Does Moving to the Cloud Make Financial Sense?
August 24 2011 by Robert Svec
With CIOs and CTOs feeling pressure to move IT and enterprise applications to the cloud, how can they be sure that the perceived cost savings don’t ultimately disappoint? The advantages of cloud computing are well-documented: On-demand delivery and subscription pricing models with lower upfront investment, reduced risk and faster time-to-value, vendor-managed maintenance and upgrades, and better performance and scalability. However, companies need to consider the additional investments that go hand-in-hand with commoditized cloud services, and assess the impact of their migrations.
By nature, IT infrastructures are highly fixed costs. Moving to the cloud without the ability to shed the fixed cost business model may actually result in an increase in IT expenses. And, because cloud computing services are based on consumption, it’s important to first understand how services and applications are being used by individual business units and to provide management with transparency into those associated costs. Insight into true total costs and utilization creates and sustains a culture that understands the consequences of its consumption, allowing organizations to effectively control costs, measure cost savings, uncover additional savings opportunities, and gain efficiencies in accounting and planning.
Considering Consumption and Calculating Costs
Although the cloud allows users to scale without limitations, exposure to unexpected costs can be without limits as well if people are not aware of how much they are consuming. Total-cost tracking and transparency in reporting back to business units are required for sustained, meaningful savings. Unfortunately, many organizations don’t have the processes, procedures, and solutions in place to gain insight into internal assets and vendor resources for effective IT financial management in the cloud. Typically, this information is housed in silos or disparate systems, tracked manually or within a financial system that doesn’t provide the level of detail necessary for true transparency.
To make more-informed decisions and control costs, organizations need a true line of sight into what IT products and services are being consumed by business users across individual units and their associated costs. With an IT financial management solution in place to aggregate the granular details of consumption, companies can then provide that visibility to the entire organization and share an itemized CIO invoice with internal customers. Publishing a consumption invoice that breaks down costs in detail provides internal departments with an exact understanding of what they are getting. With new levels of insight, decision-makers are enabled to better understand cloud services and achieve IT financial management. When business users understand their actual consumption, they can they have insight into how it is impacting profitability.
IT cost transparency also allows organizations to examine internal costs as compared to solutions from an external provider and make informed, cost-effective decisions for the business based on accurate data. Providing insight into the cost structure enables organizations to delve deep “under the hood” to determine if they will indeed experience a cost savings and get the intended value from a cloud solution.
To encourage better decisions, and for better control, it is imperative that managers understand what goes into a price. For example, rather than just a line item that says “PC and connection, $450 per month,” include visibility into the IT cost categories such as PC acquisition costs, capacity planning, security, help desk support etc. By providing transparency, managers understand they are buying the entire suite of services, not just the hardware and software.
Without a complete understanding of total internal IT costs, managers may be encouraged to ‘go rogue’ and purchase services from a vendor that has not been pre-approved by the purchasing department. For instance, the organization might chargeback $100 for storage, but the business manager learns that Amazon offers storage in the cloud for $50. Working under the assumption that cloud is the better deal, the manager makes the unauthorized purchase, only to discover there’s no cost savings because they’re either a) still being assessed by the internal group for storage fees or b) still required to pay other internal IT costs to support the solution, negating any savings.
For fair comparison, businesses must determine what it costs to deliver those services internally against the cost of outsourcing services to the cloud, while accounting for fixed and variable costs, labor and other associated expenses. However, with IT information in silos or disparate systems, it makes for a mad scramble to fully understand the costs of providing internal IT.
On the other hand, organizations that utilize true IT financial management tools and processes gain ready access to that information via an IT services rate sheet. With an IT service costing system in place, companies can make a proper, equivalent comparison of internal IT offerings versus those provided in the cloud. Having a process for identifying all IT services consumed based on the product list provides visibility into total cost of ownership of services and applications. By understanding the complete cost structure, businesses can look for areas of cost management or cost containment.
When the Cloud Makes Cents
For additional consideration, from a financial perspective, the cloud parallels the journey of Voice over IP (VoIP) technology when it was first introduced more than ten years ago. Then touted as a low cost solution, VoIP technology delivers voice calls over an existing enterprise data network. As many soon discovered, the solution was not as cost effective if the enterprise could not easily replace their existing voice network infrastructure. VoIP was not fully adopted for years, and only so as the voice network infrastructure reached its end of life and needed to be refreshed.
The same scenario holds true for cloud technology. As companies clamor for the latest and greatest, they’ll soon realize an investment in the cloud without the ability to shed their current fixed cost infrastructures will cause only heartache. They’ll need to articulate the true financial impact of the cloud in contrast to their current infrastructure.
With that in mind, if the cloud proves to be the most cost-effective method for your organization, it becomes financially beneficial when and only when it’s time to refresh existing server farms. If, for example 100 old servers need to be refreshed, it’s advisable to consider replacing those servers with cloud technology, and to follow with an in-depth financial analysis/ROI comparing the purchase of 100 new servers and/or assessing the movement of applications into the cloud. It’s possible that the most reasonable method will be a hybrid solution: move some applications to the cloud, purchase some new servers, and keep some applications in-house.
Better Insight for Long-Term Savings
With a more robust approach to IT financial management, companies can improve both vendor management and auditing of cloud invoices. A tool that provides spending dashboards that drill down to very granular levels of detail enables organizations to spot anomalies, errors and oversights. For example, the organization may be invoiced for 500 licenses on Salesforce.com, but after corporate right-sizing, may only have 450 users. Automated auditing capabilities ensure organizations note these discrepancies and adjust the rate of consumption or service level agreements, saving valuable company dollars.
As cost control continues to be top priority, IT financial transparency enables organizations to understand internal costs and cloud computing services to ensure they have a discipline for evaluating and managing consumption of services. As more organizations move to a cloud delivery model, a stepped-up approach to IT financial management enables internal business units to ensure they get what they pay for and have cost information to drive more-informed decisions. The end results – better-informed line managers and systemic cost monitoring across the organization’s entire IT infrastructure – can drive long-term savings.
Is your company leveraging the cloud appropriately while ensuring adequate security? Join other CEOs at the CEO Tech Summit to explore how other companies are leveraging the cloud to reduce costs and grow their businesses. More information on this unique event at Stanford Business School can be found at: www.ChiefExecutive.net/CEOTech