, i.e. the external alignment of Business
and IT

Analyses the outsourcing strategy and the customerprovider relationship

Consists of 6 components and 27 practices
 Components: Value Measurements, Governance,
Partnership, Communications, HR & Skills, Scope &
Architecture
Continued - CPSAM

The CPSAM has five maturity levels

The lowest maturity level is characterized by low
alignment and low harmony between the customer
and provider.

The highest maturity level is characterized by high
level of integration of customer-provider strategic
planning and co-adaption and co-development.

The analysis of maturity of each practice will not only
provide an overall maturity of the outsourcing
relationship, but also provide insight into problem
areas and process issues.
Case Study

The case company wishes to minimize costs and risks
and to improve communication throughout the value
network

The current IT architecture consist of multisourcing
external services and relies on the cooperation of a
couple providers

The proposed IT architecture consists of a more
centralized solution with one main IT provider and its
partners
Minimize IT
costs
IT management
centralized
GOALS
Communication
Customerprovider
alignment
Methods

Semi-structured qualitative interviews with open
questions

Informal meetings for background information

Information gathering; billing history, documentations,
etc.
Main Results - TCO

The TCO data was gathered based on information
collected and interviews held with the providers

The approach taken consisted of both dollar-based
direct costs and value based

A 3-year framework was decided upon for the analysis
based on typical server/virtual machine renewal cycle

The cost grouping strategy used bases on the
approach presented by Gartner and consists of both
one-time and continuous costs
Main Results - TCO
TCO
Amount
Scenario 1
Scenario 2
1
Depreciated
12 500 €
3*12
256 284 €
192 348 €
Enhancement Cost
3
35 400 €
35 400 €
Decommission Cost
1
TOTAL
-
Implementation
Cost
Cost to Operate,
Support & Maintain
5 500 € – 7 000 €
(VM migration)
298 684 €
5000 €
245 248 €
≈ 60 000 € difference in
operational costs
Main Results - CPSAM
CPSAM
Provider 1
Provider 2
Customer
AVG
Value
3,0
2,5
2,5
2,7
Governance
3,0
3,0
3,0
3,0
Partnership
2,5
3,0
2,8
2,8
Communication
2,5
3,0
2,0
2,5
HR & Skills
3,0
2,5
2,3
2,6
3,0
2,5
2,5
2,7
Scope &
Architecture
Main Results - CPSAM

Overall maturity level: weak 3

Processes are implemented and defined however
communication and articulation is lacking in
improvement

Roles and responsibilities are unclear

Ambiguity in vendor management and process
approach

Inter-provider communication is little to non-existent


Increasing risks and confusion
Overall understanding of whole value network is lacking

Transparency

Documentation

Liaisons
Conclusions

Differing factor of the scenarios in terms of TCO are
the operational costs (support and maintenance
costs)
 Depend on chosen support plan and can partly consist
of hidden costs such as extra fees for exceeding usage
and premium support
 Show benefits of implementing scenario 2

Main issues in terms of outsourcing strategy relate to
communication and articulation of processes
 Transparency, documentation, standardized processes,
and liaison for whole value network are needed for
improvement in maturity
Future Work

As the operational costs are highly variable and
sensitive to hidden costs, they should be investigated
further for an informed decision on most suitable
support and maintenance plan

Another aspect are the lock-in (switching) costs
related to cloud computing which should be
considered in scenario 2 as they affect future provider
selections
Questions?
References
L. M. Ellram and S. P. Siferd, “PURCHASING: THE CORNERSTONE OF THE TOTAL
COST OF OWNERSHIP CONCEPT,” J. Bus. Logist., vol. 14, no. 1, pp. 163–184, 1993.
B. Kirwin, “Defining Gartner Total Cost of Ownership,” Gart. Res., 2005.
L. M. Ellram, “Total cost of ownership : Elements and implementation,” Int. J.
Purch. Mater. Manag., vol. 29, no. 4, pp. 3–11, 1993.
Kyte, “Application Portfolio Management and Total Cost of Ownership
Approaches to Business Unit IT Strategies,” Gart. Res., 2016.
S. Galberaith and A. Kyte, “Application Total Cost of Ownership Principles SMBs
Should Follow,” Gart. Res., no. February, 2014
L. M. Ellram, “An analysis approach for purchasing,” Int. J. Phys. Distrib. Logist.
Manag., vol. 25, no. 8, pp. 4–23, 1995
J. Luftman, C. V Brown, and S. Balaji, “Customer – Provider Strategic Alignment :
A Maturity Model,” in Service Systems Implementation, H. Demirkan, J. C.
Spohrer, and V. Krishna, Eds. Springer US, 2011, pp. 145–163.