For the last few years, IT leaders implementing a cloud strategy, or even a "cloud first" strategy, have argued that cloud isn't a matter of saving cost, but of improving speed-to-market. They're not necessarily wrong. Survey findings gathered by CEB from 28 CTOs last summer indicate that just over half have found cloud costs to be more expensive than on-premises costs, while just under half have found the cloud cheaper or on par.
But the "speed, not cost" argument doesn't change the fact that cloud has and will continue to change the economics of corporate IT, and it doesn't absolve IT leaders of the conversation they need to have about the value of cloud computing with the CFO and other C-suite leaders. There are five imperatives for getting this conversation right:
1. Determine the role that cloud migration plays in the CFO's story to the market
Too often, a discussion of cloud economics begins with debates around the cost of on-premises IT relative to the cloud, or the shift of IT Capex to IT Opex. These are relevant, but only in so far as they relate to the enterprise's financial strategy and the story the CFO wants to tell investors.
IT cannot and should not have a stand-alone cloud strategy. IT should be part of an enterprise strategy -- presumably a digital one -- for growth. To ensure the cloud fits into the company's growth strategy, any discussion that an IT leader has with the C-suite around the value of cloud computing needs to start with a fundamental understanding of three things:
- the CFO's expectations and plans for growth and margin expansion;
- whether any anticipated long-term cost savings from the use of the cloud can be deployed to fund growth opportunities elsewhere in the business; and
- whether the short-term costs of cloud migration can be covered by efficiencies created elsewhere in the enterprise.
2. Focus on timing and trade-offs when making cloud decisions
In most industries and organizations, the key question about the value of cloud computing relates to timing -- when, and at what rate, does it make the best financial sense to migrate capacity to the public cloud? The answer comes down to the trade-offs the organization is willing to make between short-term migration costs, long-term efficiencies, the risk of underutilized assets, the compliance costs associated with on-premises assets, and the ability to meet demand growth for IT services.
This can be an overly complicated conversation that loses sight of the enterprise's financial objectives, especially if IT leaders get into the technical weeds. The key to success is to focus on the economic trade-offs between factors like migration costs and demand growth rather than highlight the details. Successful IT cost conversations frame an enterprise decision in terms of its cost consequences.
3. Train business and finance partners to think about the value of public cloud in terms of supply-chain cost
Public cloud services fundamentally change how IT serves the rest of the business. However, many leaders have yet to call out the costs involved in changing IT's supply chain to their finance and procurement partners: things like the investments required in network bandwidth increases, labor and retraining, licensing model changes, and application refactoring to make the cloud work. IT leaders must dispel the common misperception that cloud can, from a cost perspective, simply be switched on and off. Rather, they must explain that the cloud supply chain carries a set of costs that are necessary to make it work. When communicating the cloud strategy in terms of how it changes IT's supply chain shift, successful IT leaders call out the potential risks associated with the changes as well as the costs required to maintain effective security and support.
4. Emphasize immediate transparency, even if the cloud doesn't deliver immediate efficiency
For the average organization, the break-even or tipping point on cost savings after migrating to the public cloud is likely to come between years three and four -- a horizon far beyond the quarter-to-quarter cycle that drives financial reporting or the short-term IT planning windows.
However, a lack of immediate savings can be offset by the transparency and simplicity of service costing for public cloud-hosted applications. Even where the cloud is more expensive, it can provide a level of transparency that enables business partners to make smarter and clearer decisions about how they consume IT, with the potential to break a cycle of endless conversations around "why IT costs so much." Savvy IT leaders also continue to emphasize the potential role of the cloud in improving IT's overall speed, which can help business partners understand how much they are willing to pay to make gains in speed-to-market.
5. Highlight high-risk assumptions and the complexity involved in many risk mitigation strategies
Finally, a conversation about cloud economics needs to include an explicit review of the most important, highest-risk assumptions when it comes to decisions to use or not use the cloud -- for instance, the potential that migration will be irreversible without a significant cost implication.
IT leaders should highlight anticipated growth in demand for IT services, especially in light of the enterprise's digital ambitions, and be transparent about corporate IT's ability to keep pace with this growth without additional investment. Handled well, this should begin to raise the question of which risk mitigation strategies are needed, regardless of the cloud decision. Many of these strategies -- for example, the use of multiple cloud providers to avoid single-vendor "lock in" -- come with additional cost and complexity that need to be explicitly factored into the overall cost equation.
The IT cost conversation today is still largely about on-premises assets rather than the cloud. But this will change quickly, especially if IT leaders start to realize their ambitions of tripling their use of public cloud services over the next three years, as CEB data suggest. Future discussions of IT costs will be about cloud economics, and smart IT leaders will have these conversations with finance and business leaders now before hype and misunderstanding take root.
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