Direct vs. Indirect Cloud Cost: How to Optimize Spending & TCO

It’s easy to account for obvious, visible costs in any project, but what about the ones that are less obvious? Businesses tend to account for direct costs associated with cloud computing, such as compute resources, connectivity, storage, licensing and software, subscription fees, usage and consumption, but they may not think as much about the indirect costs, such as the expenses associated with cloud migration, the cost of downtime, or what they may have to spend to train employees on new practices. We’ll detail some of the most common direct vs. indirect cloud costs, and what businesses can do to optimize their spending.

What Are Direct Costs in Cloud Computing?

Direct costs in cloud computing include any expenses directly related to using cloud services. These can be costs associated with storing data in the cloud, transferring data in and out of the cloud, or using software applications in the cloud, among other things.

Key Components of Direct Costs

Some key components of direct costs in cloud computing are storage, compute, data transfer, and networking costs, as well as some additional services companies may use in the cloud.

Storage Costs

When it comes to storage costs, businesses need to calculate the amount of space they are using, the type of storage being used, and data retention of this storage. Storage space is generally measured in gigabytes or terabytes. Different storage types, such as solid-state drives (SSDs) or archive storage, have different price points. Data retention periods can also impact how much providers are charging for data storage.

Compute Costs

Compute costs can depend on the type of compute instances being used, how long they’re being used, and whether they’re on-demand or reserved instances. CPU, memory, and storage costs are tied to the type of server or virtual machine that’s being used and for how long it’s running, usually tracked in hours. Businesses that use reserved instances can get compute resources at discounted costs compared to pay-as-you-go pricing.

Data Transfer Costs

Data going in and out of the cloud may be subject to certain costs. There may also be costs associated with moving data between services within the same cloud platform.

Networking Costs

In addition to transferring data, there are broader costs associated with network infrastructure and usage. The amount of data transferred, speed of the connection, and network type (public or private, for example) can all impact costs.

Additional Services

Other cloud services also add expenses to cloud computing, such as managed databases, artificial intelligence/machine learning (AI/ML) services, and monitoring tools. Specific services incorporated and their resource usage will impact what these tools and services costs. Most services will be OpEx expenses, charged based on what companies used, versus equipment, which is a CapEx expense, paid once and used for years. Content delivery networks (CDNs), security services, and backup and disaster recovery solutions can be other sources of cloud computing spend.

What Are Indirect Costs in Cloud Computing?

Indirect cloud costs are just as important to measure and often go unnoticed when calculating cloud spend. These include any costs not directly tied to the consumption of cloud resources and can be difficult to quantify, such as personnel costs, skills development, downtime, and operational costs.

Key Components of Indirect Costs

Main contributors to indirect costs in cloud computing include cloud migration and implementation, cloud management and optimization, security, disaster recovery, and training expenses.

Cloud Migration and Integration Costs

When businesses are evaluating which cloud resources to use and how much they need, there are costs associated with the assessment and planning phases, as well as developing a migration strategy. After that, organizations need to think about the costs of moving data and applications to the cloud, including any converting or integrating essential for a smooth migration.

Cloud Management and Optimization Costs

Moving workloads to the cloud isn’t a one-time expense. Ongoing costs can include tools incorporated to improve the ease of cloud management, salaries for internal cloud experts, payments to third-party resources, and costs associated with finding and implementing optimization strategies.

Security Costs

Cloud environments need to be protected with security services and tools, such as data encryption, firewalls, and intrusion detection systems. Regular audits and security assessments can ensure that the current measures will be enough to protect the cloud environment. There are also costs businesses will incur related to planning and carrying out an incident response strategy.

Disaster Recovery and Business Continuity Costs

Sometimes, preventative security measures aren’t enough, and for this reason, businesses need to have backup and disaster recovery solutions in place. The cost of backup and data recovery services will depend highly on how much data a business can afford to lose (recovery point objective) as well as how quickly data needs to be restored to prevent significant business interruptions (recovery time objective).

It’s important to understand how much a minute or hour of downtime costs your business. According to Siemens, an hour of downtime costs businesses $36,000 on the low end, with some industries, such as automotive, seeing losses as large as $600 per second.

Companies also need to budget for testing and drills. Backup and disaster recovery tools are only useful if they work in critical moments.

Training and Skill Development Costs

If your organization decides to rely on in-house skills for cloud computing, you’ll need to account for spending related to employee training.  This can include skill development on cloud technologies, putting staff through certification programs, and supporting ongoing professional development. Businesses that do not put money into in-house training may need to pay for outside experts to come in and implement or manage certain aspects of the cloud computing environment as well.

Direct vs. Indirect Cloud Costs: How Do They Impact the TCO for Cloud Services?

The total cost of ownership (TCO) in the cloud is influenced greatly by both direct and indirect costs. To make informed decisions about cloud adoption and resource allocation, businesses need to understand how these components influence overall costs.

With direct costs, organizations need to think about the resources they’re consuming, as well as what’s necessary to maintain desired performance standards. For example, paying for more reserved instances than are necessary can lead to unnecessary expenses even with discounted prices.

Indirect costs can have more long-term consequences for the TCO of cloud services. The amount of direct costs you incur will also influence indirect costs such as in-house expertise and cybersecurity measures. The cloud TCO cannot accurately be calculated without careful consideration of the interplay of these costs.

How to Optimize Direct vs. Indirect Cloud Cost?

Optimizing your cloud computing environment will depend on your infrastructure, business size, amount of data being stored and transferred, and so on. However, there are a few optimization strategies all businesses can incorporate to improve their direct and indirect costs in the cloud.

Direct Cloud Cost Optimization Strategies

To avoid overprovisioning and cloud waste, businesses should work to rightsize their instance types based on their workloads. They should also consider using reserved instances for any predictable workloads and optimize storage based on data access patterns and retention requirements. Leverage resource provisioning and management automation where necessary to routinely optimize and remove unnecessary data. Finally, be sure to monitor resource usage and make changes based on newly found optimization opportunities.

Indirect Cloud Cost Optimization Strategies

Automation can help reduce indirect cloud costs through resources such as cloud financial management tools. However, it’s important to consider other indirect costs associated with cloud cost optimization strategies. These include not only the tools themselves but also the time and effort required to reengineer resources, consulting and professional services to analyze cloud usage and implement cost-saving strategies, and costs for training employees on cloud cost management and governance practices and techniques.

Downtime can be an unexpected source of financial strain, so ensure your cloud migrations are planned effectively to minimize costs associated with decreased productivity. Invest in training and skill development, particularly in security best practices, to reduce the risk of data breaches, which cost businesses $4.88 million on average in 2023-2024. While these investments may seem substantial upfront, they often lead to significant long-term savings and improved operational efficiency.

Need Help Optimizing Your Cloud Computing Costs?

Analyzing costs in the cloud isn’t a cut-and-dry exercise. It requires understanding the complex ins and outs of cloud computing, as well as recognizing direct and indirect costs. Read our whitepaper to learn how you can pinpoint the best opportunities for increased cloud return on investment.