What the CFO Needs to Know: Cloud Computing

▲ Cloud computing, the remote hosting of applications on virtual platforms for on-demand, Web-based delivery, is on the fast track. Analysts estimate that during the next six years, 90% of new spending on Internet and communications technologies will be on cloud-based technologies.

Cloud computing (which at its simplest means storing and accessing data and programs on the Internet — the cloud — instead of a personal computer) is profoundly impacting how IT professionals implement, deploy and manage technology solutions. It’s also having a dramatic effect on the cost, payment structure and business strategies associated with IT rollouts.

The cloud increases cost visibility: Cloud computing substantially increases the cost visibility of IT deployments.

“The cloud is here to stay,” said Chicago-based Christian Hagen, a partner in the strategic IT management practice of global management consulting firm A.T. Kearney. “It gives improved visibility of your true IT consumption and costs. Traditional implementations give you a ‘peanut butter’ spread of costs where you don’t get to understand the true drivers.”

Hagen added that in terms of capitalization, cloud-based services differ from traditional IT implementations in that they are mostly accounted for on the expense side.

Implementation is easier, which can also cause problems: Cloud systems are easier to implement than traditional IT systems since no internal hardware is usually required. As a result, the IT department is often much less involved or even bypassed entirely in systems selection and implementation, with individual end users able to pilot and roll out turnkey cloud-based solutions on their own. This easier implementation process also decreases upfront IT costs. However, Hagen cautioned CIOs that cloud rollouts need to be carefully monitored.

“Software as a service (SaaS) providers will often go right to the end users,” Hagen said. “It sounds good and you save time, but you can wind up with shadow systems that haven’t gone through appropriate IT procedures and end up with a fragmented application architecture. Introduction of new applications should be managed by both the CIO and CFO.”

The flexible and quickly deployable nature of cloud computing also makes the cloud an ideal environment for testing and development of IT systems, even if companies plan to later deploy those systems in-house.

Different models have different cost structures: Not all cloud deployments are created alike. There are three basic models of cloud systems implementations: public, private and hybrid. Public deployments take place on shared clouds where multiple clients use a single platform, while private deployments take place on a dedicated platform used by a single client, and hybrid deployments use both public and private clouds for different solutions.

Hagen estimated that roughly 25% to 50% of traditional infrastructure costs are eliminated through a cloud deployment. In general, public cloud hosting is cheaper upfront than private cloud hosting, with hybrid rollouts costing somewhere in between. Hagen explained the benefits of each model.

“Public clouds have very targeted uses, such as development and testing environments where protecting the data is not as important,” Hagen said. “Private clouds have a more secure, sophisticated architecture. Hybrid clouds use both the public and private models, with companies selecting each model for various processes.”

Amazon Web Services, Microsoft’s Azure and Google’s Compute Engine rank among the largest public clouds.

You pay for what you use: Generally speaking, cloud deployments use a flexible “pay as you go” model. Users pay for the amount of virtual services that are delivered and/or the amount of virtual server space they require.

The flexible nature of cloud infrastructure means that cloud-based IT deployments can be scaled up and down according to changes in the user’s needs, with corresponding cost adjustments. Private clouds generally offer the most usage and cost flexibility.

“The private cloud infrastructure offers a better match between supply and demand,” Hagen said. “You only get charged for the IT you use.”

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