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Making the Cloud add up

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7th Dec 2011
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John Stokdyk reflects how the Cloud computing movement would benefit from some good, old fashioned financial common sense.

Sift Media’s Business Cloud Summit on Monday was a spectacular success, attracting more than 500 delegates. After three years the event and the industry it serves have really grown up, marked this week by the latest move towards consolidation in the shape of SAP’s $3.4bn bid for SuccessFactors.

The summit is mainly a stamping ground for corporate information offices and the vendors who supply them. But as Xero’s UK managing director Gary Turner pointed out, the latest business computing transformation is being led by small businesses. Turner estimated the UK customer base for web accounting systems like Xero, KashFlow, FreeAgent Central and may more like them was around 50,000.

“We’ve got more users than most of the big companies here,” he said.

My role at the Business Cloud Summit was equally subversive, as I was asked to introduce a panel session on “Making the Cloud add up”.

One of the mistakes technologists often make is to present and think about their products as evangelical movements - for example, are you Mac or Windows? Technology is a tool for the job, and at the end of a back-slapping day, we set out to bring the meeting back down to earth - as finance people often do - by getting the technologists to focus on the discipline of cost/benefit analysis. Helping to analyse the potential returns on investment and compare total ownership costs with on premise computing models were three experienced IT professionals: (from left in picture above) IDC European research manager Spencer Izard, Mac Scott from Xantus, now a KPMG subsidiary, and Tim McGinn from Westbrook International.

Just before his consultancy was taken over by KPMG in October, Xantus published report called ‘A Clearer Horizon?’ that drew on interviews with 70-odd chief information officers about their views on Cloud Computing. Over a quarter (27%) said they were spending 30-40% of their budgets on Cloud-based solutionos. Even more impressively, three-quarters (76%) thought a felt a return on investment of up to 25% “was realistic”.

At an earlier session News International CIO Paul Cheesbrough claimed cost was only the third place consideration for migrating to the Cloud, behind implementation speed/agility and innovation. Nobody contradicted him. In the case study that followed, Richard Wallace from security group G4S (formed by the merger of Group 4 and Securicor) said that moving a legacy cash tracking/management application from a managed service took out a third of the running costs overnight.

“It’s meeting our expectations and the business case has been proven on the cost side,” Wallace said.

According to the Xantus study, the financial benefits of the Cloud come from:

  • No upfront capial expenditure, especially for “public” Cloud applications that are trusted to an external host
  • Faster time to value, which lessens overall operating costs.
  • Faster realisation of beneftis from new projects.
  • Lower maintenance and upgrade costs
  • Higher utilisation of existing assets.

On the negative side, the financial drawbacks of going with the Cloud come from:

  • Increased operating expenditure from subscription costs and other overheads, based on user numbers, transaction volumes and add-on Cloud services used
  • Increased management burden and associated costs
  • Integration, customisation and infrastructure costs if multiple Cloud vendors or a hybrid on-premise and Cloud applications are used
  • Stringent overuse or overdraft costs for exceeding contracted service quantities.
  • Potential costs associated from switching service providers
  • Potentially extra security and compliance costs.

Spencer Izard from IDC emphasised that the IT community tended towards the “capex good, opex bad” view. “That is an overly simplified position as it does not take into account software maintenance costs, hardware costs, and support costs both in the head count required and the cost of management and monitoring software,” he said.

From his experience in business, Izard said that the managed services approach often meant that managers responsible for dealing with suppliers spent so much time attending to the contract and service levels that they might as well have kept the facilities in house. Assessing the full business case for corporate users meant getting a very clear idea of the end-user community and working out what they needed. It was more a case of ordering the right selections from the supplier’s menu to fit their needs rather than paying for the “all you can eat” licensing model of on-premise software vendors, he said.

But for smaller businesses, the Cloud business case often boiled down to getting out their credit card to get their hands on proven, functional business software quickly.

“For small firms setting up now the opportunities to use enterprise level applications capability such as Salesforce.com on an incremental basis with zero upfront costs and just monthly payments with no commercial commitments has really been a game changer,” said Scott. “Five years ago there would have been servers to buy or lease, licenses to acquire, software to configure and so on. As a result most firms ran spreadsheets as they grew. Start-ups can go straight to enterprise level capabilities on an incremental cost basis.”

Tim McGinn from Westbrook International agreed, and cited numerous examples from companies and charities that had implemented FinancialForce.com and reaped a measurable financial benefit very rapidly.

But Excel can’t be dismissed that lightly. The panellists agreed that when it comes to presenting a business case for the Cloud, it’s worth identifying the different components of the arrangement (hardware, software, maintenance, speed to value and opportunity cost) and projecting the contribution of each to the expected return on investment.

The Cloud is shortening the lifecycle of software applications. As McGinn put it, even accountants are thinking these days about changing their software more frequently than their best suit. And rather than making a down payment and effectively taking out a long-term mortgage for business software, the rental model offered agility and flexibility as well as cost savings, the panellists agreed.

Technology as well as finance managers sometimes feel threatened by the arrival of business models that give them less direct control, but for both communities, the Cloud presents an opportunity to look at computing the way it should be - as a strategic resource that in the right circumstances can be harnessed to their advantage.

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By karlcw
08th Dec 2011 11:49

Sensible stuff

From a tech perspective it's easy to see the benefits. However, if you have a traditional office model where everyone congregates in one place to work then the cloud concept perhaps is less viable.

You also have to consider the tech-readiness of your team, if they struggle with change then it could be an uphill journey into cloud computing.

However, I work in technology and almost everything I do is cloud based because of the peripatetic nature of my work.

So it really does depend on what type of business you are and how you work.

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