Realizing The Financial Value Of Cloud

As more and more organizations embark on the cloud journey or add further impetus to it, CIOs and CFOs are trying to grapple with an existential cloud question: How can they truly realize the financial and nonfinancial value of cloud?

According to McKinsey's recent report, "75% of cloud's predicted value comes from boosting innovation," and "cloud promises an average rise in EBITDA of more than 20% across industries." Like most things in life and business, some of cloud's most applauded benefits fall under the realm of intangibles. While aspects around the speed, flexibility, scalability and agility that cloud provides can be measured, cloud also enables innovation due to these inherent features. Innovation as a process cannot be quantified. However, it can be a significant competitive advantage for organizations and can even lead to market disruption and, thereby, immense tangible value.

Understanding the true value of the cloud is a multilayered challenge. Here are eight considerations for CXOs as they plan to realize the total financial value of cloud:

1. Define what matters (ROI): Organizations must first articulate what cloud ROI means to them. While cost savings is an essential driver of cloud adoption, a holistic view of what cloud offers is needed. Identify the value that the organization wants to achieve, and ensure that the cloud business case is built around it. A convincing cloud business case would mean a lower total cost of ownership (TCO) when factoring in the capital costs, real-time operating costs, opportunity costs around downtime, productivity benefits or losses, training and communication costs, etc.

2. Future readiness and cost of opportunity lost: Today, cloud can help organizations reduce technology debt to regain the required agility. More than that, cloud is an excellent platform for experimentation and faster innovation to build future products and services, new business channels, resilient supply chain and new business models. As part of the cloud business case, consider the cost of opportunity lost if cloud isn't adopted.

Any investment that helps organizations navigate crises and ensures business continuity is imperative for becoming future ready. Cloud also enables better and quicker data-driven decision-making to drive better business processes and product development/innovation. A cloud-first mindset will have a multiplier effect on business, and the value journey starts with the end in mind.

3. TCO of IT infrastructure (before-after): Comparison of costs toward achieving the same business objectives with on-premises infrastructure and cloud is the primary way to gauge its financial value. When comparing TCO, ensure it defines:

• Baseline financial data: Cost to run today across all landscapes.
• Environment scope (technical, financial).
• On-premises cost projections for the next three to five years.
• On-premises cost projections once migration to cloud is complete.
• Projections of migration cost and optimized public cloud run rate.
• Estimated cost differential on managed services, networking, third-party tools used for operations, cost of cybersecurity, audit compliance, etc.
• Secondary costs (on-premises model), including investments in server/hardware (sunk cost in most of the business models), software and applications acquisition, real estate costs and other depreciating assets, investing in excess capacity for future eventualities (which is often underutilized), installation and maintenance/downtime, staff for deployment and support as well as their training costs, and the cost of electricity/cooling.

4. IT as an asset: When evaluating the cost benefits derived from cloud investments, look at how cloud adoption can help in transforming the IT from a cost center to an asset with IT agility (to match the velocity of business change), empowering business with innovation in addition to productivity gains and cost savings. Typical IT agility factors to consider are:

• Deployment time for a new compute/network/storage or solution landscape.
• Time to respond to unexpected changes in network, demand, etc.
• Time to develop new applications and software upgrades for continuous delivery of enhanced customer value.
• Staff and training costs.
• Managing unplanned downtime/crises.
• DevOps and AIOps can help companies immensely by shortening the systems development life cycle and providing a continuous delivery system with high software quality. According to a DevOps Research and Assessment report, high-performance DevOps companies achieve 46 times the deployment frequency, resulting in faster time to market (thus increased revenue) and, more importantly, a change failure rate that seven times lower.

5. Impact on customer experience: The actual value of any investment ultimately lies in the value derived by the customer — the customer experience.

6. Cybersecurity: The increased thrust on cloud has led to a greater impetus on cloud security — greater than what companies would have had in place without cloud. Cybersecurity and trust can have a domino effect on organizations and brand equity.

7. Sustainability: Cloud computing is an energy-efficient and resource-efficient greener technology. Research from Accenture shows cloud migration can reduce carbon emission by 60 million tons a year, which is equivalent to taking 22 million cars off the road.

8. Financial engineering: Most customers struggle with recognizing capex to opex in cash flow, which entails reduced investments in fixed assets (including costs associated with assets acquisition). With cloud adoption, organizations need to plan for the financial engineering and process changes to ensure total financial value to cloud is realized. Organizations need to understand how cloud adoption would impact:

• Financial position (capex vs. opex, asset cost and depreciation, cash flow).
• Budget planning (shifts in budgets from "capital" budgets to "operating/running" expense budgets).
• EBITDA with the transition from capex to opex.
• Cash flow plan: Budget consumption predictability with better consumption predictability and flexibility in fees and billing cycles of cloud providers.
• Financial considerations (accounting KPI and account processes).

In short, cloud value can be realized by customers with the CART model.

Cloud Value = Cost Efficiency + Agility (IT and Business) + Resilience + Time to Market (CART)

For any organization to stay relevant, be sustainable and become future ready, investment in cloud is almost nonnegotiable, and understanding the actual value it brings to an organization can help business leaders inch closer toward deciding to invest in it. Cloud is the most relevant technology, especially in a post-Covid-19 world.