TECHNOLOGY

The Cloud Is a Better Expense Model, But Manage the Change Dynamics

Cloud computing is one of the biggest tech trends in a generation. It’s changing IT strategy for just about every business on just about every level, and it’s driving a huge shift in spending. The global cloud market is expected to grow to US$390 billion by 2020, according to research by management consultancy Bain.

One of the biggest areas of impact is the new landscape that chief financial officers have to work within. Cloud asks businesses and their finance leaders to re-evaluate some long-held approaches to information technology and how it is accounted for.

An organization’s IT ecosystem will more than likely be a hybrid mix between on-premises and cloud (off-premises) solutions. The move to or from the cloud can occur in multiple layers and with multiple providers

Cloud computing also presents the CFO with the challenge of dealing with ‘procurement democracy’ as marketing, HR, and other departments and units are tempted to bypass IT (and finance) to subscribe to cloud services from their own budgets.

Capex vs. opex

Traditionally, any time an organization wanted to make a significant technology change, the CFO needed to ensure the long-term business model supported the investment. Making heavy capex investments up front — think expensive data-center hardware — always brought with it the risk that the hardware wouldn’t be fully utilized down the road.

In contrast, cloud offers the flexibility to move technology resources and to not be tied into one big investment at the beginning of a new project or business. Software-as-a-service (SaaS), for example, removes the need for businesses to install and run software and applications on their own hardware within their own physical infrastructure, which also removes the associated expenses.

In this operating expense model, instead of taking a large cash hit on the P&L statement right away, the company can pay for the service over time as it gradually grows the investment.

In the past, if IT teams needed additional hardware, software, or connectivity resources at certain times of the year — for seasonal reasons, perhaps — the investment to cover that requirement may have resulted in over-provisioning after the busy period ended. And a double hit resulted — the company subsequently owned depreciating technology assets that weren’t being used most of the time.

This approach has never been popular with CFOs, but before the arrival of the cloud there was little alternative.

In contrast, moving from old-school tech capex to cloud-powered opex offers the ability to spread the cost as IT resources are utilized. Cloud investments require shorter commitments and, in many cases, can be turned on and off, up or down, according to need.

This ability to scale as fast as required is possible with a SaaS model because someone outside the organization is planning, building, and maintaining the technology. Market-leading cloud infrastructure and service providers are geared for growth, and businesses are now approaching cloud as a long-term technology option for this reason.

Hybrid mix

One important thing to keep in mind is that an organization’s IT ecosystem will more than likely be a hybrid mix between on-premises and cloud (off-premises) solutions. In addition, the move to or from the cloud can occur in multiple layers and with multiple providers.

Companies are going to be moving elements of their business IT, and the question will be what to put where. Will they keep crucial applications on premises? Security and accessibility will be overarching considerations for the placement of key assets.

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