27/02/2017
Mark Skelton

Cloud Economics. Many clients I work with are just starting their journey to the Cloud.  And across all sectors, a common first step is to try and understand cloud economics.  Most organisations are keen to understand how Cloud changes day-to-day financial modelling.  And ultimately will Cloud save the organisation money.  According to Gartner, Cloud is, typically anywhere from 50% less expensive than the current status quo to 20% more expensive. 

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In the past, a CIO's financial reporting responsibilities were fairly simple.  Typically, they dealt with a world of up-front capital budgets for acquiring assets. Physical assets would then be "sweated" until it was time to think about an upgrade or renewal. And interactions between CIOs and CFOs were fairly limited. You agreed a budget and that was pretty much it.

But with Cloud, this has changed. Now, organisations will more typically work to a month-by-month operational spend.  This still needs budgeting for, but this is a model that sits much more comfortably with a modern, agile organisation.

One of the key questions I always get asked is “Ultimately, is Cloud going to save my organisation money?”  My answer is always “yes”. But not if you compare it like-for-like. That is, by comparing it directly to your existing on premise set up.

 

 

To truly understand Cloud Economics and the true value of Cloud, I believe, you need to focus on four key areas:

1. Consumption Payment Models

2. Lower total cost of ownership

3. The shift from CAPEX to OPEX

4. The refocus on delivering business value

Let’s look at these in more detail.

1. Driving up Efficiency with Pay-as-you-Grow

For years, I have been watching business spend and allocate budgets for worst-case scenarios.  So, when it comes to computing resource, this often means businesses are over provisioned with lots of unused capacity.  With the Cloud this changes. Services are designed to scale and contract with demand.  So, as you hit seasonal peaks like a year-end, or Christmas, services will flex with your demand.  You only pay for what you consume. So, when the busy period is finished, services will shrink and so will your cost. Your overall spend on those services is lowered.

2. Lowering total cost of ownership

If you initially look at the headline cost of running services on premise versus in a Cloud model, over a 3-5 year period, it’s actually cheaper to keep the existing kit. But there are other considerations that need to be factored in. Utility bills for the data centre, for example, (such as power and cooling), plus the ongoing support overheads.  When considering the total cost of ownership, things like patching and the underlying service are all taken care of by the Cloud Service Provider. These costs, therefore, can be freed up and released back into the business.

3. Making IT Investment Agile: From CAPEX to OPEX

With the fast pace of change in technology, organisations are more reluctant to invest in capital items that will depreciate at a rapid rate. Most are looking for models that help them constantly move with the times and avoid “lumpy investments”. By removing fast depreciating assets from the balance sheet, this is where, over time, businesses can really recoup the cost of Cloud.

4. Refocussing on delivering business value

In an ideal world, we want the primary focus for IT staff to be on the applications or data that have the biggest business impact.  We often talk about having the 80:20 split of IT admin time.  Generally, in reality, this means 80% focused on keeping the lights on and 20% focussed on delivering business value.  Many CIO’s are now aiming to flip this . With Cloud, the lights are kept on by the Cloud service provider, so the IT team can stay focused on delivering the services that have the biggest business impact.

Cloud Economics: The Transformation Costs

But the big elephant in the room when it comes to Cloud Economics is the cost of the transformation to get to these optimal models.  And I agree. It’s often a big investment of money and time to get to the right “as-a-service” model for your organisation.  Often Year 1 & 2 of Cloud can look expensive. But, that’s why it’s important to consider benefits over a much longer transformation period.

When looking at Cloud over this longer period of time, your business will really start seeing the cost benefits and certainly make that initial investment pay for itself.

Join experts and peers at our Cloud Economics Executive Dinner in the City of London.

Together, we’ll explore how Cloud can help drive up IT efficiency and fuel long-term business growth.  

Thought piece