|Cloud Computing |
The Executive Committee
Sub: Cloud Computing Arrival
The cloud is here, but better exploitation of cloud computing will require improving IT cost transparency management practices to prevent overspending on IT, manage decentralized IT spending, and enable sustainable shared IT service organizations. There is considerable ambiguity in many enterprises about how to financially approach the cloud at the highest levels within IT and in corporate finance.
In its various forms, cloud computing has the ...view middle of the document...
Maintaining a capacity buffer due to high business demands in the past meant overinvestment in IT infrastructure and services, and was a large part of IT spending. Now, one of the major reasons for traditional IT investments (overspending for high or unpredictable growth) has disappeared for the next five years for many IT organizations. One can assume that a large percentage of unpredictable future business demand for IT capacity will be satisfied by cloud computing. In many cases, the business will attempt to forgo dealing with the central IT organization — thereby, cutting out the middleman or otherwise driving a partial disintermediation of the traditional IT organization (decentralized IT spending). Although the economic concept of higher consumption being a result of lower pricing is one reason many enterprises will spend more with cloud computing, there are many other reasons, such as poor project planning, failure to consider business process re-engineering, poor integration, poor estimating and failure to adequately manage systems after projects are completed. These reasons often have nothing to do with the technology or vendors that provide cloud computing services.
After partnership with a cloud vendor, some of what we now consider to be traditional "maintenance" costs will continue to be expensed annually, because they are expenses that are predictable year over year, and no additional business benefits are delivered from the existing functionality. This is similar to how purchased software is treated, but there are many other scenarios that include cloud maintenance that are not renewed predictably year over year. Some include a one-time fee, some include a monthly charge associated with use, and still other cloud purchases will be predictable monthly charges that do not change. Because of the categorization of a purchase as "cloud," it will tend to be expensed more, rather than capitalized, even if it is above the enterprise capitalization threshold. Often, similar systems created by the IT organization are not retired and costs can increase because of cloud vendor ambitions for upgrade and the IT organization's failure to retire legacy systems. Hereafter, the risks of vendor lock-in begin. With the promise of switching vendors quickly because of commodity market conditions, IT organizations would seem to enjoy a buyer's market to force prices down because of competition. However, for some cloud computing services, there may not be competition. Changing or reinsourcing may be architecturally difficult and require transition capital, and larger organizations may require multiyear contracts and minor customizations that change the service from cloud computing back to traditional ITO. Today, switching cloud vendors is difficult and obstacle-laden because of a lack of standards. Although standards will emerge in the long term, in the mean time, the marketplace has responded with increasing the number of cloud brokers that can...