Let’s say a business faces scalability issues with its on-premises data centers, which lead to high costs and operational inefficiencies during peak usage times. While maintenance costs rise, downtime becomes frequent, impacting customer trust and satisfaction.

You might think that cloud migration could solve these problems by offering flexible and dependable infrastructure that adjusts easily to changing demands. However, it’s important to consider that businesses face rising IT infrastructure costs, with cloud expenses expected to increase by 13%, according to GlobalDats. Global cloud spending is projected to exceed $1 trillion in 2024, growing at 16% annually. In this case, is migrating to the cloud necessary for costs optimization?

In this article, we will understand what infrastructure costs include, in what situations migrating to the cloud can optimize infrastructure costs, and when it might not. 

What is included in infrastructure costs?

First and foremost, let’s clarify, what are infrastructure costs? Infrastructure costs typically include elements essential for maintaining and operating a business’s technical framework. 

These include hardware expenses such as servers, storage devices, networking equipment, and data center space itself, renting, building, maintaining buildings. Software costs are another significant component, covering licenses, subscriptions, and maintenance fees for various applications and operating systems.

Besides, ongoing maintenance, upgrades, and security expenses contribute to infrastructure costs. Scalability considerations, addressing the ability to accommodate growing or fluctuating demands, are also integral to this equation.

Generally, infrastructure costs include the full spectrum of investments and expenditures required to establish and sustain a technological infrastructure.

Benefits of migrating to the cloud for cost optimization

According to Colorlib, just in 2023, 94% of companies globally use some form of cloud computing service to support their operations, reflecting a 14% increase since 2020. Due to the statistics we can see that companies keep moving to the cloud, as cloud migration offers several ways to optimize businesses’ infrastructure costs. Let’s see these ways:

No upfront capital investment

Firstly, it eliminates the need for significant upfront capital investment in hardware procurement and infrastructure setup. Instead of purchasing and maintaining physical servers and networking equipment, businesses can leverage cloud service providers’ infrastructure on a pay-as-you-go basis, shifting from a capital expenditure (CapEx) model to an operational expenditure (OpEx) model. This allows organizations to allocate resources more efficiently and scale their infrastructure according to actual usage, reducing waste and optimizing cost management.

Scalability and flexibility

Next, cloud computing offers inherent scalability and flexibility, allowing businesses to adjust their infrastructure resources based on fluctuating demand dynamically. Unlike traditional on-premises infrastructure, where scaling often involves significant time, effort, and cost, cloud platforms enable rapid provisioning and de-provisioning of resources in response to changing workload requirements. This agility ensures optimal performance during peak usage periods and eliminates the need for over-provisioning, thus further reducing infrastructure costs.

Improved resource utilization and efficiency

Moreover, cloud migration can save costs through improved resource utilization and efficiency. Cloud providers typically offer advanced resource management tools and optimization algorithms that help businesses right-size their infrastructure, allocating resources more effectively based on workload patterns and performance metrics.

Reduced maintenance and operational overhead

Another way cloud migration optimizes infrastructure costs is through reduced maintenance and operational overhead. With traditional on-premises infrastructure, businesses manage and maintain hardware, software, security, and compliance requirements, which can be time-consuming and resource-intensive. By migrating to the cloud, organizations offload many of these responsibilities to the cloud service provider, who handles infrastructure maintenance, security updates, and compliance certifications as part of their service offering.

Economies of scale and cost efficiency

Last but not least, cloud computing allows businesses to take advantage of economies of scale and cost efficiencies achieved by cloud providers through their massive data center infrastructure and global reach. Cloud service providers can spread the costs of infrastructure investment and maintenance across a large customer base, driving down unit costs and offering competitive pricing for computing, storage, and networking services. This allows businesses to access enterprise-grade infrastructure and advanced technologies at a fraction of the cost of building and managing equivalent on-premises infrastructure.

Let’s sum up: cloud migration offers several avenues for optimizing infrastructure costs, including eliminating upfront capital investment, allowing dynamic scalability, improving resource utilization and efficiency, reducing maintenance and operational overhead, and leveraging economies of scale.

When cloud migration might not optimize costs

Moving to the cloud might not always save money. Sometimes, keeping your existing on-premise setup is cheaper. Certain businesses, like those with strict data rules or needing super-low latency, may find on-premise solutions better. Let’s see when exactly cloud migration won’t optimize costs:

Existing investments in on-premise infrastructure

When evaluating the transition to cloud computing for cost optimization, businesses must consider their existing investments in on-premise infrastructure. Sunk costs refer to the expenses already incurred in the purchase, setup, and maintenance of these systems that cannot be recovered. In some cases, it might make sense to continue using this infrastructure, especially if it still functions efficiently and meets the company’s needs, as abandoning it would mean wasting these substantial investments.

Besides, the financial implications of fully depreciated assets – those that have already undergone full accounting depreciation – are significant. Fully depreciated assets no longer impact the financial statements through depreciation expenses, allowing businesses to use them without additional cost burdens, thereby maximizing their initial investment. This scenario often provides a compelling reason to delay cloud migration until the on-premise infrastructure becomes economically unviable or technologically obsolete.

Specific business requirements

In some cases, moving to the cloud may not optimize costs due to specific business requirements. Certain industries, such as finance, government, and military tech face stringent regulatory requirements that often necessitate on-premise solutions to ensure data protection and privacy laws compliance. These regulations might mandate that sensitive data be stored and processed within specific geographical boundaries or under controlled environments that only on-premise infrastructure can guarantee.

Further, local infrastructure can offer superior performance for applications demanding ultra-low latency and high performance compared to cloud-based solutions. For instance, high-frequency trading platforms, real-time gaming, or mission-critical manufacturing systems benefit from the minimal latency and consistent performance provided by on-premise setups. In such scenarios, the unique demands of compliance and performance make on-premise infrastructure a more cost-effective and practical choice.

Total cost of ownership (TCO)

When considering cloud migration, it’s crucial to assess the total cost of ownership to determine if it truly optimizes costs. Hidden costs associated with cloud migration can undermine anticipated savings.

For instance, data transfer fees, which are charges for moving data in and out of cloud services, can accumulate quickly, especially for data-intensive applications. Additionally, potential downtime during the migration process can disrupt business operations and incur significant costs.

To accurately evaluate TCO, businesses should compare cloud and on-premise solutions by accounting for all expenses, including initial setup, maintenance, operational costs, and hidden fees. While on-premise solutions involve higher upfront investments, they may offer predictable ongoing costs without the variable expenses linked to cloud development services. A thorough TCO analysis helps businesses identify the most cost-effective solution based on their specific operational needs and financial constraints.

Bottom line

Optimizing costs doesn’t necessarily require moving to the cloud. While cloud migration offers benefits like scalability and flexibility, it is not a one-size-fits-all solution. The decision to migrate should be based on thoroughly evaluating your business’s unique needs and capabilities.

Factors such as existing investments in on-premise infrastructure, regulatory requirements, and performance demands can make on-premise solutions more cost-effective. Additionally, hidden costs associated with cloud migration, like data transfer fees and potential downtime, should be carefully considered. Considering all these elements, a tailored approach will provide the best cost optimization strategy.