How Finance, IT and Commercial can work together for success

It seems like we have been talking about The Cloud for an eternity. But what is it, and is it real or just the next buzz before we move on? Well according to Statistica it is here to stay. The worldwide public cloud services market is projected to grow to $236 billion in 2020, up from $182.4 billion in 2018.

If you are not in the Cloud yet, or simply wondering what Cloud is, in simple terms it is an agile, flexible and scalable solution for organisations’ compute requirements – taking your physical infrastructure and putting it online. Of course, somewhere, someone has the physical infrastructure (maybe AWS or Azurre for example), but now you rent and connect to it (over the Cloud) rather than own it. Most often this is paid for via a blend of fixed and consumption-based costs.

With this comes a new set of adoption dynamics and a new business model. Organisations going into the Cloud no longer need the capital investment required for alternatives such as data centres or co-location space, they are also able to deploy solutions in minutes not weeks, and benefit from a range of prepacked security configurations.

In the Cloud, the hard work is already done.

 

But with this comes challenges

If you view Cloud like taking on a cell phone contract, then going to the Cloud is like ditching your fixed line and taking on mobile for the first time. There are lots of permutations and combinations and it can be confusing. That’s where Commercial should be able to help as organisations navigate through complex cost benefit analysis, authorisation of spend post commitment, spend visibility, forecasting/budgeting and demand management.

This article addresses potential ways to meet these challenges through Finance and Commercial working hand in hand.

 

If Cloud is an IT thing; what role does Finance play in the migration?

Most organisations will have sunk costs for existing compute solutions (most commonly either co-location or data centre). So, when building the business case for Cloud all Finance Functions will need to help stakeholders not only get to grips with a new calculation model, but also ensure that all costs are factored in, to the right extend. For example;

• -- Sunk costs like infrastructure, maintenance and resourcing are considered and factored into the investment/business case. This is complex because internal IT resource costs may need to be allocated against multiple buckets to reflect the different infrastructure tasks that they do. Often it is “arms and legs” that are outsourced under a Cloud model rather than always full FTE’s (for example when server tasks are outsourced but application tasks are not). This creates complexity and Finance and Commercial can help stakeholders to ensure that the right apportionment is undertaken. Sometimes Time and Motion studies may even be required to apportion resource costs correctly.

Action: Capture sunk costs and allocate IT resource cost to gain a true cost comparison of in-house versus Cloud.

 

• -- The Operating Model implications of Cloud must also be considered within the business case (IAAS, PAAS, SAAS). For example, Cloud will present options around license ownership and organisations should work through the differing implications of the more traditional legacy models vs Cloud utilisation models. The different models have a sliding scale of customer/ vendor responsibility and corresponding price points. In general terms Infrastructure as a Service (IAAS) places the most emphasis on the customer, and Software as a Service the least. There will also be, in most cases, additional security and network infrastructure considerations to factor into the case for Cloud.

Action: Ensure that options are considered for the Operating Model and that the financial business case is comprehensive covering various people, software and infrastructure implications.

 

• -- Transition costs are real and often underestimated. They need to be thought through. There will be people and training implications but also what to do with legacy equipment. When migrating from a co-location or owned data center model, assets such as servers, storage network hardware may need to be written off or sold on the secondary market. This could even extend into data centre disposal for some.

Action: Factor in the write-offs and estimate potential revenue from disposal of owned data centres.

 

Championing the need for strong Cloud Governance

Going onto the Cloud is often done in stages. Because of this many organisations start without putting in place strong financial and operational governance, and manage changes and issues in a piecemeal way. Better practice is to plan and implement a Cloud governance framework prior to going live. This means understanding how the organisation will track adoption, issues, opportunities and change requests in an efficient and structured way.

Action: Finance Functions must partner with IT and Commercial Functions to ensure there is a robust framework covering financial budgeting and commitment approval, forecasting, growth and operational considerations. This may include:

• -- Ensuring that there are subject matter experts trained on cloud pricing models. This can be done by partnering with Commercial and utilising Cloud vendor training which is readily available from the chosen vendor.
• -- Ensuring that IT budget holders are completing Cloud capacity planning as part of the budgeting process, in the same way as they would normally do internal capacity planning.
• -- Completing regular reviews with IT, Commercial and the Cloud vendor to ensure that the Cloud model is optimised commercially and operationally.
• -- Ensure the organisation utilises spend reporting and budgeting functionality available from the Cloud provider. This will ensure that the organisation has a clear view on spend to date and budgeting functionality will give an early warning of potential overspends. Working closely with the vendor is the best way to ensure that everything is tracked, as opposed to trying to shoehorn complex financial models into ill-suited templates.

 

How can organisations optimise the Cloud operating model?

As an organisation becomes more cloud savvy there will be opportunities to optimise. These may include (turn up and down scripts of) on-demand instances, instance sizing, reserved instances and selecting the right tier of storage. So basically, usage and usage patterns.

An emerging model which is currently best in class sees organisations reserve instances of 70% or greater of the total estate size. They have turn up down scripts for all development use cases and complete regular reviews of tiering and utilisation. This effectively makes 30% of their Cloud estate “on demand”. However, leaving this unchecked may drive cost and operating inefficiencies into the model. Finance partnering with Commercial and IT should;

• -- Challenge the IT Function to reserve the appropriate level of instances, this is generally completed following 3 months of usage as a minimum. This will allow for the identification of cost optimization and reduction.
• -- Decide whether a commitment framework should be entered into such as an enterprise discount program which will give an overall % discount against overall annual spend. This is essentially seeking to minimize fixed costs.
• -- Ensure turn up and down scripts are actually being utilised by IT development. This will reduce costs for on-demand instances and link needs to consumption.
• -- Ensure that the cloud provider’s technical account manager is completing regular reviews of instance sizing and tiering for most appropriate fit for both compute and storage

 

Its complex, but don’t hold back

Cloud computing is here to stay and will continue to expand, Finance and Commercial must embrace the change and start the learning process now.   

You can read Proxima's report on the capability conundrum in government here.

Or read more insights here.