All posts by hpeterken

Hugh brings strategy to practical problems. This doesn't solve everything, but it sure helps

Why are executives so keen on the cloud? Follow the money

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Cloudless sunset

You can tell who vendors are marketing to by where they place their magazine ads. When you start seeing ads for cloud services in golfing magazines, the Economist and airline giveaways, you can be fairly sure that they are targeting the mobile executive and not the IT department. So how do executives ensure that they get best value from this opportunity?

There is a growing view amongst those who know that cloud is the future and that IT departments are not embracing it quickly enough. The impact on IT costs should be understood by the business leaders:

1. Cloud is a different financial model and budgets need to change. Traditionally IT departments have lived on budgets with two components – and operational budget and a development (capital) budget. It has been thought that a 70/30 split is good practice. Cloud could change all this.

IT systems need constant maintenance and every 5 years or so they need major upgrades. The maintenance is an operational cost, whereas upgrades can be capitalized under accounting rules. I have seen many cases where business conditions have led to delays in upgrading systems, often associated with howls of pain from the users. After a big capital injection everyone is happy for a few more years.

With cloud, there is no upgrade cost. You pay an ongoing fee and if business conditions are good you can increase your services for an incremental cost. When business conditions turn, you can reduce or cancel the service. This is a huge relief to users and IT Departments alike.

There will be a rebalancing from capital to operational budget, but the capital budget will no longer be buying depreciating systems. It can now be spent on business process improvement and organizational change.

Key tip – Ensure a granular recharge so that business units know exactly what services they are paying for.

2. Cloud should be cheaper – but then they said that about outsourcing! The key to reducing costs is to buy commoditized cloud services. These are services that are used in the same form by many customers. Good examples are email, web sites and Amazon servers. Providers can leverage economies of scale and can multi-tenant systems (house multiple customers on the same gear).

Whenever the business identifies special needs, the commoditized model falls down and you start paying cloud providers like outsourced providers. It is important to recognize the non-standard processes that deliver real business value vs those that are driven by personality.

I remember a discussion on how we run our HR systems. The organization had for a long time used dual reporting (some staff members had 2 line managers). This model was not supported in cloud performance management systems – leading to a choice between building something bespoke or changing business processes. We changed to the accepted good practice business processes, lost some flexibility but saved money on IT systems.

3. Extract savings from the IT Department. This might sound like teaching you to suck eggs, but investing in cloud should show savings elsewhere. If cloud is just an extra cost for a new service, you do not have an effective cloud strategy.

Within IT, a move to the cloud may reduce workload on some staff, but their roles may still be needed. Managing a small number of servers is not a full time role, so moving all infrastructure to the cloud adds operational costs without reducing staff expenditure.

IT departments should be re-organizing roles around a short term and long term view of which services will be provided internally and which bought from the cloud. I suggest planning to move systems to the cloud at the time when a major upgrade cost would be incurred.

My experience with moving services to the cloud is that the financial impacts can be difficult to understand. I was able to extract savings in the network costs by moving some servers to a cloud based “infrastructure as a service” model. I was also able to extract savings on licensing through purchasing a cloud solution that replaced a number of onsite solutions. I have no doubt that I reduced the long term costs of IT by moving services to the cloud, but I never managed to reduce staff numbers based solely on purchasing a cloud service.

Is your main interest in cloud to save money?

Congratulations CEO, you did something great!

First place
Getting the top prize

CEOs are there to create outcomes for their stakeholders – the shareholders, staff, community or government. In many cases this is a thankless task, so how would it feel to get a letter 10 years from now congratulating you on some of the important calls you have made that put the business in a strong position. I put my mind to what those big decisions would be, and the answers might surprise you:

1. Well done for identifying that all your key people will need to be excellent in managing technology! You recognized that your technology is a key driver of business improvement. The solutions were not going to come exclusively from the IT Department, but you had to avoid the chaos of business units all purchasing their own disconnected systems.

You created development opportunities for staff to understand the relationship between the business and technology. This meant formal education in the tools of technology (enterprise architecture, business cases, service management etc), as well as on the job engagement with technology procurement, implementation and operations. Your senior managers became expert in understanding the risks and opportunities from various approaches to technology.

You have adapted your succession planning to incorporate technology competence as a key differentiator. Managing technology is a serious stream of business, as important as financial competence or technical expertise. The language of business has adapted to incorporate concepts that many of your business leaders were uninterested in 10 years ago.

2. Your approach to business process management was revolutionary and may have been a game changer. You understood that there is both value and opportunity in your company’s processes. Inside your organization, you focused on awareness and incremental improvements, using full scale process re-engineering only when the benefit clearly outweighed the risk. Your key metrics were achieved through great people running great processes on the right technology platforms.

The real difference that you made was to not stop at the edge of your business. You understood your customer’s business (and life) processes. You drove your organization to seamlessly become part of your customer’s processes. This was a challenge because of the complexity of such integrations, but it created a stickiness in your customers – you were no longer a supplier, you became part of their value chain.

3. Relationships. There it is all in that one little word, you moved relationships to the forefront of strategic thinking. You created a relationship architecture that provided clarity and direction. You reset your relationships with suppliers to provide transparency and shared success. You invested in relationships with your peers and competitors, and most importantly you encapsulated the relationship with your customers as a key value set in your organization.

You acquired and organized information to provide insights into your stakeholders. Every touch point with stakeholders was fully informed and provided them with value. All this required investment, but with savings from business process improvements and reliable internal data this was manageable. There is further to go in this area, but the lack of skilled resources has curtailed your aspirations.

My heartfelt thanks from your imaginary friend ……

We hear stories of the CEO who has creatively transformed the business, like Steve Jobs. The reality is that many transformations fail and most successful businesses strategies are around incremental improvements and intermediation. All of the above approaches can be tackled as increments, through pilots and gradually acquired competencies. You have after all got 10 years to achieve it!

Have you identified the long term initiatives that are going to differentiate your company? How long is your list and does it have anything in common with mine?