BlogManaging the Disruptions Cloud Is Creating for the IT Business Model

Managing the Disruptions Cloud Is Creating for the IT Business Model

april 25, 2019, Communications Lifecycle Management

By Larry Foster

Last week, we attended the 32nd annual Financial World of Information Technology ITFMA conference in New Orleans. This year, organizations openly discussed the challenges they are facing due to the rapidly growing reliance on cloud services.

Cloud services now encompass the full range of IT operations, and learning how to manage them is crucial for success. In this blog, we’ll summarize challenges that organizations are facing and share our key takeaway from this year’s event.

Organizations Share Their Cloud Concerns
All the organizations who participated in this year’s conference are at some stage of deploying cloud services. This was a stark contrast to a few years ago, when discussion around cloud services was still in its infancy. The rapid rise of cloud adoption has brought new challenges, which organizations are now openly facing and discussing.

Just what are these challenges? Many revolve around the fact that cloud services can be activated, changed, or decommissioned on-demand by anyone in the business without centralized coordination. Many attendees also feel they are not realizing the value from free management tools offered by leading cloud service providers.

Specific examples discussed the inability to glean sufficient actionable information from a supplier’s invoice, inconsistencies in terminology across cloud suppliers, and the lack of appropriate governance for tagging labels and values.

#1 Takeaway: The Need for Accurate Financial Modeling for Cloud Services
A universal concern among attendees is the need to develop an accurate, universal financial model for cloud expenses. Cloud services provide a number of challenges to traditional financial modeling:

  • There is a spectrum of dynamic recurring, non-recurring, and usage-based metered expenses that are often only noticed when there are measurable charge increases in the provider’s next invoice, and after the newly-discovered service(s) are already supporting some facet of the business.
  • The details of a cloud supplier’s invoice can encompass hundreds of thousands to several million itemized charges, and can quickly overwhelm the capabilities of a spreadsheet. This forces organizations to rely on macro trend models of top-line charges to benchmark financial performance.
  • The billing increments for metered cloud services can vary from per second to per minute, per hour and day. Each billing increment represents a different potential cost liability to mitigate, as well as an opportunity to reduce expenses. The variability in billing increments adds additional complexity to developing appropriate financial models.

Why Traditional Financial Modeling Doesn’t Work for Cloud Services
ITFMA professionals are tasked with the responsibility to help organizations maximize their technology investments. Their primary purpose is to develop accurate accounting that helps business stakeholders make better decisions with that information. To do this correctly requires accurate modeling and accountability of the details. The nature of cloud services makes this task a little more difficult.

The traditional methods of accrual cost accounting are designed to support capital purchases. In the traditional framework, most of the details for modeling cost accountability and amortization are completed prior to procurement and remain static throughout the entire lifecycle. Traditional financial modeling is typically a well-structured and drawn-out process completed over a period of weeks, with appropriate collaboration and approval from financial managers who represent all relevant business units.

But as cloud adoption continues to gain momentum, ITFMA professionals are realizing they need to embrace new automated methods and governance workflows in order to manage activity and costs, so stakeholders can make effective decisions in a timelier manner. Cost accountability and reduction decisions can’t be made without the contextual understanding of the business purpose, operating requirements, and interdependencies of each cloud service.

The Challenge of Usage Time-Based Billing
With cloud services, expenses accumulate while a service is active. Most of the metered charges are measured in fractions of a penny per billing increment (e.g. $0.0045 per GB). Unlike traditional capitalized assets, the complete lifecycle of an ephemeral-based cloud service may measure in days, not years. It is not uncommon for many cloud services to be activated and decommissioned within a single billing cycle, only to reappear in subsequent billing cycles.

Unfortunately, the person activating the service often doesn’t consider the fact that billing increments are continuous 24×7 until all the related services are properly decommissioned. There are many instances when cloud services are only required to be active during normal business hours. The multi-faceted challenges for cost accountability and benchmarking financial performance becomes extremely challenging when organizations don’t have an effective way to automatically associate the financial ownership of a service. In addition, the standard information provided on a cloud supplier’s invoice is insufficient to make effective actionable decisions to sustain or change the configuration of a service.

What Can Organizations Do?
Calero will be publishing several blogs throughout 2019 that will help organizations understand how they can maximize their cloud service investments by adopting proven best practices and automated workflows to manage accountability of cloud service expenses and enable cost center stakeholders to render effective decisions in a timely manner.

Be sure to subscribe to the blog to keep up-to-date with these articles and learn how to manage your cloud service expenses.