The Cloud and the CFO: Reality Check for Finance

More and more IT departments are coming round to the view that cloud computing liberates the IT shop from the hassle of hardware and software maintenance. CFOs are also getting convinced that cloud computing can result in hefty cost savings.

But there is danger in the hype. “CFOs and CIOs must be realistic about the scope of these savings,” warns Daryl Plummer (pictured), managing vice president and chief of research for Gartner, a global technology research and advisory company. “There are many factors that must be considered when evaluating the financial impact of cloud computing, including license/subscription cost, implementation, infrastructure costs, IT support and upgrade costs.”
Plummer spoke to CFO Innovation’s sister publication, Asia Cloud Forum, which is owned by Questex Media, on finance issues related to cloud computing. Excerpts:
On the benefits of cloud computing
Cloud computing is a concept that has garnered a great deal of buzz during the past several years. It is not defined by a single product or technology; rather, it is a style of computing in which providers deliver a variety of IT-enabled capabilities to consumers using Internet technologies.
The basic opportunity is for businesses to consume IT services from entities that enable them to cease providing those services themselves. This can lead to companies eliminating work that previously might have been done in-house and saving upfront investment costs (enabling preservation of capital). Cloud computing can also lead to massive changes in the way corporate IT budgets are spent.
Much of the buzz around cloud computing is based on the assumption that it is a less costly way to provide IT-related services to the organization. Cost savings are expected to largely come from paying for cloud-computing resources in proportion to use, rather than by purchasing hardware and software directly.
Also, with cloud computing, the cost is moved from capital expense to operating expense, which means the cash flow impact is spread over the usage of the resource rather than heavily weighted upfront. Therefore, cloud-based services have financial advantages when capital is constrained or cash flow is under pressure.
There is also an associated reduction in internal IT support costs and "hard" dollar cost savings in hardware maintenance, data center floor space, energy, or heating, ventilation, and air-conditioning, as well as an associated reduction in the carbon footprint.
Moreover, most cloud providers have tremendous leverage with hardware vendors and expertise in virtualizing storage, networks, processing, and others that even the largest enterprises have difficulty matching.
On the importance of being realistic
While there are many opportunities to reduce costs via cloud computing, CFOs and CIOs must be realistic about the scope of these savings and resist getting caught up in the hype. Gartner predicts that through 2013, most enterprise cloud users will fail to reduce infrastructure costs by more than 20%.
The potential cost savings will vary by organization. For example, organizations that already make extensive use of virtualization and are adept at managing capacity in their own enterprise data center will not attain the same level of cost savings as smaller organizations or those whose IT operations are less efficient. The CFO must balance the benefits of cloud computing against its associated risks to understand the total impact.
On the factors to consider
There are many factors that must be considered when evaluating the financial impact of cloud computing, including license/subscription cost, implementation, infrastructure costs, IT support and upgrade costs.
Cloud computing is not always less expensive than on-premises computing. It can actually be more expensive over a three- to five-year time horizon. On-premises equipment is usually depreciated or amortized over a three- to five-year period. Therefore, the cost of using that equipment drops annually.
However, the price of computing in the cloud will not undergo a similar or consistent drop over the same period. In fact, usage may go up, which will lead to the increased cost of computing resources in the cloud. The time horizon and the cost of migration from existing on-premises computing to cloud computing must be weighed against the cost savings of moving to cloud computing. These costs include migration, implementation, training and process redesign.
Also, one must take into account the variability of service consumption in a cloud model. Since services will be paid for by subscription or in a "pay-as-you-go" style, there is the possibility that some months will vary wildly above or below other months. CFOs will need to plan for much more variability in spending to gain the agility inherent in cloud computing.
On the disruption to IT budgets
With cloud services, a specific amount is paid to the provider according to certain criteria, like volume and service levels, making costs easily trackable and controllable.
However, the correlation between cost and usage can make IT budgets more variable, particularly in the infrastructure area, where usage may be somewhat unpredictable. (In the application area, users are generally able to accurately forecast usage -- that is, number of users -- over a period of years.)
Some CFOs may prefer the predictability of fixed-cost computing. In addition, CFOs can require that pay-as-you-consume contracts for cloud services have some kind of cap, so budgets are not completely blown if the organization begins to use more capacity than expected.
Also, CFOs and CIOs should require that internal parties requesting cloud services forecast the demand for the services and identify the variables that are most likely to increase/decrease demand.

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