A CIO guide to why CFOs love cloud computing? Whatever for? Many CIOs already know their CFOs are gaga for the...
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cloud -- and have a strong inkling why. Cloud computing solutions come cheap. Even better, they offer the ability to move IT costs -- a behemoth of the balance sheet -- from capital expenditures (capex) to operating expenditures (opex).
Indeed, according to Forrester Research Inc.'s most recent polling, finance executives expressed the highest level of interest in cloud computing solutions -- more, even, than other business leaders and app developers, two other groups traditionally high on cloud's benefits.
"What CFOs love about cloud computing is the ability to dial up and dial down services, based on business cycles. They want to pull that lever," said analyst James Staten, a vice president and principal analyst who covers infrastructure and operations for the Cambridge, Mass., research and advisory firm.
The biggest challenge CIOs have is explaining to CFOs where the cloud cannot be applied.
Dennis Hodges, CIO at Inteva Products LLC, got a big thumbs-up from both his former CFO, a cost-cutter, and his current CFO, who takes a more strategic view of IT investments, for adopting a cloud model. He went with cloud computing solutions for his ERP system, wide area network (WAN) and soon for a financial consolidation tool. But Inteva, which supplies the roof, lock and other systems that go into vehicles, is something of an exception among 100-year-old global companies. Spun off in 2008, the Troy, Mich., company had 15 months to get off its existing SAP systems. The new ERP system, hosted in a public cloud and delivered as a service, has resulted in huge upfront and ongoing cost savings. An on-premise ERP system upgrade due this year would have cost the company $10 million, including the staff it would have taken to maintain it.
"We do not have coders supporting the ERP system. We do not have infrastructure people supporting the hardware the ERP system runs on, and we do not have disaster recovery issues because all of that is handled by the ERP provider," Hodges said.
But, as he quickly notes, "We were in a unique position. A lot of our legacy systems did not come with us."
Educating CFOs on cloud computing metrics and solutions
For CIOs with a lot of legacy systems, CFOs' infatuation with cloud computing solutions should actually give them pause, Staten says. CIOs need to partner closely with their CFOs, understanding the cloud metrics CFOs find attractive, but, more critically, pushing back when cloud computing does not serve the enterprise well.
"The biggest challenge CIOs have is explaining to CFOs where the cloud cannot be applied," Staten said.
Not all cloud services give companies the flexible, pay-per-use opex model many CFOs covet. While infrastructure as a Service (IaaS) and Platform as a Service (PaaS) offerings are sold by the drink, Software as a Service (SaaS) usually follows a pay-per-named-user model and requires a 12-month contract. "It's real hard to dial that up and down," Staten said.
Irv Rothman, president and CEO at Hewlett-Packard Financial Services Co. and a firm believer in the cloud's power to transform IT and businesses, agrees that cloud metrics are more nuanced and complex than many CFOs -- let alone CIOs -- realize.
"Most CFOs know what they read in magazines. They think of cloud like flicking a switch and getting electricity, paying for it as you use it. But that is not a reality today and probably won't be for some time," said Rothman, whose company, based in Murray Hill, N.J., is the technology leasing and financing service subsidiary of Hewlett-Packard Co., based in Palo Alto, Calif.
Instead, most companies will exist in a "hybrid environment for a long time to come," running a traditional data center alongside the more revolutionary cloud apps. "CFOs have to find the dollars to invest in both simultaneously, whereas previously they might have only been investing in the data center," Rothman said.
Elasticity and transiency with cloud computing solutions
Applications that leverage the economic advantage of cloud must possess elasticity and/or transiency, Staten said. An online store, for example, is an attractive candidate for the cloud because it needs to scale. Usage often varies by time of day or season. A company that does not have to carry the ongoing operating cost of supporting the Web store at its peak footprint, however, has a good story to tell investors.
"If operating costs are commensurate with the increased sales, then I immediately have better margins on every additional sale I make. That is good for a CFO," Staten said.
Applications that fall into the transiency category are those that don't have to be running all the time, business intelligence (BI) apps being one example. Most companies fire up BI apps periodically to measure changes or during business-strategy sessions. End-of-quarter systems are another example. "These are great in the cloud, because you can light them up and then completely shut them down when they are not active," Staten said.
Conversely, an SAP ERP system, for instance, does not have the ability to scale elastically. "It's a big, permanent footprint running all the time," Staten said. SAP and other traditional ERP vendors have added modules that can scale elastically and be lit up in a transient way, allowing customers to start taking advantage of cloud economics. But these will often require an upgrade to newer versions of the ERP system, requiring some investment upfront. "It can get to be expensive," he said.
More about ERP and cloud solutions
For CIOs, consolidation and virtualization have been the classic means of driving down IT costs. But both consolidation and virtualization require time. On a shorter time budget, cloud and outsourcing are alternative solutions to the financial predicament of getting more for less money. Outsourcing has been used as a "kind of escape valve" while companies transition to other IT models, Staten said. But traditional outsourcing comes with long-term costs. Cloud, on the other hand, offers a flexible, opex component that was lacking in traditional outsourcing contracts. The bottom line, he said, is that CIOs should be using cloud solutions wherever they make financial sense.
Let us know what you think about the story; email Linda Tucci, Senior News Writer.