Corporate Finance

When CFOs consider closing their data centers

As cloud computing solutions become more accepted, more chief financial officers are weighing whether their companies should retain any on-premises...
A CFO InterviewSeptember 23, 2013

As cloud computing solutions become more accepted, more chief financial officers are weighing whether their companies should retain any on-premises data center services. When considering whether to remain in the data center business, the first steps for a CFO should be understanding what assets the company has and creating a list of those assets, said John Parkinson, an affiliate partner of Waterstone Management Group. From that list, the CFO should figure out which applications and technology are so old that a third-party service provider won’t want to take them over, Parkinson said. “Many places are running obsolete technology because they never figured out how to stop using it,” he said. One example is the AS/400 IBM computers that were built from the 1980s until about five years ago. He said knows of at least 25 companies that are buying AS/400 parts on EBay because IBM doesn’t make them any more. Some companies are running 20-year-old software on 15-year-old machines for which there are no spare parts built any more. At some point, the CFO is going to have to decide whether to spend money to convert data from obsolete systems for new systems, which would be a precursor to moving those systems to a cloud solution, Parkinson said. Another factor that may cause companies to keep applications on-premises are security concerns, even if the outsourcer’s quality of service is better than what the in-house IT team can provide, said Peter Marston, an applications research manager for International Data Corp. in Framingham, Mass. “If you use an outsourcer…and there are concerns that there is data leakage or that data can be accessed by hackers, then that’s going to weigh heavily with some organizations about how secure the data is in the outsourcing world,” Marston said. Some of the other factors that the CFO should consider are the price and the quality of service of the company’s own information technology department versus the third-party provider, Marston said. CFOs should ask: “Do we stay the course, doing what we’re doing, and is that better than having a third party do it for us?” The CFO should write a business case that factors in considerations of whether moving the data center operations off premises will help the company avoid certain costs or grow revenues faster—not just the costs of each option, said Jimit Arora, a vice president at Everest Group. In addition to providing the business case for moving data center operations to the cloud, the CFO needs to evaluate the potential partners that the company may work with, including their security standards, Arora said. The company should also consider its options for the move, whether it is private or segregated cloud; public cloud; or a community cloud, which is when a cloud option is created and configured for the applications of companies in a certain industry silo, Arora said. Also, the CFO needs to evaluate whether the company will use a service provider to help migrate, deploy, integrate, develop and manage the cloud applications, if the company chooses that route, Arora said. Parkinson said that if the CFO’s list of data center assets and on-premises applications is close to industry standard, not too old and at the right point in its depreciation cycle so it won’t create significant balance sheet issues, then the company is ripe for finding a partner to start to move the on-premises computing. Companies should also factor in their size, and whether they are organized well enough to move just a piece of their total application footprint at a time, Parkinson said. If the smallest unit that the company can move is the whole business, then it will be piling on a lot of risk. The risk might still be worth it, but it should be considered carefully, he said. By transferring on-premises data center operations to a third party one piece at a time, it reduces the risk level and the disruption factor to the business, Parkinson said. It might take longer and cost more, but the risk-weighted cost will be reduced, he said. Regardless of whether a company decides to move its data center operations, it should not be managing the infrastructure of its data center, because the required skill set is very sophisticated and very expensive, Parkinson said. “Get out of the physical infrastructure management business as fast as possible, he said. “I’ll give anybody in the Fortune 100 a pass on that, but no one else.” Companies should also separately consider moving any of their software development and production work on to the cloud, using a platform as a service model, Arora said. Cloud servers and storage configurations can be set up and available in minutes, compared to the days, weeks or months of waiting required to set up the on-premises servers for testing and development, Arora said. Once the company has decided to go ahead with the move, it should consider what parts of its application footprint can be moved first. Typically, those start with the most common applications used by many companies, such as email, Parkinson said. Usually companies adopt a “crawl-walk-run” philosophy by setting up a gradual migration, and not “big bang approach” where everything is moved at once, Arora said.

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