Evaluating the total cost of ownership (TCO) for a Microsoft 365 implementation is the relatively simple part of a cost-benefit analysis. There is a monthly or annual fee for each Microsoft 365 user subscription, and those subscriber fees are predictable and ongoing. Contracts might be renewed with different prices at intervals, but those costs still remain predictable. It is possible that costs could rise precipitously in the future when the contracts are renewed, and the subscriber might feel locked into one provider, but that is a risk with any software product.

Predicting the cost of an on-premises network is more difficult. It is common for businesses to categorize their expenses by distinguishing between two types of expenditures, as follows:

• Capital expenditures (CapEx) are money spent on fixed assets, such as buildings, servers, and other hardware, deployment expenses, and purchased software.
• Operational expenditures (OpEx) are ongoing expenses, such as rent, utilities, staff, and maintenance.

The basic differences between CapEx and OpEx expenditures are shown in Table 4-2.

TABLE 4-2 Capital expenditures versus operational expenditures

For a Microsoft 365 shop, nearly all the expenses are OpEx, including the subscription fees. There are virtually no CapEx expenses involved, except perhaps for things like initial administrator cloud training. Businesses like working with OpEx expenses because they enable them to create accurate budgets and forecasts.

For an on-premises network, the CapEx outlay required to set up the infrastructure can be enormous, including the cost of building and equipping datacenters and purchasing server software products. Depending on the nature of the business and the sensitivity of the data involved, these expenses can by multiplied by the need for redundant datacenters and equipment. These big expenses must be paid before the network can even go live. These CapEx costs can be amortized or depreciated in the company’s accounts over a period of years, but the initial investment is substantial compared to that of a cloud-based network, which requires almost none.

An on-premises network also has OpEx expenses, including rent, power, and other utilities datacenters require, and the salaries of the staff needed to operate and maintain the datacenter equipment. There are also expensive software upgrades to consider every two to three years. The main cost benefit of an on-premises network is that hardware and software are purchased outright and do not require monthly subscription fees.

There are other factors to consider as well. When designing an on-premises network, the organization must consider the possibility of future growth, as well as seasonal business fluctuations. Therefore, the already substantial CapEx outlay can be increased by the cost of the additional datacenter space and equipment needed to support the busiest times of the year, as well as several years of predicted growth.

A cloud-based infrastructure like that of Microsoft 365 uses a pay-as-you-go model, which can accommodate virtually unlimited growth and occasional business fluctuations with no extra expenses other than the increased subscription fees for the extra services. The organization never pays for hardware and software that it isn’t using. In addition, the growth and fluctuations can be accommodated almost immediately and downsized when necessary, while on-premises resources can require months to approve, obtain, and install.

The entire cost-benefit analysis can be further complicated if the organization has already invested substantially in on-premises infrastructure. For example, if the expanding company already has sufficient space in its datacenters and sufficient IT staff, the CapEx needed for a network expansion can be much less than it would be for an entirely new network installation. The question then becomes whether it is more economical to add to the existing on-premises infrastructure or expand into the cloud, creating a hybrid network that might require additional planning and training to bring personnel up to speed in cloud technologies.

Therefore, the result can only be that every organization must consider its own economic, personnel, and business situations and calculate the TCO of its network options. In a new deployment, a subscription-based, cloud-based option, such as Microsoft 365, can be faster and less expensive to implement, but there are many situations in which organizations might be compelled to consider an on-premises network instead.

 Exam Tip

Candidates for the MS-900 exam seeking greater familiarity with the characteristics of cloud-based services versus on-premises services should also consult the “Describe the benefits of and considerations for using cloud, hybrid, or on-premises services” section in Chapter 1, “Describe cloud concepts.”