Head in the clouds

The need for information technology is paramount in almost any large organisation today, but that doesn't mean that IT is regarded as any more than a cost centre in some circles.

Regular and costly refresh cycles demand large capital outlays whose benefits are difficult to track, and the rapid obsolescence of IT means there is always something to be upgraded or replaced. Outsourcing was once seen as the magic bullet, until it proved to be equally troublesome thanks to restrictive contracts that hampered the development of the business itself.

Cloud computing is the latest solution put forward by the IT industry to reduce the burden of IT investment. Although it has been heavily hyped for a number of years, there are now sufficient examples of organisations that have implemented cloud solutions for its value to be determined.

Cloud computing promises many benefits that should appeal to CFOs. By hosting data and applications on the internet (or cloud), rather than in local data centres, they can avoid large upfront investments in IT infrastructure and software licences. This also means that new applications can be activated quickly, delivering flexibility for the organisation using them. And because they are hosted on theiInternet, cloud applications can be accessed by users almost anywhere.

Many cloud services allow customers to pay by the month, and to vary their service usage as needed. This alleviates the need to buy as many software licences as are needed for peak periods. Users are also able to hand off the responsibility – and cost – of security and application availability to the cloud service provider.

There are several models of cloud computing. Software-as-a-service providers such as Salesforce.com give access to cloud-based software applications hosted securely on the public Internet. This type of service is often called a public cloud service, as is the cloud-based hosting service from Amazon Web Services which enables organisations to host their own applications and data in Amazon’s cloud infrastructure.

IT departments can also build their own cloud services and offer these as a service back to the business. These private clouds appropriate many technologies found in the public cloud to offer a service that provides similar benefits in terms of getting new applications up and running quickly.

But cloud computing is not all upside. Concerns about service provider security are the number one inhibiter of the adoption of cloud services, along with questions about exactly where data will be stored.

But increasingly organisations are satisfying these concerns and pumping more data and applications out to cloud service providers such as Amazon Web Services, Google and Salesforce.com.

According to cloud computing consultant and author of the book Navigating through the Cloud, Rob Livingstone, awareness of cloud computing in the CFO community is increasing gradually.

“But there is a real need for clearing up and educating CFOs as to what actually is cloud because it is not always that clear what the underlying value proposition is, other than the promise of lower cost and increasing cash flow moving from a cap-ex to op-ex basis,” Livingstone says.

“The main theme is about cash flow, lowering cost and moving from capital expenditure to operational expenditure, which is deleveraging the balance sheet. They are all laudable objectives, but the devil is in the detail, with each implementation having to be looked at on its own merits.”

Livingstone has first-hand experience with cloud computing, having implemented a cloud strategy in his time as CIO at Ricoh Australia. He says security is the most obvious concern, along with the question of which jurisdiction data actually resides in. This is particularly important to CFOs in the financial services space, where the Australian Prudential Regulation Authority has issued guidelines for data management.

Often cloud sourcing can be described in terms of outsourcing, and doing so can strip the hype out of the conversation. A looming issue for all CFOs is the true total cost of ownership (TCO) of cloud computing. While individual organisations might be able to eliminate the need for upfront investments, the cloud service provider doesn't, and may pass these costs along in terms of pricing that is not attractive when investigated over the long term.

Livingstone says it is important that the ‘TCO ruler’ be run over all components of a cloud service, particularly the hidden costs of integration with existing systems and processes.

“That is probably one of the biggest surprises in store for the early adopters, particularly of the software-as-a-service cloud,” Livingstone says. “As the early adopters are moving down the path they are beginning to realise that when you factor in all of those peripheral costs, it doesn't necessarily mean that it is very cost effective. It is going to be cheaper, but is not going to reduce IT delivery costs by an order of magnitude.”

The research director at analyst firm Longhaus, Scott Stewart, says getting a handle on costs is the most crucial issue in negotiating a cloud deal.

“One of the things that gets a conversation started with a CFO is calculating the true cost of IT,” Stewart says. “What that is about is getting more than three years of your general ledger and capturing all the ICT costs in your company, including all the prepayments. Once you have that you can do a cost model around cloud.

“Therefore the same rules apply,” Stewart says. “CFOs want to know about risk, they want to know about the contractual side of it, and what surprises are in store for additional work.”

Only once the true cost of IT is understood can all parties make an honest assessment of the areas within IT that can be both easily and cost-effectively moved into the cloud – commonly email and data storage.

Stewart also has direct experience in negotiating a cloud computing contract, having done so in a previous role as CIO at the stockbroking firm Wilson HTM. Working with the cloud service provider IntraPower, Stewart was able to negotiate a five year contract that drove down the per-user, per month cost on an annual basis.

“The business was forced to contribute to the effort to getting the cost of IT down, and the vendor was also contractually committed to delivering all the cloud transformation,” Stewart says. “We built a contractual framework around the business case, and it had to work.”

As both Livingstone and Stewart have found, the concerns around cloud computing can be overcome.

Telecommunications company AAPT is another example of an organisation that is betting part of its future on cloud computing, both in offering cloud services to clients, as well as using them itself.

APPT’s chief financial officer James Orlando says his company’s unique selling proposition is that it is a very fast, flexible, agile and scalable company, and this is in part enabled by its use of cloud computing.

The company’s first foray into the cloud involved dumping its email system, based on Microsoft’s Exchange Server, and moving the email accounts of its 800 staff to a cloud-based system provided by Google.

“From a CFO’s perspective, it’s been great,” Orlando says. “Running cost is less than 10 per cent.”

He says another big benefit is that staff can now access the service from pretty much anywhere they can get an internet connection, and on any device.

“It is a productivity enhancement that is hard to quantify, but you can feel it in the business.”

Success with cloud-based email meant that when the sale of part of AAPT’s business left it without a call centre, management opted for another cloud-based solution from the Australian developer IPscape.

Orlando says the impact that both systems have had on his operating budget has been remarkable.

“In the old days the systems costs were a very large percentage of my non-people related costs,” Orlando says. “We have taken that cost base down to a fraction of what it used to be. The running costs are now at 25 to 30 per cent of what our legacy cost base was. And I don’t have to buy a huge amount of capacity that is going to sit there unused on the off-chance that I am going to need a piece of it.

“It makes my capital planning much easier. It reduces the lumpiness of capital purchasing decisions. Converting that large capital expenditure into an operating cost reduces my overall risks. From a financial perspective it is line-ball with what you want.”

And there are other benefits that don’t show up on the balance sheet.

“The cool factor cannot be underestimated,” he jokes, “but it is hard to quantify.”

AAPT has also invested $5 million in its own private cloud infrastructure, bringing the scalability and flexibility of cloud computing to its own IT environment. The key benefit here is agility.

“In the past it would take us months to stand up a new server or upgrade an application or add a new application,” Orlando says. “Now we are doing it in days. The agility and speed is unbelievable, and at a fraction of the cost. And now we have the opportunity with our own private cloud to host our own applications.”

While large organisations such as AAPT are adopting a gradual transition to the cloud, some younger companies are throwing themselves in wholeheartedly.

The five-year-old online electronics retailer Kogan Technologies was essentially born in the cloud. Executive director David Shafer says the cloud is effectively integrated into his business in every area.

“Our entire business is in the cloud,” Shafer says. “If our office went up in smoke, we could relocate to a new office, and there would be no hiccup at all. It is all in the cloud.

This includes all emails and all records of manifests and invoices, which are hosted with Google.

“All of that is in the cloud and accessible by our staff from any computer in the world,” Shafer says. “And we see that as integral not only to the security of our data, but the ease with which our staff can access data and interact with our customers and suppliers. And it has been like that since day one.

“It is being protected by Google, and out of any company in the world Google has the most to lose from a security breach. Google is the best specialist in the world at managing and storing data and information.”

Shafer says use of the cloud has enabled Kogan to focus on what is core to its business and the things that it holds as a competitive advantage over its competitors.

Kogan uses four main cloud services, and despite the fact that these are paid for on a monthly basis, Shafer says none of them are cash flow intensive.

“The services we are using, in comparison to investing in capex and building on site, are much cheaper,” Shafer says. Over time, Stewart says that stories such as Orlando’s and Shafer’s will fuel the willingness of more CFOs to work alongside their CIOs and other business leaders in defining a cloud computing strategy. But he says it is important that the discussion be moved away from viewing the cloud as either a purely financial or technological initiative.

“This is a business transformation,” Stewart says. “This is more about process and people than it is about technology. And it’s going to take a lot of business cases and it is going to take a roadmap and strategy, and it’s going to be one step at a time, and it is going to take five years plus.”