This document discusses cloud economics and calculating total cost of ownership (TCO) when considering moving IT infrastructure to the cloud. It provides examples of how AWS can lower costs compared to on-premises infrastructure through pricing efficiencies like reserved instances, right-sizing instances to workloads, and enabling elasticity. The document also discusses how to optimize costs on AWS through measures like tagging resources, enabling consolidated billing, and automating management to reduce labor costs. Finally, it notes that businesses are increasingly migrating infrastructure to the cloud to reduce costs, improve agility and productivity, and retire legacy on-premises systems.

1. Cloud Economics and calculating TCO
(or… “show me the money”)
22 November 2016
johnenoc@amazon.com

2. Where are we now? Where are we going?
Big IT Small IT
Small Cloud Big Cloud
Today? Three years? 10 years?
“Cost-out” road vs. “cloud now” road?

3. Alan Shepard,
Apollo 11 Astronaut
“ It's a very sobering
feeling to be up in
space and realize that
one's safety factor was
determined by the
lowest bidder on a
government contract.”
Be careful what you build for

4. How Decisions are made
Problem Outcome
Problem
Problem OutcomeDebate
No
Outcome

7. Possible IT Futures: agile, innovative vs. cost out
How do we run
IT?
Adopt Cloud
Off-shore IT
Automate

8. The IDC analysis show 41%
of the value of moving to AWS
is in the business productivity
Efficiency Category Efficiency p/app % of Total
Business Productivity 181,669.00$ 41%
IT Staff Productivity 133,389.00$ 30%
IT Infrastructure Cost Reduction 131,073.00$ 29%
Total 446,131.00$ 100%
It is not all about cost…
» Business productivity benefits. AWS customers are
driving their businesses and making their employees more
productive with AWS thanks to the agility, scalability, and
improved performance it provides for their business
applications. IDC projects that these organizations will
realize increased revenue and productivity benefits worth
an average of $173,003 per application per year over five
years, or $7.04 million per organization.
» Risk mitigation – user productivity benefits. AWS
customers benefit from the stability, reliability, and
security of applications running in the AWS environment,
which reduces downtime and increases confidence in IT’s
ability to support operations and business. IDC projects
that these organizations will realize savings worth an
average of $8,665 per application per year over five years,
or $0.35 million per organization.

9. TCO Definition
Models the total cost of ownership (acquisition and operating costs)
for running an infrastructure environment along with the costs of
decommissioning and retiring systems (if applicable)
TCO analysis is typically used to…
1) Compare the costs of running an entire infrastructure environment on
premises or in a co-location facility versus on AWS
2) Compare the cost of the underlying infrastructure requirements for a
specific workload to the cost of running that workload on AWS
3) Build the business case for moving to AWS

10. How does AWS cloud lower costs?
1
Source: IDC Whitepaper, sponsored
by Amazon, “The Business Value of
Amazon Web Services Accelerates
Over Time.” December 2013
“Average of 400
servers replaced per
customer”
Replace up-front
capital expense with
lower “pay for what
you use” variable
cost model
3
Periodic Price
Reductions
Economies of scale
allow AWS to
continually lower
costs
2
Pricing model choice
to support variable &
stable workloads
On-Demand
Reserved
Spot
Dedicated

11. Cloud & SSC Economics : Efficiency at scale
Unable to
Serve
Customers
Infrastructure
Cost $
Time
Large
Capital
Expenditure
Opportunity
Cost
Predicted
Demand
Traditional
Hardware
Actual
Demand
Automated
Virtualization
Quantifying:
• Cost Efficiency
• TCO
• Optimisation
• Trade-offs
• Risk
• Reward

12. TCO & Transition
TCO Modeling
Staff Productivity
Business Benefit
Inclusive
Typical One-time activities that
increase cost for the migration
duration.
• Planning and Assessment
• Duplicate Environments
• Staff Training
• Migration Consulting
• 3rd
Party Tooling
• Lease Penalties
Cost$
Time
Current
Operating
Cost
Target
Operating
Cost
Benefit Realization
• Infrastructure Savings
• Staff Productivity
• Business Value
5% 10% 30% 60% 80% 100%
Migration Cost Bubble
Benefit Realization Schedule

13. • Idle capacity is a major inefficiency of private cloud
deployments.
• Private cloud Infrastructure is provisioned for peak capacity plus
overhead. This leads an operational inefficiency from continuous
idle capacity.
• Capacity is provisioned long before applications are ready to
migrate. This also leads to continuous idle capacity.
• Applications ready for cloud prior to infrastructure completion
(capacity, platform support, services supported) will have an
opportunity cost.
• Long-term capital commitment decreases agility,
and increases risk of inaccurate capital forecasting.
• limited in the breadth of platforms and services that can be
offered. Keeping pace with Market Innovation is almost impossible
Opportunity
Cost
Idle
Capacity
Idle
Capacity
On-Premise, “Private” Cloud

14. AWS Benefits increase over time
Source: IDC Business Value of AWS Accelerates over
time
According to IDC, this relationship between length of time using AWS and return is due to customers leveraging the more optimized
environment to generate more applications along a learning curve.
$1 Investment in AWS
$8.40 in benefits
At 60 Months of using AWS
~8X
$3.50 in benefits
$1 Investment in AWS
At 36 Months of using AWS
~3X

15. Analysts have shown AWS reduces costs over long term
Source: IDC, Quantifying the Business Value of Amazon Web Services (May, 2015)
https://aws.amazon.com/resources/analyst-reports/IDC-business-value-aws/

16. Comparing TCO is not easy
(But We’re Going to Try)
≠

17. Decision Options
Owned-IT Cloud Impact?
Pay upfront Metered: Pay for usage Cost Efficiency
Risk reduction
Productivity
Innovation
Governance
Reputation
Over/Under provision Elastic: Match usage/demand
Limitations Scalable: Resource pooling
Delays, complexity Instant: click “on” globally
Big IT & ITIL Lean, DevOps, innovation culture
Limited cost visibility Transparency & monitoring

18. Current Infrastructure Utilization typically is very low
- Result: a significant portion of IT Spend is wasted
Example of TCO facts vs. assumptions

19. IT Labor Costs
TCO the way customers typically see it illustrative
Network Costs
Storage Costs
Server Costs Hardware – Server, (+Maintenance)
Software - OS, Virtualization Licenses
(+Maintenance)
Hardware – Storage Disks
Network Hardware – LAN Switches, Load Balancer
Bandwidth costs
Server Admin Virtualization Admin4
1
2
3
Diagram doesn’t include every cost item. E.g. software costs can include database, management, middle tier software costs. Facilities cost can include
costs associated with upgrades, maintenance, building security, taxes etc. IT labor costs can include security admin and application admin costs.

20. TCO the way it really is illustrative
Hardware – Server, Rack
Chassis PDUs, ToR
Switches (+Maintenance)
Software - OS,
Virtualization Licenses
(+Maintenance)
Facilities CostHardware – Storage
Disks, SAN/FC Switches
Software - Backup
Network Hardware – LAN
Switches, Load Balancer
Bandwidth costs
Software – Network
Monitoring
Server Admin, Virtualization Admin, Storage Admin, Network Admin, Support Team
Diagram doesn’t include every cost item. E.g. software costs can include database, management, middle tier software costs. Facilities cost can include
costs associated with upgrades, maintenance, building security, taxes etc. IT labor costs can include security admin and application admin costs.
Space Power Cooling
Project planning, Advisors, Legal, Contractors, Managed Services, Real-Estate,
Training, Cost of capital
Less-tangibles:
Cost of delays
Risk premium
Competitive abilities
Governance
Etc.
IT Labor Costs
Network Costs
Storage Costs
Server Costs
4
1
2
3
Extras5
Facilities Cost
Space Power Cooling
Facilities Cost
Space Power Cooling

21. In your TCO calculations and analysis
• Use 3 or 5 Year Amortization
• Use 3-Year RIs
• Use Volume RI Discounts
• Use Realistic Ratios
(VM Density, Servers:Racks, People:Servers)
• Explore On-Premises CPU Utilization
• Mention AWS Tiered Pricing
(Less expensive at every Tier)
• Apply Cost Benefits of Automation
(Auto scaling, APIs, Trusted Advisor, Cost Optimization)
What Works
Does Not
BONUS

22. In your TCO calculations and analysis…
What Works
Does Not
BONUS
• Forget Power/Cooling
(compute, storage, network)
• Forget Administration Costs
(procurement, design, build, operations, network, security)
• Forget Rent/Real Estate
(building depreciation, taxes, shared services staff)
• Forget SW & HW Maintenance Costs
• Forget to mention Cost of “Redundancy”

23. In your TCO calculations and analysis
What Works
Does Not
BONUS
• Time from ordering to procurement
(Releasing early = Increased Revenue)
• Cost of “capacity on shelf”
• Incremental cost of adding an on-premises server when physical
space is maxed out
• Real cost of resource shortfalls
• Cost of disappointed or lost customers when unable to scale fast
enough
• Human error – misconfiguration of environment by technicians
• Benefit of failing fast
• Business Value increases over time
http://media.amazonwebservices.com/IDC_Business_Value_of_AWS_Accelerates_Over_time.pdf

24. Cost Optimisation
$ $
Paying for what
you think you need
Paying for what
you actually use

25. The four pillars of infrastructure cost optimisation
Right sizing Reserved
Instances
Increase
elasticity
Measure,
monitor, and
improve

26. Cloud is not “Lift n Shift”…
On-
Premises
Lift & Shift Instance Right-
Sizing
Improved
Elasticity
Storage
Optimization
Optimized Lift
and Shift
Measure
Monitor and
Improve
Serverless
Architecture
Managed
Services
Replatformed
AWS
Optimized
Traditional TCO
Comparisons

27. Right-sizing (fit instance to app)
More small instances vs. less large instances
29 Large @ $0.32/hr
= $9.28
59 Small @ $0.08/hr
= $4.72

28. Reserved Instances
Commitment Level
1 Year
3 Year
Note:
Coverage
Utilisation
* Dependent on specific AWS service, size/type, and region

29. 0
2
4
6
8
10
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
/Spot
SUMMARY: Reserve, Spot (pricing efficiencies)
Reserved Instances enable you to reserve capacity for one or three years by
paying a low, one-time fee for the capacity reservation and receiving a
significant discount on the hourly charge for your instances
AWS Services Offering RIs
• Amazon EC2
• Amazon RDS
• Amazon DynamoDB
• Amazon Redshift
• Amazon ElastiCache
On Demand
Spot
RI

30. Elasticity (turn stuff off)
• Dev/Test (Non-Prod) instances
• Use simple instance start/stop, or tear down/build up altogether
Monday Friday End of Vacation Season
35% saved

31. Measure and monitor
• identify resource, audit resources, Turn off untagged
Tagging
Permissions
• Control of provisioning
Consolidated Billing
• Visibility, discounts

32. Cost Optimisation
Simple Stimulating Stretching
Consolidated Billing
Permissions
Tagging
Idle Resources
Design for Elasticity
Instance Right Sizing
Storage
Purchasing Options
OS Licencing
Offloading Architecture
Higher Level Services

33. The Migration Bubble – Components
Planning and
Assessment
Migration Tools Consulting Partners
Internal Training Duplicate
Environments
Lease Penalties

34. Cloud Adoption Investment Roadmap
Project/
Initiative
Foundation/
Hybrid
Migration
Optimization
Cloud Discovery
Platform Architecture Jumpstart
Security Architecture Workshop
Operations Architecture
Workshop
Big Data Medical Design
AWS Training
Database / RDS Assessment
TCO/Business Case
SAP Migration Jumpstart
Mobility POC
Created Cloud Services Team
AWS Training
Well-Architected Health Check
Well-Operated Health Check
Enterprise Accelerator
Migration Acceleration
Cloud Journey Simulation
Mass Migration Factory
Security Strategy
Portfolio Migration Strategy
Operations Transformation
Cloud Center of Excellence
Cloud Knowledge Base Buildout
AWS Training and Certification
Current Location
Company Investment
AWS Investment

35. Businesses are migrating IT to cloud
I'm not going to sell another aircraft
engine because I run a global data
center operation really well. That's
AWS's differentiator in the
environment.
Jim Fowler, CIO General Electric (2015)
2014 2017
34 Data
Centers
4 Data
Centers

36. Trend: Retirement of Legacy Technology Debt
From 6 Data Centers to 2.
Time to market reduced by
6 months.
Productivity up 100% in
front end-processes; up
40% in back-end processes.
Closed 8 Data Centers.
Queries 98% faster, 80%
cheaper than previous data
warehouse solution.
Data Center server footprint
cut 91%.
$ 3.5M saved over 5 years.
75% ops migrated to AWS.
$ 20M annual savings.
Saved 50% in CAPEX by
exiting Data Centers.
From 40 Data Centers to 6.
25% cost savings vs. colo.
30% faster development
Migrated 500+ servers,
closed Data Centers, cut
costs by 40%, grew
productivity over 30%.
(Italy) Reduced CAPEX
30%. PCI-DSS compliant
within 3 months.

37. Novartis, Cycle Computing &
AWS Spot instances
Goal: Screen 10 million compounds against a
common cancer target
Estimated on-prem costs: $40M

38. Solution: Use 10,600 AWS Spot Instances
Outcome: 3 promising compounds identified
Cost: $4,232
Time: 9 Hours
Novartis, Cycle Computing &
AWS Spot instances

39. 16MM Ledger Saving Velocity = 50 apps/qtr.
Operational CostsWorkforce ProductivityCost AvoidanceOperational ResilienceBusiness Agility
• 98% reduction in
P1/P0’s
• 77% faster to deliver
business applications
• 52% average
TCO savings
• 35% reduction in
compute assets (792)
• 15 automated bots
developed
• 80% cloud first
adoption
• 15 cloud services
created
• 50 applications
decommissioned
• 8 cloud migration
parties
• Improved security
posture
• Shift to self-service
culture
• Rapid
experimentation
• Reduced technical
debt
• 14M YOY Savings
• Improved
Performance
• Streamlined M&A
Activity
• DevOps in Practice
Progress as of May 2016
14.2M
Investment
Focus
18
Months
311 Apps
in Cloud &
14M YOY
Savings
Sample outcome – GE Transportation
http://www.slideshare.net/AmazonWebServices/demystifying-cloud-economics-how-to-build-an-investment-case-for-scale-migration-to-the-cloud-business

40. Demonstrated Results
Dec ‘14
128
O&G – Apps Migrated
Apr ‘15
206
Mar ‘15
177
Feb ‘15
163
Jan ‘15
131
Nov ‘14
115
Month with Migration Party
Q2 ‘14
24
Q3 ‘15Jun ‘15
229
Built Core Services &
Automation
May ‘15
221
Q3 ‘14
63
Oct ‘14
82
Jul ‘15
245
311
Q4
‘15
280
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Q2 '14 Q3 '14 Oct '14 Nov '14 Dec '14 Jan '15 Feb '15 Mar '15 Apr '15 May '15 Jun '15 Jul '15 Aug '15 Sep '15 Oct '15 Nov '15 Dec '15
Cost Out

41. Lessons Learned
Automate, then Automate More
Everything we do is with automation in
mind, from deployment to operations.
This is the only way to survive at scale.
Security at Every Layer
Fully utilizing the security provided in the
public cloud allows us to have confidence
in a multi-tenant world.
Embrace Agile
From organization structure to project
management, everything we do is with
agile principles in mind.
Bias toward action
Everyone has a reason not to move to
cloud. Our mission is to find more reasons
why we should.
Work Instead of Workflow
Embracing automation has allowed our
employees to concentrate on doing work,
instead of filling out workflows.
Encourage (calculated) Risks
Celebrate failure. Talk about pivots.
Continuously examine new tools. This
leads to rapid innovation resulting in
progress.
Transformation – Rebuild technology skill sets,
encourage diversity and embrace “hands-on” Pipeline – A pipeline of 50+ will ensure
consistent velocity
Collaboration - Embed Security & Risk
teams, CIO + CTO + Corp partnership
Cloud Aware – Rehosting is OK if it maximizes
margin, agility, resilience & performance
Enablers

42. Typical business case related challenges
§ Migration challenges
§ Sunk Infrastructure Costs – fully depreciated hardware and/or are not close to a hardware
refresh cycle
§ Cost (and effort) of Migration / Decommissioning – moving existing footprint to the cloud and
shutting down existing systems requires significant time and effort
§ Difficulty building a baseline for workload comparison to AWS
§ Lack of “Cloud Readiness”
§ Human factor – customer team lacks the skills and experience required to transition to the cloud
§ Applications – customers’ legacy applications or workloads are not ready for (or would not
immediately benefit from) moving to the cloud
§ IT Organization Change Management – unclear impacts on how the IT organization will operate
after migration to cloud
§ Need for predictable forecasting models for budgeting purposes

43. Map the Decision… include the concerns

44. Leverage Partner ecosystem

45. AWS Cloud Decision Framework
33%
20%
18%
13%
7%
3%
2%
2%
1%
0%
Performance
Cost Efficiency
Execution risk
Governance
Provisioning Speed
Scalability
Future-proofing
Functionality & Security
Migration Costs
Relationship & Legal
0% 5% 10% 15% 20% 25% 30% 35% 40%
RELATIVE IMPORTANCE OF VALUE DRIVERS
Context
Cost & Benefit
Analysis
Consensus
Communications

46. The business case for cloud typically addresses these
common questions
1) What is the future expected IT cost run rate in AWS versus the
existing (base case) cost forecast?
2) What are the estimated migration investment costs to get there?
3) What is the expected ROI and when is the project cash flow positive?
4) What are the business value benefits beyond cost savings?
Business Case Considerations

47. Framing: Objectives
Finance
• Capex ↓↓
• Opex ↓↓
• Opportunity cost ↓↓
• Risk premium ↓↓
Productivity Quality & Risk
• Cycle Times ↓↓
• POC Delivery ↓↓
• Innovation ↑↑
• Speed to Market ↑↑
• Complexity ↓↓
• Defects ↓↓
• Outages ↓↓
• Support overhead ↓↓
• Compliance ↑↑
• User satisfaction ↑↑
• BI quality ↑↑
25% - 40%?
15% - 25%?
20% - 30%?

48. Inclusion & Diluting Decision Risk

49. TCO Model

50. Customer Example: Tier 1 bank
We worked with a Tier 1 bank to build a 5-year forecast that accounts for
incremental revenue from increased developer productivity, cost savings
from moving to AWS, and migration costs and other financial concerns (e.g.,
writeoffs, running duplicate environments, balancing CapEx/OpEx)

51. 16MM Ledger Saving Velocity = 50 apps/qtr.
Operational CostsWorkforce ProductivityCost AvoidanceOperational ResilienceBusiness Agility
• 98% reduction in
P1/P0’s
• 77% faster to deliver
business applications
• 52% average
TCO savings
• 35% reduction in
compute assets (792)
• 15 automated bots
developed
• 80% cloud first
adoption
• 15 cloud services
created
• 50 applications
decommissioned
• 8 cloud migration
parties
• Improved security
posture
• Shift to self-service
culture
• Rapid
experimentation
• Reduced technical
debt
• 14M YOY Savings
• Improved
Performance
• Streamlined M&A
Activity
• DevOps in Practice
Progress as of May 2016
14.2M
Investment
Focus
18
Months
311 Apps
in Cloud &
14M YOY
Savings
Try and Replicate this…
http://www.slideshare.net/AmazonWebServices/demystifying-cloud-economics-how-to-build-an-investment-case-for-scale-migration-to-the-cloud-business

52. Cloud is a choice
over where your
focus will be

53. Where is your focus at
4am if your systems are
off-line? … “cost-out”?
Build for Flexibility

54. Thank You!
johnenoc@amazon.com