It seems like we have been talking about The Cloud for an eternity. But what is it, and is it real or just the next buzz before we move on? According to Statistica, it is here to stay. The worldwide public cloud services market is projected to grow to $236 billion in 2020, up from $182.4 billion in 2018; almost 30% in two years.
If you’ve not embraced cloud implementation, or you’re still wondering what Cloud is all about, in simple terms, it is an agile, flexible, and scalable solution for organizations’ compute requirements. It takes your physical infrastructure and puts it online. Of course, somewhere, someone has the physical infrastructure (maybe AWS or Azurre, for example), but you now rent and connect to it (over the Cloud) rather than own it. Most often, this is paid for via a blend of fixed and consumption-based costs.
With this comes a new set of adoption dynamics and a new business model. Organizations going into the Cloud no longer need the capital investment required for alternatives such as data centers or co-location space, they are able to deploy solutions in minutes not weeks, and they benefit from a range of prepackaged security configurations.
In the Cloud, the hard work is already done.
But with this comes challenges
If you view Cloud like taking on a cell phone contract, then going to the Cloud is like ditching your fixed line and taking on mobile for the first time. There are lots of permutations and combinations and it can be confusing. That’s where Commercial should be able to help as organizations navigate through complex cost benefit analysis, authorization of spend post commitment, spend visibility, forecasting/budgeting, and demand management.
This article addresses potential ways to meet these challenges through Finance and Commercial working hand in hand.
If Cloud is an IT thing; what role does Finance play in the migration?
Most organizations will have sunk costs for existing compute solutions (most commonly either co-location or data center). So, when building the business case for Cloud, all Finance functions will need to help stakeholders not only come to grips with a new calculation model, but also ensure that all costs are factored in, to the right extent. For example;
- Sunk costs like infrastructure, maintenance, and resourcing are considered and factored into the investment/business case. This is complex because internal IT resource costs may need to be allocated against multiple buckets to reflect the different infrastructure tasks that they do. Often it is “arms and legs” that are outsourced under a Cloud model rather than FTE’s (for example: when server tasks are outsourced but application tasks are not). This creates complexity and Finance and Commercial can help stakeholders to ensure that they undertake the right apportionment. Sometimes Time and Motion studies may even be required to apportion resource costs correctly.
What should IT and Finance do? Capture sunk costs and allocate IT resource cost to gain a true cost comparison of in-house versus Cloud implementation.
- The Operating Model implications of Cloud must also be considered within the business case (IaaS, PaaS, SaaS). For example, Cloud will present options around license ownership, and organizations should work through the differing implications of the more traditional legacy models vs Cloud utilization models. The different models have a sliding scale of customer/vendor responsibility and come with corresponding price points. In general terms, Infrastructure as a Service (IaaS) places the most emphasis on the customer, and Software as a Service the least. There will also be, in most cases, additional security and network infrastructure considerations to factor into the case for Cloud.
What should IT and Finance do? Ensure that options are considered for the Operating Model and that the financial business case is comprehensive covering various people, software, and infrastructure implications.
- Transition costs are real and often underestimated. They need to be thought through. There will be people and training implications, but organizations also need to consider what to do with legacy equipment. When migrating from a co-location or owned data center model, assets such as servers or storage network hardware may need to be written off or sold on the secondary market. This could even extend into data center disposal for some.
What should IT and Finance do?: Factor in the write-offs and estimate potential revenue from disposal of owned data centers.
Championing the need for strong Cloud Governance
Going onto the Cloud is often done in stages. Because of this, many organizations start without putting strong financial and operational governance in place, leading them to manage changes and issues in a piecemeal way. Better practice is to plan and implement a Cloud governance framework prior to going live. This means understanding how the organization will track adoption, issues, opportunities, and change requests in an efficient and structured way.
What should IT and Finance do? Finance Functions must partner with IT and Commercial Functions to ensure there is a robust framework covering financial budgeting and commitment approval, forecasting, growth, and operational considerations. This may include:
- Ensuring that there are subject matter experts trained on Cloud pricing models. This can be done by partnering with Commercial and utilizing Cloud vendor training which is readily available from the chosen vendor.
- Ensuring that IT budget holders are completing Cloud capacity planning as part of the budgeting process, in the same way as they would normally do internal capacity planning.
- Completing regular reviews with IT, Commercial, and the Cloud vendor to ensure that the Cloud model is optimized commercially and operationally.
- Ensure the organization utilities the spend reporting and budgeting functionality available from the Cloud provider. This will ensure that the organization has a clear view on spend to date, and the budgeting functionality will give an early warning of potential overspend. Working closely with the vendor is the best way to ensure that everything is tracked, as opposed to trying to shoehorn complex financial models into ill-suited templates.
How can organizations optimize the Cloud operating model?
As an organization becomes more cloud savvy there will be opportunities to optimize. These may include (turn up and down scripts of) on-demand instances, instance sizing, reserved instances, and selecting the right tier of storage. So basically, optimization will can come from usage and usage patterns.
An emerging model, which is currently best in class, sees organizations reserve instances of 70% + of the total estate size. They have turn up/down scripts for all development use cases and complete regular reviews of tiering and utilization. This effectively makes 30% of their Cloud estate “on demand”. However, leaving this unchecked may drive cost and operating inefficiencies into the model. Finance partnering with Commercial and IT should;
- Challenge IT to reserve the appropriate level of instances. This is generally completed following 3 months of usage as a minimum. This will allow for the identification of cost optimization and reduction.
- Decide whether a commitment framework should be entered into, such as an enterprise discount program which will give an overall % discount against overall annual spend. This is essentially seeking to minimize fixed costs.
- Ensure IT development is actually utilizing turn up/down scripts. This will reduce costs for on-demand instances and link needs to consumption.
- Ensure that the Cloud provider’s technical account manager is completing regular reviews of instance sizing and tiering for most appropriate fit for both compute and storage
Its complex, but don’t hold back on your cloud implementation
Cloud computing is here to stay and will continue to expand. It’s crucial that Finance and Commercial embrace the change to ensure a successful cloud implementation into the day to day life of the business.
For more information on how your finance team can help implement a cloud implementation and migration, please get in touch with our financial experts and procurement consultants.