While using cloud computing increases opex costs, CIOs should consider other financial factors before making a decision.
Contributor: Laurence Goasduff
Learn how you can “Get Smarter With Gartner”
Many organizations are slow to adopt cloud computing due to confusion around the financial impact of its implementation and management.“Despite the hype, the uptake of cloud computing as a solution has not been as rapid as first anticipated, in part because of the confusion created around the financial benefits,” said Sanil Solanki, research director at Gartner. “While it’s said to be cheaper than on-premises, cloud gets push-back from the finance function because it increases operating expenditure (opex) costs. IT departments let finance take the lead on this decision, and this stalemate is rarely broken.”Ahead of the Gartner IT, Financial, Procurement & Asset Management Summit 2015, September 21-22, in London, U.K., Mr Solanki, said that while using cloud computing does increase opex costs, CIOs should consider other financial factors before making a decision.
CIOs who have a rounded view of the financial impact of cloud are more likely to have progressive discussions with their finance business partners about when and how to deploy cloud services. Understanding the outcomes cloud computing can support is crucial for IT leaders when having these discussions (see Figure 1). Adopting the cloud can save significant amounts of money, which ultimately is the lifeblood of any business.
Gartner defines cloud computing as:
“A style of computing where scalable and elastic IT-related capabilities are provided ‘as a service’ to external customers using Internet technologies”.
5 attributes that support outcomes
- Service-based – Consumer concerns are extracted from provider concerns through service interfaces.
- Scalable and elastic – Services scale on demand to add or remove resources as needed.
- Shared – Services share a pool of resources to build economies of scale
- Metered use – Services are tracked with usage metrics to enable multiple payment methods
- Internet technologies – Services are delivered through a use of Internet identifiers, formats and protocols
Gartner has outlined the positive and negative financial considerations of cloud computing.
Three positive financial aspects of cloud:
- Greater cost agility with infrastructure as a service — Cloud services have a high degree of cost variability, so expenses can quickly go down if demand for services is reduced.
- Increased retained cash — By using cloud/on-demand services, CIOs do not have to invest upfront to buy IT infrastructure via regular refresh cycles.
- Reduced opportunity costs — Opportunity costs are defined as the value foregone by pursuing a certain course of action. By choosing to use cloud/on-demand, a company can free up cash to invest in other parts of the business.
Three negative financial aspects of cloud solutions:
- Less cost agility with software as a service (SaaS) — SaaS providers are promising cost agility as one of the benefits; in reality, however, this is only working one way — up. Clients can end up paying more if they use more licenses, but not less if they don’t use as many.
- Higher subscription fees — The total cost of ownership may be lower over five years, but the subscription fees are more than the perpetual licenses after year three or four; therefore, the savings need to be significant and ongoing to make cost lower after more than five to seven years.
- High switching costs with SaaS — The cost to get data out and bring it back on-premises is high.