“Go to the cloud” has been a key building block in every global CIO’s digital strategy. However, as the CFO, do you find yourself getting into frequent arguments with them over the savings promised at the time of embarking on this journey?
As many of you have probably already discovered, the cloud has many advantages. It helps you to be more agile and achieve a faster time to market for new offerings, gives easy scalability and is economical so far as security, maintenance and other common costs are concerned. For finance, however, one of the greatest advantages especially for growing companies / startups is the cost variability offered by this solution. You need not be straddled with huge CAPEX investments each time you grow or have sunk costs when you exit a market. In the cloud, you can autoscale your consumption as a variable cost rather than a fixed one with significant flexibility.
However, while the Cloud offers a lot of solutions in the IT domain, the acceptance from finance has been quite lukewarm despite the advantages. This is mainly due to the often erroneous assumption that the cloud strategy would be a fantastic cost-saving opportunity. In the long run, if managed properly, the Cloud will for sure deliver savings, however, it would be naïve and self-defeating to assume that this is a pure “cost savings” initiative.
How does one deliver value?
From my experience, below are a minimum few pointers that you need to understand as finance professionals, to make sure that your cloud strategy delivers the value it is expected to.
- Cost commitments happen at lower levels - As the system move to the cloud, the thresholds of approvals are lowered for agility. This is also encouraged by the fact that the costs of exit due to wrong decisions are very low (most providers offer exit in days if not in hours or in minutes). Thus, the reins of the IT cost approvals are moved to individual departments and to people in lower rungs of the organization, who are typically not responsible for budgets. While this is great from a decentralization and agility perspective, the central ‘total cost’ oversight is lost. Small increments on the infra by hundreds of technical engineers across the globe can spin the costs out of control in a matter of weeks
- De-scaling – So what? Can’t we scale down if we made a mistake? Is de-scaling the cloud infra to bring back the costs under control as easy as it is advertised by the providers? Not really. Costs of switching can be significant in terms of one-time effort and the costs of business loss in terms of system downtime which is unacceptable. Ergo care must be taken up front to ensure that scaling is done slowly but surely. Ensure rights for approving the infra is given only to people who understand how the infra and its pricing works
- Compliance challenges – Because of different rules in different countries on data hosting and transfer, it may not be possible to put all data on the cloud and this may create a problem with the business case if it was not done in the first place with the correct assumptions
- Unique Pricing – Many times I have seen that the finance guys are unpleasantly surprised by the costs incurred after implementation. The pricing structures are different depending on whether the Cloud is public, private or a hybrid solution. The charge may be based on the number of processors reserved or based on CPU hour etc. Many cloud providers now provide total cost of ownership (TCO) calculators thereby lending better insight into specific components of pricing but be aware that these calculators only provide certain components of the pricing and that many other additional costs are likely. Some additional costs which many people miss out in their business case are:
- Underestimation of Migration costs to the Cloud. The parallel run time between the two systems can be far more than originally expected
- Costs to reclassify and separate data before migration are often underestimated
- Write-off of stranded Core IT assets, software and applications
- Write-off of current running contracts which may have been negotiated for longer term for better rates
- Costs of training for upskilling the existing workforce
- Internal Level 1 service desk and other technical resources to interface with the cloud provider’s Level 2 desk and other monitoring costs
- Network architecture often not state of the art do not support cloud services. The classical hierarchical and tier-based architectures do not support the new landscape and are very expensive to exchange and to maintain
- Very optimally designed core IT infra may not be able to be replicated in the cloud. So, while the per unit cost may be lower, the total cost may not be
In summary to make your cloud strategy work from a financial perspective,
- Understand that cloud strategy is not just a “pure cost savings” initiative.
- Do your Cost Benefit Analysis from the business point of view and not purely from an IT standpoint.
- Effective cost control on the cloud can only happen if there is an online demand planning and financial forecast system in place. Always keep an eye out for total costs and ensure to use predictive analysis tools by monitor your usage pattern continuously. Keep an eye open for new developments like AWS providing lower rates for AMD powered server instances etc. New innovations keep happening. Be on top of it.
- The move to the cloud helps forces a fresh look at the applications and eliminating lots of unused applications reduces waste significantly.
- As the infra moves to the cloud, keep an active eye on simultaneously de-commissioning the core infra. If you don’t, you will be paying twice the amount.
- For moving the applications to the Cloud and migrating the batches; a migration factory setup (through experienced vendors) can help to attain the objectives in an efficient and industrialized way.
- Invest in hiring a good cloud finance subject matter professional who not only understands the total cost of cloud services ownership but can also track service consumption along with cost transparency to the correct product / service driver.
Remember that Cloud is not only a technical and financial journey but also a mindset transformation journey for the company. Keeping the above points in focus should help you deliver excellent RoI on your cloud strategy, irrespective of your industry… Let the light come through the cloud.