A while back I wrote about the Cloud shift. Recently, after speaking with several customers and IT professionals who are still sceptical about cloud adoption, I felt compelled to take an unbiased look at what it truly means and why it’s important to view it objectively.
The shift from traditional IT infrastructure to cloud computing is more than a technological evolution; it is a fundamental financial transformation. Instead of bearing the full cost of ownership, businesses can scale IT resources up or down as needed, paying only for what they use.
To drive innovation and transformation, organisations must navigate three primary IT strategies: on-premises, cloud-first, and hybrid cloud while balancing cost efficiency, scalability, and control.
Understanding the economic forces behind cloud adoption, Total Cost of Ownership (TCO), operational vs. capital expenditures (OPEX vs. CAPEX), and FinOps principles; is key to making financially sound IT decisions.
Comparing On-Premises, Cloud-First, and Hybrid Cloud
| Aspect | On-Premises (CAPEX-Driven) | Cloud-First (OPEX-Driven) | Hybrid Cloud (Mixed CAPEX/OPEX) |
| Cost Structure | Large upfront CAPEX investments | Pay-as-you-go, consumption-based OPEX | Mix of upfront and pay-as-you-go |
| Resource Utilisation | Low (5-10%) due to over-provisioning | High due to elastic scaling | Variable, depending on cloud adoption |
| Scalability | Slow, requires hardware procurement | Instant, scalable on demand | Moderate, scalable only for cloud portions |
| Budget Flexibility | Fixed costs, difficult to adjust | Highly flexible, adjusts to demand | Somewhat flexible but requires cost governance |
| IT Management | High internal management burden | Reduced burden, managed by cloud provider | Requires expertise in both on-prem and cloud operations |
| Security & Compliance | High control, but requires dedicated resources | Provider-managed security, less direct control | Retains on-prem security for sensitive workloads |
| Business Continuity | Redundant on-prem systems required | Built-in cloud disaster recovery and redundancy | Custom disaster recovery strategy needed |
| Innovation & Agility | Slow, constrained by hardware | Fast, enables AI, automation, and experimentation | Moderate, depends on which workloads move to the cloud |
Pros and Cons of Each Approach
1. On-Premises: The Traditional Model
Pros:
- Full control over infrastructure, data, and security.
- No reliance on external providers or internet connectivity.
- Predictable costs once infrastructure is deployed.
Cons:
- High upfront CAPEX with long hardware refresh cycles.
- Inefficient resource utilisation, leading to wasted capacity.
- Limited scalability and slow response to business changes.
2. Cloud-First: Maximising Efficiency and Agility
Pros:
- OPEX-based model reduces financial risk and improves budget flexibility.
- Higher scalability and elasticity, enabling quick responses to demand spikes.
- Lower IT management burden, with maintenance and security handled by cloud providers.
- Enables access to AI, analytics, and automation for innovation.
Cons:
- Less direct control over security and compliance compared to on-premises.
- Uncontrolled cloud costs can escalate without FinOps governance.
- May require re-architecting legacy applications to be cloud-native.
3. Hybrid Cloud: Balancing Control and Flexibility
Pros:
- Retains on-prem control for sensitive workloads while leveraging cloud for scalability.
- Gradual migration allows businesses to modernise IT at their own pace.
- Optimises costs by keeping critical workloads on-prem while offloading variable workloads to the cloud.
Cons:
- More complex IT management, requiring expertise in both on-prem and cloud environments.
- Dual cost structures (CAPEX and OPEX) can increase financial overhead.
- Data integration and latency issues can arise between cloud and on-prem environments.
Cloud Economics: Why Public Cloud Has the Lowest TCO
There is a body of knowledge and evidence why public cloud achieves the lowest total cost of ownership (TCO):
- Supply-Side Economies of Scale:
- Large cloud providers operate massive data centres with bulk purchasing power for hardware and energy.
- Cloud-based automation reduces IT labour costs compared to managing on-prem servers.
- Demand-Side Aggregation:
- Cloud providers optimise server utilisation across multiple customers, ensuring better efficiency than isolated on-prem data centres.
- Elastic consumption allows businesses to scale up or down without over-provisioning.
- Multi-Tenancy Efficiency:
- Running shared infrastructure lowers software licensing, maintenance, and security costs.
- Reduces the burden of patching and upgrades, as providers apply changes at scale.
FinOps: Controlling Cloud Costs and Maximising Value
While cloud offers financial flexibility, uncontrolled spending is a major risk. FinOps (Financial Operations) provides a structured approach to cloud cost management through:
- Real-time cost visibility, ensuring teams understand where cloud spend is allocated.
- Optimisation techniques, such as rightsizing, elasticity, and reserved instances to reduce waste.
- Collaboration between IT, finance, and business teams, ensuring cloud investments align with business goals.
Financial Modelling: Light Touch vs. Depth Approach
Organisations use different financial modelling techniques to plan their cloud investments:
- Light Touch Model – A high-level TCO and ROI analysis, ideal for small-to-mid-sized migrations.
- Depth Model – A detailed cost and workload assessment that spans four to six weeks and requires in-depth financial data sharing. Used for high-value cloud adoption strategies.
Strategic Business Benefits of Cloud Adoption
Beyond cost savings, cloud computing enhances business strategy by:
- Enabling Faster Innovation:
- AI, machine learning, and automation become accessible without large upfront investments.
- Reducing IT Complexity:
- IT teams can focus on strategic goals rather than hardware maintenance.
- Improving Disaster Recovery:
- Cloud-based backup and failover solutions offer superior resilience compared to on-prem systems.
Historical Perspective: Lessons from Early Cloud Adoption
A pivotal moment in cloud adoption came in 2007, when Derek Gottfrid at The New York Times leveraged cloud services to process and host massive digital archives without IT department approval. This marked the rise of “rogue IT”, where business units independently adopted cloud services.
Today, FinOps and structured governance frameworks prevent cloud sprawl, ensuring cloud adoption is both strategic and financially sound.
Finding the Right Cloud Strategy for Your Business
The transition from on-premises to cloud computing is reshaping IT spending and strategy. While cloud-first adoption maximises efficiency and agility, hybrid models provide flexibility for businesses balancing security, compliance, and legacy system dependencies.
By integrating FinOps principles, cost optimisation strategies, and financial modelling, businesses can maximise the value of their IT investments turning cloud spending into a competitive advantage rather than a financial burden.
The key to success lies in financial discipline, operational agility, and strategic decision-making ensuring that every dollar spent accelerates business transformation.
Myths vs. Facts About Cloud Adoption
Myth 1: Cloud is Always Cheaper Than On-Premises
Fact: While cloud can reduce capital expenditures (CAPEX), long-term costs depend on usage, architecture, and optimisation. Poorly managed cloud environments can lead to higher operational expenses (OPEX). FinOps practices are essential to control spending.
Myth 2: Cloud is Less Secure Than On-Premises
Fact: Leading cloud providers invest billions in security, often exceeding what most organisations can achieve in-house. However, security is a shared responsibility – businesses must implement proper identity, access, and encryption controls.
Myth 3: Cloud Migration is Just “Lift and Shift”
Fact: A successful migration requires more than moving workloads as-is. Optimising applications for the cloud (e.g., re-architecting for scalability, automation, and cost efficiency) is critical for realising cloud benefits.
Myth 4: Cloud Eliminates IT Jobs
Fact: Cloud changes IT roles rather than eliminating them. Traditional infrastructure management shifts towards cloud engineering, DevOps, and FinOps, requiring upskilling rather than workforce reductions.
Myth 5: A Single-Cloud Strategy is Enough
Fact: Many organisations adopt multi-cloud or hybrid cloud models to balance cost, performance, compliance, and resilience. Different clouds offer unique strengths, and avoiding vendor lock-in is a common strategic goal.
Myth 6: Cloud Adoption Guarantees Innovation
Fact: Cloud enables innovation but doesn’t guarantee it. Organisations must adopt cloud-native approaches, automation, and a culture of continuous improvement to unlock real innovation.
While I was researching for this, I found this great whitepaper on Cloud Economics created by Microsoft in 2010.
Initially, in the early 20th century cars were seen as just carriages without horses (i.e.: horseless carriages), and their potential for being cheaper and more useful was missed. This mirrors how people might initially misunderstand the cloud, failing to see its true cost savings, flexibility, and effectiveness beyond just replacing on-premises servers. The key is to avoid this “horseless carriage syndrome” and fully grasp the new paradigm of cloud computing to unlock its real benefits.
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