Title: COMP3xxxx Service Centered and Cloud Computing
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COMP30231 -5 Cloud computing cost models
> Zoheir Ezziane
## Cloud computing cost models
So far
IS strategy and meeting business needs the role that cloud computing can
play
Implementing cloud services, the role of Enterprise Architecture and how
patterns of business demand can create need for cloud services
The importance of governance in ensuring successful cloud implementation
Today
Capital (CAPEX) and operational expense (OPEX)
Total Cost of Ownership (TCO)
Financial evaluation
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Capital expense and operational expense OPEX CAPEX
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You buy a house
You buy a car You hire a car
You rent a house Capital expense (CAPEX)
> CAPEX: When a company makes a capital purchase;
Cannot deduct the value of the purchase from its income as part
of calculating corporation tax
Typically for an asset that retains value for a period (buildings up
to 50 years, manufacturing plant around 10 years, computer
hardware around 3 years)
The value of that asset appears on the companys balance sheet
> 5/3/2025 5
## Clouds vs. on -premise
Better resource planning
Lower costs
5-year infrastructure rule
Electricity bills
Downtime
5/3/2025 6Operational expense (OPEX)
What is OPEX ? (sometimes also called Revenue Expense)
When a company makes an expense purchase
Could be used to reduce the amount of corporation tax it will pay
(by reducing its declared profit and taking the expense out of
revenue)
The value of what is purchased will not appear on the balance
sheet
Once purchased it is assumed to be immediately consumed or
used.
Generally used for the day -to -day running expenses of a business
> 5/3/2025 7
## Capital versus Operational Expense
Why might organisations prefer Operational Expenses to Capital
purchases?
Companies often have complex financial treatment of capital
expense (e.g., buildings) including its depreciation. Similarly
complex models of operational expense exist related to profitability,
tax liabilities, cash flow, etc.
A company could borrow money and make a capital type purchase,
and repay the loan in monthly instalments as operational expense
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## Simplified cost model traditional IT
> 5/3/2025 9
Customer Equipment
vendor
Capital purchase
CAPEX
Company needs to invest in IT infrastructure Simplified cost model cloud services
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Service
provider
Customer Equipment
vendor
Capital
purchase
Expense
purchase
CAPEX OPEX Copyright Microsoft Corporation. All rights reserved.
# Compare CapEx vs. OpEx
Capital Expenditure ( CapEx )
The up -front spending of money on physical infrastructure
Costs from CapEx have a value that reduces over time
Operational Expenditure ( OpEx )
Spend on products and services as needed, pay -as -you -go (pay -per -use)
Get billed immediately Total Cost of Ownership (TCO) Total Cost of Ownership (TCO)
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## TCO to BUY the car
Purchase price
Insurance
Periodic maintenance
Wear and tear replacements (e.g., tyres, windscreen wipers)
Washing & care
Petrol
Repairs if damaged
Interest on loan taken out to buy the car
Driving lessons and test if you cannot drive
Minus any selling price when the car is sold
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## TCO to RENT or LEASE the car
Monthly lease charges
May include maintenance
May include wear and tear replacements
Petrol
Insurance
Washing & care
Repairs if damaged
Driving lessons and test if you cannot drive
No benefits at the end of the lease / rental period
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## Video Time: Total Cost of Ownership
https://www.youtube.com/watch?v=0RAcIsjTaHc
> 5/3/2025 16 Copyright Microsoft Corporation. All rights reserved.
# Consumption -based model
Cloud service providers operate on a consumption -based model, which means
that end users only pay for the resources that they use. Whatever they use is what
they pay for.
Better cost prediction
Prices for individual resources and services are provided
Billing is based on actual usage
What you pay depends on the resource
Pay per second for VMs or for persistent storage
Pay per GB for data transfers between regions or from the cloud to on -premise
Pay per read operation for persistent storage or requests units per second 18
Power Usage
Effectiveness
PUE is the ratio of the total amount of energy used by a computer data centre facility to the energy
delivered to computing equipment. An ideal PUE is 1.0 (extra lighting and cooling increase PUE).
PUE = 3.0 is VERY inefficient; PUE = 2.5 is inefficient; PUE = 1.1 IS VERY EFFICIENT. Copyright Microsoft Corporation. All rights reserved.
# Pricing Calculator
The Pricing Calculator is a tool that helps you estimate the cost of Azure products .
The options that you can configure in the Pricing Calculator vary between products,
but basic configuration options include:
Region
Tier
Billing options
Support options
Programs and offers
Azure dev/test pricing Copyright Microsoft Corporation. All rights reserved.
# Total Cost of Ownership Calculator
A tool to estimate cost saving s you can realize by
migrating to Azure.
A report compares the costs of on -premises
infrastructures with the costs of using Azure products
and services in the cloud. Copyright Microsoft Corporation. All rights reserved.
# Azure Cost Management
Reporting billing reports
Data enrichment
Budgets set spend budget
Alerting when cost exceed limits
Recommendation cost recommendations Copyright Microsoft Corporation. All rights reserved.
# Minimizing costs
Perform Perform cost analyses. Use the Azure Pricing and TCO calculators.
Monitor Monitor usage with Azure Advisor . Implement recommendations.
Use Use spending limits . Use via free trial customers and some credit -based Azure subscriptions.
Use Use Azure Reservations and Azure Hybrid Benefit (HUB) .
Choose Choose low -cost locations and regions. If possible, use low -cost locations.
Keep Keep up -to -date with the latest Azure customer and subscription offers.
Apply Apply tags to identify cost owners . Identify usage owners with tags.
"Cost Owner tag specifies the individual/team responsible for the cost of that
resource. 5/3/2025 23
## Quick Biased Video 5/3/2025 24
Cloud service &
3 year operating
costs for project
platform for test
& development
operations
Example Cloud Total Cost of Operation - Cloud Video Time: Hidden Cloud
https://www.youtube.com/watch?v=UUEru7mB -dM
> 5/3/2025 25
Financial evaluation Discounted Cash Flow (DCF)
Discounted cash flow (DCF) models consider the fact that the value
of money changes with time due to inflation, interest rates or the
lost opportunity of investing in other projects.
Example 1: 100 today is worth 128 in 5 years time with 5% accrued annual
interest.
Example 2: 500 today is worth 429 in 5 years time considering the effect of
3% annual inflation
DCF models use a discount rate to consider future changes in the
value of money.
Remember that inflation will affect the value of benefits as well as costs
Companies use different discount rate based on risk, type of
project, their cost of borrowing, market expectations etc.
NPV calculations are typically done over a 3 year or 5 year period
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## Financial assessment of IS project proposals
## - NPV
End of year Cash flow
( M)
Discount
factor
Present value
( M)
0 -10.0 1.000 -10.00
1 2.7 0.893 2.41
2 2.78 0.797 2.22
3 2.86 0.712 2.04
4 2.95 0.636 1.88
5 3.04 0.568 1.73
Net present value (NPV) 0.27M
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Discount factor = 12 %. Project costs are 10 M this year. No income from the project
this year, and no project expenses in years 1-5. Project income forecast to be 2.7 M
per year (in today s money increases by 3% a year for inflation). Financial assessment of IS project proposals
## - NPV
Project Description NPV
A Installation of paper invoice
scanning software
2.5M
B Replacement of HR database 1.3M
C Provide hand -held Smartphones to
field engineers
0.27M
D Replace desktop monitors with 24
models
0.16M
E Upgrade to Microsoft Office 2017 -1.2M
> 5/3/2025 29
The company then ranks proposed projects based on their NPV. They
may have a cut off (e.g., nothing below NPV of 1M).
What can you say about Project E? Financial assessment of IS project proposals
## - IRR
Internal Rate of Return (IRR) uses the same concept of
discounting as Net Present Value (NPV).
Instead of using a fixed discount rate, and calculating the NPV, in
IRR, you force NPV to equal zero and calculate what the discount
rate would be for this to happen.
This can be useful where companies have a particular cost of
money, which becomes the IRR threshold.
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## Financial assessment of information systems
## project proposals - IRR
Project Description IRR
A Installation of paper invoice
scanning software
15.8%
B Replacement of HR database 14.5%
C Provide hand -held Smartphones to
field engineers
12.2%
D Replace desktop monitors with 24
models
11.8%
E Upgrade to Microsoft Office 2010 -4.2%
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The cost of money to this company may be 12%. So, they would not
consider any project with an IRR of less than 12% - as they could
invest that money better somewhere else.
> No
> Yes
## NPV and IRR explained (video)
https://www.youtube.com/watch?v=Fw5 -wccViOM
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Summary and seminar topic Summary
Moving expenditure from capital expense to operational expense is
often proposed as a benefit of cloud computing but neither is
wholly good or bad.
It is vital to identify and quantify all components of the Total Cost of
Ownership (TCO) of both cloud services and traditional on -premise
solutions for a complete comparison.
Financial analyses of costs and benefits should be done using
discounted cash -flow techniques, like NPV and IRR.
> 5/3/2025 34
## Seminar topic
Cloud Computing cost models
This seminar will explore the use of Cloud Computing cost
calculators to estimate the cost of using IaaS cloud services
You will look at 2 calculators
You will then use the calculators to estimate the cost of using cloud
services for some case studies.