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Cloud Economics 101: Contingent costs and calculating true TCO



This is the second in a series of blogs on cloud economics. In the first blog, I discussed the role of cost in determining your right mix of hybrid IT. Later in this blog series, we will be reviewing some tools and methodologies for calculating TCO (total cost of ownership, or operation) of public cloud, private cloud, and managed cloud options. These tools and methodologies let users generate consistent, comparable cost measures for the different options so that they can derive “apples-to-apples” comparisons for options that have inherently distinct cost models. But before taking this next step, I thought it would be useful to say a cautionary word or two about what I call “contingent costs.”

For the purposes of this discussion, contingent costs are defined as costs:

  • that are not expected to be incurred, and
  • for which there is no reliable way to predict either the likelihood of incurring the cost or the monetary amount of the cost if it is incurred. Since these costs are inherently non-quantifiable with any precision, there is no way to work them into any rigorous TCO model. In fact, most or all of the contingent costs that I have in mind are ones that you will never want to incur, but still need to consider when evaluating TCO for different cloud options.

The main potential source of contingent costs that I have in mind could arise if an application or service is subject to strict regulatory or other legal constraints—and those constraints are somehow violated. For example, many countries have “data sovereignty” laws that prohibit the physical movement of certain broad classes of data to servers or datacenters outside of the country’s borders. Another example is the HIPAA requirement in the USA for protecting all data relating to patient medical records. There are many other examples, and the list is more likely to grow than to shrink.

A business providing cloud applications or services that runs afoul of these constraints could face a number of potentially very costly consequences. These include fines and business sanctions such as the suspension of the ability to offer the application or service, costs of remediation including the liability of fixing the problem, law suits, damage to the company reputation, and general management distraction, which takes focus away from running the core business. Needless to say, these costs could be significant even to the point of dwarfing basic operations costs.

Whichever combination of cloud delivery options you select, you are certainly going to try and design them so that issues don’t ever arise. However, it may turn out that different cloud options still present differing levels of risk. For example, even if an application that uses a public cloud service is designed to address data sovereignty concerns, the fact that the underlying infrastructure is being managed by someone outside your business, and therefore not under your direct control, may raise concerns. As an alternative, you may want to consider a private cloud solution where you have full control over the location of the underlying infrastructure.

For many applications, these considerations will not come into play or the costs will be small, even if they are incurred. In these cases, a pure TCO approach that looks at readily quantifiable costs should be all that is needed. However, in cases where the costs can be high, you may want to opt for a solution that minimizes risk even if it seems to be more costly than other options.

Now that I’ve touched on the role of cost in determining your right mix, and how to consider contingent costs, up next I’ll review the different approaches customers can take to create a cost comparison across multiple cloud options.

Other Recommended Resources:

If you’re just getting started on exploring the issue of cloud TCO, I encourage you to read Forrester’s insightful research paper, “The Top 10 Facts Every I&O Pro Should Know About Cloud Economics.” However if you’re looking for more on how to create a quick comparative multi-cloud TCO, explore the 451 Research paper.

Read the next blog in the Cloud Economics 101 series: Approaches to Comparing Costs in a Hybrid Cloud World

About the Author


I am the Chief Operating Officer and Vice President of the Hewlett Packard Enterprise cloud business unit, driving all aspects of operations and performance. I am a leader in HPE’s Cloud Economics campaign. I have also held various leadership roles in General Electric and Electronic Data Systems, and have a Master’s degree in Business Administration, Analytical Finance and Strategic Marketing from the Indian School of Business, Hyderabad in India. I am also Six Sigma Black Belt certified. Follow me on Twitter @lalitsingh17

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