When you produce any good or service, value-added costs (including overheads) fall by about 25 percent every time the cumulative volume, or your accumulated experience, doubles. This results in a downward-sloping price curve that increases your profit with experience, and this price curve is known as the experience curve. 1 Cloud computing is an evolutionary, though revolutionary in terms of its application, change to traditional computing as it draws on computing’s cumulative experience. As such, it repre-sents a shift in traditional computing’s experience curve to the right. This moves the break-even point for using an outsourced cloud computing service, thus increasing your profit margin further. This is shown in figure 18, which is an adaptation of the BCG’s experience curve of profit margin instead of costs. In fact one of cloud computing’s value proposition is that it increases your profit margin more than traditional computing due to the experience curve effect.
How do you translate the value that cloud computing pro-vides you into a meaningful financial measure? There are various financial yardsticks that can be used to assess the value proposition of a cloud service. Let us consider four common financial metrics: payback method, net present value (NPV), return on investment (ROI), and time to mar – ket (TTM). There are other metrics that can be used as well, such as economic value added (EVA), return on assets (ROA), and return on equity (ROE). These latter metrics, however, are difficult to use when considering a single ser – vice, product, or project because they typically aggregate the computations at a corporate level and so rely on other factors such as the company’s tax rate and its corporate KPIs. So we will not consider them further.