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?

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