Economic decision criteria for the migration to cloud storage

Cloud storage has fast become a widespread alternative to in-house costly storage infrastructures. However, the migration to cloud storage is not necessarily everybody’s best choice and should be evaluated in a rigorous quantitative way against the alternative over a long time horizon. We propose a methodological approach for the comparison of cloud vs in-house solutions, based on the use of the Net Present Value and employing stochastic models for storage prices and memory needs. We analyse two decision criteria, which employ the median and the mean value of the Differential Net Present Value (DNPV), respectively. Through three appropriate risk measures, we show that the mean DNPV is the less risky decision criterion. Since the DNPV is a stochastic quantity, we also consider a protection measure against the risk of taking the wrong decision, which relies on underwriting an insurance policy. Through the real options approach, we propose a pricing formula for such policy, showing that it is an affordable means to hedge against risk for smaller companies and over a limited time horizon. Both the decision criteria and the insurance pricing formula are applied in a typical scenario.