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TCO Analysis
On-Premises vs Cloud TCO: The Complete 5-Year Cost Comparison Framework
📅 December 2025⏱️ 13 min read✍️ TCOIQ Team
Why TCO Comparisons Are Usually Wrong
Most on-premises vs cloud comparisons compare the wrong things. Cloud advocates forget to account for cloud management overhead. On-premises advocates forget to include all the hidden costs of owning hardware. A rigorous TCO comparison must include everything.
On-Premises TCO Components
Direct Infrastructure Costs
| Component | Typical Cost | Frequency |
|---|
| Server hardware (dual socket, 256GB RAM) | $12,000-25,000 | Every 5 years |
| SAN/NAS storage (100TB) | $80,000-200,000 | Every 5-7 years |
| Network switches (ToR, spine) | $8,000-30,000 | Every 5 years |
| Rack, PDU, cabling | $5,000-15,000 | Every 10 years |
Facility Costs
| Component | Annual Cost |
|---|
| Data centre space (colocation) | $1,500-4,000/rack/year |
| Power (20kW rack at $0.12/kWh) | ~$21,000/rack/year |
| Cooling (PUE 1.5) | +50% of power cost |
| Internet connectivity | $2,000-20,000/year |
Personnel Costs
| Role | Annual Cost (incl. benefits) |
|---|
| Systems Administrator | $90,000-130,000 |
| Network Engineer | $100,000-150,000 |
| DBA (if on-prem database) | $110,000-160,000 |
| Security Analyst | $100,000-140,000 |
Cloud TCO Components
| Component | Note |
|---|
| Compute (EC2/VMs) | Primary cost — varies by size and commitment |
| Storage (EBS, S3) | Often underestimated at scale |
| Data transfer egress | Frequently overlooked — can be $0.09/GB |
| Managed services | RDS, EKS, Lambda — often save money vs DIY |
| Cloud management tools | CloudHealth, Apptio — $10-50k/year |
| Cloud-specific training | $2-5k/person/year |
| Cloud architect/DevOps staff | Different skills, similar cost to on-prem ops |
5-Year TCO Example: 100-Server Environment
| Cost Category | On-Premises | AWS (RI 3yr) | OCI |
|---|
| Hardware (amortised) | $400,000 | — | — |
| Compute | — | $720,000 | $240,000 |
| Storage (100TB) | $150,000 | $138,000 | $153,000 |
| Facilities (5yr) | $500,000 | — | — |
| Personnel (2 FTE) | $750,000 | $400,000 | $400,000 |
| Networking/egress | $100,000 | $270,000 | $26,000 |
| 5-Year Total | $1,900,000 | $1,528,000 | $819,000 |
Factors That Favour On-Premises
- Very stable, predictable workloads with high utilisation (80%+ servers busy)
- Regulatory requirements prohibiting third-party data hosting
- Extremely high data volumes with large egress requirements
- Existing hardware not yet at end-of-life
- Strong in-house operations team with spare capacity
Factors That Favour Cloud
- Variable or unpredictable workloads
- Need for global distribution
- Development and testing environments
- Disaster recovery requirements
- Desire to eliminate capital expenditure
Honest TCO analysis almost always favours cloud for compute-intensive workloads — but the magnitude depends heavily on egress costs, commitment levels, and specific cloud provider chosen. Run the numbers with TCOIQ before making a 5-year commitment.
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