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Six Questions about the Cloud

What finance executives should ask about cloud computing.
David Rosenbaum, CFO Magazine
September 1, 2012

At an increasing number of companies, cloud computing tops the technology agenda. That's not surprising. It can be a lot cheaper and more efficient to buy and access computer services over the Internet (in the cloud) — whether it's applications, software and product development tools, or servers and storage — than to acquire the physical stuff and manage it internally.

But as with any new trend, companies should critically examine cloud computing before embracing it. Here are six questions, plus answers, that every CFO should ask about the cloud:

1. Will the total cost of ownership for the cloud be lower than what we're already spending for IT?
That depends: do you know what you're already spending?

Most companies don't know how much it really costs to run an application because IT departments "are still seen as cost centers," contends Forrester senior analyst Dave Bartoletti. The company buys the servers, the storage, and the applications, and flips the switch. "What does it cost to run? Who knows?" says Bartoletti. "You just depreciate the assets over a certain amount of time and after they're fully depreciated, you buy more." Even organizations that account for staff costs, maintenance, energy — all the indirect costs that go into producing a service the business needs to run — will probably not be able to put an accurate price tag on individual applications.

With cloud computing, estimating IT cost is a lot simpler. As Intacct CFO Marc Linden told CFO last year, "I get a bill. All I have to do is read the bill. That makes the cost-benefit analysis a lot easier. I can ask, 'This thing is expensive. Here's what we expected. Are we getting it?'"

The cloud particularly shines, says Bartoletti, when a business is handling dynamic loads, seasonal variations, and cyclical demand. Instead of stocking up on expensive servers to handle peak volumes, companies using the cloud can simply pay for capacity as needed.

William Forrest, a principal at Mc-Kinsey, says if a company's internal IT organization claims it can meet or beat a cloud provider's price, the CFO should ask the CIO for a "fully loaded cost" for each server the company owns, including depreciated capex, opex, and all associated labor. "If your CIO can't give you the fully loaded cost, you can reasonably point out that the claim that they're as inexpensive as a cloud provider is not credible," he says.

2. Can I leave it to IT to manage the cloud for me?
That depends on how finance savvy your IT department is. "The financial and contractual acumen required to purchase and manage cloud services is quite different from the traditional capex and depreciation model well understood by chief information officers," says Forrest.

Still, CFOs can work with IT staff to teach them the basic principles of financial management, Bartoletti says. "Build a simplified model of capex and opex by application," he advises. "Inventory the cost to the business of services on a per-application basis, because that's how you're going to move to the cloud. It will be piecemeal: enterprise resource planning, customer relationship management, Salesforce. Try to figure out the costs for one or two key applications. That will help advance the communication between the CFO and IT, thinking in terms of service, not infrastructure."

3. Will our data be safe?
In the connected world in which we live, security is relative. It's pretty obvious, however, that the cloud can concentrate risk. When something goes wrong in a shared data center, it can affect a large number of organizations. And because of the complexity of those large data centers, it may be difficult to identify and fix whatever has gone wrong.

On the other hand, security at cloud providers tends to be more professional, and certainly better funded, than small businesses can usually afford. But it's up to CFOs to vet their providers' security and make sure their certifications, policies, and procedures fulfill their businesses' regulatory requirements.

4. What happens if the cloud provider has an outage?
Outages happen all the time. In June, for example, East Coast electrical storms took down Amazon.com's cloud, causing outages for Netflix customers and Instagram and Pininterest users. But disruptions are inevitable. What's important is to understand the risk and accept that it's your responsibility to mitigate it.

When signing a cloud contract, make sure you have the backup services your company needs. "It's a business-recovery decision for CFOs," says Ben Trowbridge, founder and CEO of Alsbridge, a sourcing advisory and benchmarking firm. "What does it mean to your business to be out for a couple of hours or a couple of days? Perhaps you can afford to have your business down intermittently." In that case, Trowbridge says, you may be able to forgo the cost of having your site backed up so it can be moved to another set of servers in case of an outage.

For large businesses, Forrest advises contracting with more than one infrastructure vendor. If you have a "split vendor policy," says Forrest, "your business might not be taken down" during outages.

5. What if the provider goes out of business?
"Always have a plan for where you would go if your provider shuts down," says Liz Herbert, principal analyst at Forrester. But even before that, vet your vendor. Make sure it is solvent and carries insurance, advises Andrew W. Klungness, a partner at law firm Bryan Cave who specializes in cloud issues. "Check breach incidents and lawsuits against them, and ask for customer references," he says. Trowbridge says finance chiefs should talk directly with the provider — to a businessperson, not a technologist "or, even worse, a technology salesperson."


6. What's the best way to start?
Begin by inventorying all of your existing applications, and by thinking about what makes your business special, recommends Timothy Chou, who teaches cloud computing at Stanford University. He says cloud providers are becoming increasingly specialized, and that you can match your needs with what they do.

Trowbridge suggests that smaller businesses explore channel providers that can offer a "higher level of touch" than a big cloud provider can. "Dealing directly with Amazon," he says, "is like being handed a brain-surgery kit, being told it's world-class and ready to go, and now you can go perform brain surgery."

Don't go into the cloud without a "trusted adviser," who could be the CIO, advises Phil Garland, a principal at PwC. It's impossible for a finance chief "to keep abreast of the [technology] changes," he explains. And be sure you establish up front the level of service your company needs, adds Bartoletti. "You should go into the cloud with a clear set of service-level expectations and an understanding of the penalties your provider will pay if they're not met."




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