Cloud Source Blog
In This HP Cloud Source Blog, HP Expert, Christian Verstraete will examine cloud computing challenges, discuss practical approaches to cloud computing and suggest realistic solutions.

Understand cloud financials and the value to your CFO

Finance.jpgWouldn’t it be great if IT could move away from being thought of as purely a cost center and more of a strategic partner and trusted advisor for the CFO?  According to a recent article by CFO.com, that time could be now but, it will require a new approach to the discussions the CIO has with their CFO, hint; think business service versus infrastructure cost.  CIOs migrating to cloud computing will see this as a natural evolution. In their quest to become a strategic service broker, services become center stage rather than the infrastructure on which those run. In line with the converged cloud vision the infrastructure supporting the services may be managed and operated by themselves (traditional and private cloud) or by others (managed or public clouds).

 

The article, referenced above, looks at a number of questions a CFO might ask about cloud technology and explores how cloud can be the key that unlocks the IT “financial black box” so many currently struggle to open.  As you might expect, any CFO evaluating cloud will first want to know what their IT expenditures are and if moving to a cloud environment will actually be more cost effective for the business.  The problem is that most don’t know what the associated “real” costs are for the IT environments they financially support. 

 

Let me give you an example. About 18 months ago I met with the CIO of a global company who was trying to create an internal cloud to support all of the business unit and regional sites. His rational, having one integrated environment would drastically reduce cost through consolidation. So, he calculated the cost of a number of services delivered centrally and submitted them to the BU and site CIOs. To his uttermost amazement, they told him the same services only cost them 50% of what he proposed. He couldn’t believe it, so he started digging into the issues and it turned out, the CIOs were not paying for the buildings or for the energy. Indeed, the datacenters were located alongside factories and the additional consumption of the datacenter was a blip on the chart. Obviously, they were not comparing apples and apples, making progress difficult. It actually took the global CIO more than one year to start migrating these disparate environments to a managed cloud.

 

Technology cost vs. business value

 

As the article points out, a CFO’s conventional view of the IT world is defined by what technology investments are required to run the business.   The traditional Capex model, where technology assets are typically depreciated over set period of time, is one that most CIOs understand and play up in the conversations they have with their CFOs.  However it’s not strategic and clearly relegates the CIO to a discussion focused on technology cost versus business value.  The IT department is viewed as a cost, and in the current economic climate costs are not really popular. We all agree that today’s enterprises would not be able to run without IT, but how many are able to put a financial figure to the value provided by IT?

 

The cloud is changing that dynamic, and as discussions move away from Capex to one more focused on Opex, CIOs have an opportunity to restructure their conversations and help paint a clearer picture of the cloud and benefits it presents.  That opportunity starts with providing the CFO with a “fully loaded cost” analysis for their IT environment.  This means “looking at each server the company owns, the applications that run on it and the depreciated Capex, Opex and labor costs involved in managing it.” Actually I can only agree with the article’s point that if your CIO can’t tell you it’s x y z per box, you really have a problem.

 

But such approach can also change the discussion with the business as a whole, because now we can discuss the ROI of a service. The debate gets really interesting when you ask the business what the actual return to the business is for providing a new service. How much more revenue does it drive or what is the cost reduction associated with running a particular application or service. In other words, do we need to invest in developing and sourcing this application or not. But this requires a true governance to be put in place.

 

Now that CFOs can do an apples-to-apple comparison of the “real” costs associated with each application, they can better determine where it will be more cost effective to run those applications – either in their local infrastructure environment or on the various cloud environments that exist today.  For the CIO, the conversation is no longer focused on technology costs but rather on the application business services needed to run the business and where cloud could provide financial value. Obviously the financial consideration is not the only one to keep in mind when looking at where to run a particular application, but it’s definitely part of the mix.

 

With the CFO’s function increasingly setting their organizations cloud strategy, being able to provide the business value information they seek with cloud will be important.  In fact, research conducted on behalf of HP of more than 550 global companies found that the cloud strategy is set by the CFO in 17% of organizations—and that number is growing1.  For the CIO, building on this relationship to establish a combined approach to IT investment options will be critical, and will help better position CIOs as “demand shapers, not just order takers, for IT and cloud services.”  There’s a great whitepaper that explores this relationship a bit further that can be found on the HP CFO website for those that are interested.   

 

CIO as trusted advisor to CFO

 

One of the most poignant points mentioned in the article was around the need for a “trusted advisor” who can help CFOs keep abreast of the multitude of changes associated with cloud. As I already pointed out a number of times, the CIO can become the trusted advisor, not only of the CFO, but of the board of directors as a whole. IT is not going away; it’s actually becoming an integral part of the business.

 

To become that trusted advisor your CFO wants, it’s important for the CIO to become more of a revenue and strategy leader and less of a follower.  A recent study entitled “The IT strategy of Leaders2 analyzes what CIOs of revenue leaders do differently from the ones of CIO followers. It turns out to be a number of simple things:

1. Leaders couple information with automation:

     a.Leaders transform information into clear goals
     b. Leaders automate information management
     c. Leaders speed decisions with business intelligence
     d. Leaders have compliance and audit controls in place
2. Leaders standardize application software
3. Leaders wring more from their hardware
4. Leaders take information security seriously

 

And guess what, neither a mainframe nor a BYOD strategy has any significant impact on the revenue growth of the enterprise. This may give you some hints on what NOT to discuss with your CFO, except if he is asking you for a tablet.

 

Conclusion

 

When talking to your CFO, make sure you balance the cost associated with the delivery of services to the business with the value for the corporation. Do not hesitate to calculate ROI and use it as a decision criterion on whether a service is actually needed or not. Move away from the technology discussion, think business and speak finance. Your CFO will notice and their attitude towards you and towards IT will evolve.

 

For more information, visit HP Cloud Financial Services.  http://www8.hp.com/us/en/hp-financial-services/campaign/cfo.html

 

 

  1. The future of Cloud” research conducted by Coleman Parks on behalf of HP, February 2012
  2. The planet’s top companies reveal their IT secrets, study performed by HP in October-December 2011

Labels: cloud| CloudSource
Comments
Nadhan | ‎08-08-2012 10:59 PM

Christian, Very well put.  Like the way you have called out the manner in which CIOs should package the financial aspects of cloud and its benefits to the CFOs.  It is imperative that CIOs have an effective mechanism in place to track Cloud ROI because it is not just the CFOs but shareholders who are driving the IT conversation today.  Also, here are a few tips for CFOs to compute the cost of cloud computing.

 

Connect with Nadhan on: Twitter, Facebook, Linkedin

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About the Author
Christian is responsible for building services focused on advising clients in their move to cloud, particularly from a business process and ...
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