How to Calculate the Reverse ROI of Cloud
You know what ROI is, but do you know what reverse ROI is? Probably not, because I kind of made it up. ROI is the number of months it takes to get your return on investment. Reverse ROI is the number of months that renting, leasing, or subscribing to something overtakes the cost of buying that thing outright.
I started calculating reverse ROI a few years ago when businesses started offering cloud services that replaced one-time software and hardware purchases. Reverse ROI mileage varies per vendor and product. The shorter the time period to reverse ROI, the worse the investment. Some products actually deliver in infinite reverse ROI. Let’s look at a few examples.
Microsoft 365
The best reverse ROI you’ll be familiar with is Microsoft 365, and in particular its flagship products, Microsoft Exchange email and Microsoft Office. Only 10 years ago, the most popular business email platform was Microsoft Exchange, and the most popular office productivity suite was Microsoft Office. Would it surprise you that the same is today? However, most businesses pay monthly or annually for these programs, and they are delivered via the cloud, and they are called Microsoft 365.
10 years ago, a micro-business of 10 people would have paid $5000 for the hardware to run Microsoft Exchange and around $2500 for the software. Now they pay $6.40 a month for Exchange email, with a bunch of addons. So the reverse ROI math looks like this, $7500/ $64 = 117 months. This is essentially infinite reverse ROI because you’d have to replace the server in that time frame and you’d never catch up.
10 years ago, a micro-business of 10 people would have paid $320 for Microsoft Office per person. Now they pay $10 a month via Microsoft 365. The reverse ROI on that is 32 months, not quite as good as infinite. However, that $10 a month gets you the $600 version of Microsoft Office, which is now a 60-month reverse ROI, and when you consider the Microsoft releases a new version of Office every 36 months, which is included in Microsoft 365, well the deal just gets better and better.
This just considers two flag ship Microsoft products, but Microsoft 365 includes so much more. If you haven’t read my last blog, check it out.
Adobe is Not Your Friend
For terrible reverse ROI, look no further than Adobe Acrobat. Adobe Acrobat Standard, the most used PDF editing software costs $388 to buy the software outright. But, Adobe will not point you in that direction on their website, but instead coerce you to sign up for a subscription for $17 a month. Reverse ROI = 22 months. Not great!
One used to be able to buy Adobe Create Suite for $1300, but in 2012 Adobe forced people into a subscription model at $70 a month. Reverse ROI, 18 months. Worse!
Cloud Server Hype Exposed
A friend and customer used to always ask me, why don’t we just put our servers in the cloud? A reasonable question. I did the math and the answer is bad reverse ROI. Of course that isn’t always the case, otherwise AWS (Amazon Web Services) and others wouldn’t be the critical infrastructure that they have become.
The bad reverse ROI comes when you have applications designed and licensed to run on windows servers in-house and then take those servers and applications to the cloud and try to run them the same way. The reverse ROI can be as little as 12 months. Meaning that after a year of paying for cloud services you could have bought the servers and licensing and not paid any more after month 13 for the life of the server. Don’t do that, unless you are getting actual ROI from not having an office or some other benefit.
What is your reverse ROI? Consider the cost of thing you could pay for once and own and divide that buy the cost of the comparable thing that you rent, lease, or subscribe to. Do the math.