Thursday, 23 May 2013
Migrating to the cloud? Beware prickly financial situations
By Jim McGittigan, Gartner | Mar 20, 2012
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Any potential investment in cloud computing requires a solid business case that evaluates the associated financial and nonfinancial costs, benefits and risks. While there are several operational and risk reasons impeding the growth of cloud computing, there are also financial roadblocks.
The first three roadblocks listed below are structural in nature and have nothing to do with cloud adoption; the remaining five could be triggered by moving to the cloud:
- IT budget excludes capital/depreciation
- financial performance management excludes depreciation
- austerity programs focus on cutting opex
- high upfront costs
- inability to manage utilization
- IT financial management skills
- lower working capital
- extra cash required on the balance sheet
Regardless of root cause, any of these roadblocks could potentially lead organizations to avoid moving to cloud computing, even if it is the right thing to do (that is, all nonfinancial issues are mitigated, and the business case contains a positive net present value and favorable ROI).
Structural Challenges
Capital/depreciation excluded from the IT budget. Some organizations, especially public entities, do not have capital and the associated depreciation within the IT budget. Therefore, when a business case is presented for cloud computing, there is a funding issue that needs to be resolved, because the IT budget may significantly increase while the savings from lower depreciation shows up elsewhere.
Action: Build a proper business case, and if the overall benefits (both financial and non-financial) of moving to the cloud are significant, then begin the internal discussions about how to get the right thing done. For IT, this can be a very difficult, highly political discussion.
Financial performance measurements exclude depreciation. Some organizations measure financial performance for organization success based on measures such as EBITDA. While perhaps useful in valuing companies on a basis that is capital-neutral, it can impede adoption of cloud services, even with a solid business case and ROI if capital is seen as free.
Action: Follow the same action as capital/depreciation excluded from the IT budget, but it will, perhaps, be even more politically charged.
Company-wide opex-focused austerity programs. Beginning with the recession in 2008, many companies instituted enterprisewide cost reduction programs focused on opex (and often capex as well). Cloud computing, especially public cloud, will often cause an increase in a single cost category (generally a services category), and a decrease in capital/depreciation and other opex categories, such as maintenance.
Action: Ensure that it is clear that the increase in one cost category will be more than offset by decreases in other categories, and that the organization will experience a net reduction in cost (assuming cloud computing has a less expensive total cost of ownership than on-premises).
