The Cloud

The Cloud: A Better Expense Model

Say goodbye to over-provisioning and depreciating technology assets.
Roy GoldingAugust 11, 2017
The Cloud: A Better Expense Model

Cloud computing is one of the biggest tech trends in a generation. It’s changing IT strategy for just about every business on just about every level, and it’s driving a huge shift in spending. The global cloud market is expected to grow to $390 billion by 2020, according to research by Bain, and one of its biggest areas of impact is how it presents a new landscape for chief financial officers to work within.

Cloud asks businesses and their finance leaders to reevaluate some long-held approaches to IT and how it is accounted for. Traditionally, any time an organization wanted to make a significant technology change, the CFO needed to ensure the long-term business model supported the investment. Making heavy capex investments up front — think expensive data-center hardware — always brought with it the risk that the hardware wouldn’t be fully utilized down the road.

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In contrast, cloud offers the flexibility to move technology resources and to not be tied into one big investment at the beginning of a new project or business. Software-as-a-service (SaaS), for example, removes the need for businesses to install and run software and applications on their own hardware within their own physical infrastructure, which also removes the associated expenses. In this operating expense model, instead of taking a large cash hit on the P&L statement right away, the company can pay for the service over time as it gradually grows the investment.

In the past, if IT teams needed additional hardware, software, or connectivity resources at certain times of the year — for seasonal reasons, perhaps — the investment to cover that requirement may have resulted in over-provisioning after the busy period ended. And a double hit resulted — the company subsequently owned depreciating technology assets that weren’t being used most of the time. This approach has never been popular with CFOs, but before the arrival of the cloud there was little alternative.

In contrast, moving from old-school tech capex to cloud-powered opex offers the ability to spread the cost as IT resources are utilized. Cloud investments require shorter commitments and, in many cases, can be turned on and off, up or down, according to need.

This ability to scale as fast as required is possible with a SaaS model because someone outside the organization is planning, building, and maintaining the technology. Market-leading cloud infrastructure and service providers are geared for growth, and businesses are now approaching cloud as a long-term technology option for this reason.

One important thing to keep in mind is that an organization’s IT ecosystem will more than likely be a hybrid mix between on-premises and cloud (off-premises) solutions. In addition, the move to or from the cloud can occur in multiple layers and with multiple providers. Companies are going to be moving elements of their business IT, and the question will be what to put where. Will they keep crucial applications on premises? Security and accessibility will be overarching considerations for the placement of key assets.

When companies are considering cloud services such as Amazon Web Services or Microsoft Azure, they should test workloads while moving between different providers at the same time to leave their options open and ensure flexibility. Organizations should put themselves in a position to leverage the increasingly diverse ecosystem of on-premises and public cloud solutions hitting the market. The strategy will not be just all on premises or all in the cloud, so companies should spread their bets for the long-term goal of achieving true IT resilience.

Amid the opportunities, there are also challenges. The inherent flexibility offered by cloud has, in many organizations, created a kind of procurement democracy, where IT investment is no longer under the control of the IT department or subject to the limits of the IT budget.

Roy Golding

Roy Golding

Cloud service providers have begun to significantly erode the role of IT department in the choice of technology, using the accessibility of their services as a way to cut IT out of purchasing decisions altogether. Marketing teams are a great example of a key business function taking greater control of tech procurement. They are able to choose from a huge variety of cloud-based products and increasingly pay for them from non-tech budgets.

This is a fundamental change, and one that CFOs need to embrace and manage in equal measure. IDC predicts that by 2020 more technology investment will be made outside the IT department than within it.

At the end of the day, making the most from the cloud opportunity will mean that the CFO and chief information officer will have to find common ground on what technology is needed, where the money will come from, and how it will be allocated.

A company with significant growth plans will have to think about the future when planning its move to the cloud; that can’t be ignored. If in two years the business wants to grow to 1,500 people, the members of the C-suite need to ask how the company will scale, how it will build the efficiency for global operations, how it will protect against cyberattacks, and how it will make sure that the data for running the business is adequate and always accessible.

Organizations need to assess cloud technology providers with all of those concerns in mind. If the business has downtime because of IT infrastructure issues or because employees can’t get at critical data, the growth of the company could be dramatically affected. CFOs and CIOs both need to be deeply involved in the business plan to take advantage of the efficiency that comes with the opex approach; however, they also have to ensure that efficiency doesn’t compromise business operations. That’s essential to leveraging the cloud successfully.

Roy Golding is CFO at the software company Zerto and has more than 15 years of experience in senior financial management positions. Prior to joining Zerto, he served for five years as CFO of Telmap.

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