Quantifying Total Cost of Ownership (TCO) for Exchange Online and Office 365 versus On Premises Solutions

One of the most common points of debate that gets raised when I am talking to Microsoft partners and customers about the value of cloud based solutions such as Microsoft Exchange Online, which is part of Office 365, and traditional on premises solutions such as Exchange Server, is around the total cost of ownership (TCO) of the solutions and the benefits to customers considering available options.

Historically, the TCO for an on premises solution has revolved around considerations of any capital expenditure required, such as the initial upfront costs for required hardware and software licenses plus the cost of any migration services and implementation projects.


An example of a capital expenditure project

For example, assume that an IT budget of £10,000 to provision a replacement email service has been allocated, total costs would be spread across the core requirements to implement the solution. They could be:

  • · Hardware - £5,000
  • · Software Licenses - £2,500
  • · Services (e.g. upgrade, migration, configuration and setup) - £2,500

The TCO for this project could then be split over the lifetime of the provisioned service so if the refresh cycle was every five years for example, the cost of the service could be perceived as £2,000 per year albeit with the total amount laid out as capital expenditure. If the lifetime of the service could be extended to ten years, then the cost of the service would be perceived as £1,000 per year using the same logic.



Economic challenges faced by small and midsized businesses

Currently, very few businesses are in the fortunate position where they can afford to spend large capital expenditure budgets on technology upgrade projects. Even businesses who are less affected by cash flow challenges are reluctant to spend large amounts of money on projects that they perceive to have little or no business benefit other than ensuring continuity of existing capabilities.

Combine this situation with ageing servers and end of life customer email platforms and you have a challenge that the basis of the cloud based or hosted email service is designed to help solve.

The hosted email proposition takes the capital expenditure option and turns it into an operational expenditure model. Instead of the upfront costs associated with hardware and software licensing, the model is based on per user/month or per user/year payment model.


An example of an operational expenditure model

For simplifications sake, as an example, consider fifty users paying £3 per user per month for an email service. This would equate to £150 per month for all fifty users which in turn totals £1,800 per year.

After the initial cost of migration services is taken into account, the cost of the service per month/year in this example remains constant but the total cost, month on month, year on year increases as the service continues to be used.

Eventually, there comes a point in time where the operational expenditure model costs more over time than the capital expenditure model. In this example, this is somewhere in year five, where the migration service costs and operational expenditure software costs cross the initial £10,000 budget allocation.



Hidden Costs of Information Technology

This is the basis upon which many businesses base their TCO equations and therefore, their decision around which option is most cost effective over the lifetime of their platform of choice. However, there are often other costs, both tangible and non-tangible, that also need to be factored in when working out the TCO of traditionally installed, on premises based solutions.

Examples can include both capital and operational expenditure such as:

  • · Email/Spam filter
  • · Backup solutions
  • · Disaster recovery plans
  • · Ever increasing storage needs
  • · Replacement hardware components

Even things such as power for on premises servers needs to be accounted for.

When combined with less easily quantifiable costs such as the total time required for staff to support, monitor, manage, maintain and patch the software and undertake generic maintenance tasks, these hidden costs start to mount up significantly over the lifetime of traditional on premises based solutions.


Benefits of online, hosted services

For many of the traditional costs associated with on premises based service delivery, the provision of a cloud based or hosted online service already has these costs built in to the user subscription cost.

When considering the TCO of a cloud based solution, the timing of when the operational expenditure outweighs the capital expenditure for the lifecycle of the project can be misleading if the hidden costs of traditional solutions are not factored in.

There is no de facto standard for measuring TCO gains when moving to a cloud based online service. Taking all costs into consideration and combining any additional benefits gained, such as an always up to date platform inclusive of the latest productivity software tools and enhancements is one of the ways in which this can be measured.

Because of this, it comes no surprise to see many small and midsized organisations already on board with cloud services, having moved to Exchange Online or one of the combined plans available in Office 365 as a solution for their combined email, collaboration and productivity requirements.