Cloud financials as a catalyst for business culture upheaval

Summary:While cloud implementations continue at pace, the promised revolution that would change internal financial structures involving IT have yet to appear, because businesses are not ready for it.

Chargeback and proper pay-per-use computing, long touted as one of the benefits of as-a-service models, has failed to revolutionise the way IT departments engage with their fellow business units thus far.

Despite an ability to use the chargeback process that has existed for some time, companies have failed to take advantage of it, and, according to one study, it looks set to be left on the back burner for some time yet.

That study, a piece of research conducted by Forrester Consulting and commissioned by datacentre provider Equinix, entitled Enabling The Virtual Data Center in Asia, revealed that the financial benefits of as-a-service computing were rated the lowest in a survey of 112 IT decision makers conducted across four countries.

Pay-per-use chargebacks rated the lowest to the question of how important capabilities are to business improvements, and being able to shift procurement budgets from capital expenditure (capex) to operational expenditure (opex) came in second last.

While the much-hyped financial benefits of cloud computing brought up the rear, topping the survey was having a service level agreement of 99 percent or higher uptime, and being able to virtualise a datacentre's resources.

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The research points out that the financial benefits of cloud are often the most difficult to implement due to internal organisational resistance, and have a longer life before they are able to provide sufficient return on investment.

In fact, the research says that programs to reduce IT expenditures within the organisation are second last, with only initiatives designed to move spending from capex to opex proving to be less important.

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To the extent that a change to financial models from cloud deployments is on the radar of CIOs and other IT decision makers, Forrester Research vice president and research director Michael Barnes told ZDNet that it is something viewed favourably by organisations and CIOs, but the question quickly turns to when it is feasible to implement, and how it fits into IT refresh cycles.

"Organisations don't move quite that quickly in terms of shifting how they finance and how they procure technology," he said. "From that standpoint, it's viewed as one of those cloud principles that is a good thing, but it's not something that is going to drive decisions today, in the next quarter, or even in the next few quarters."

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It's a view supported by Chalan Aras, Citrix vice president and general manager of CloudBridge product group, who says that moving funds between capex and opex budgets can be a difficult process, depending on the financial structure of the organisation concerned. He says that simplification, user experience, and other practical benefits that can be gleaned from cloud deployments matter more to decision makers.

"Simplification [matters], far more. Financial structure doesn't matter so much," he said.

"Say we have this large capex budget, and then you have all these opex offerings, what do you do? You can't convert from one to the other after you've already presented a certain capital structure to your shareholders.

"So that's one of the pushback reasons.

"The other one is that, if it's equivalent, capex is actually easier because you already have a budget for that. You present opex results differently, so some companies actually prefer a capex-type structure."

Aras pointed out that the more global an entity is, the more likely it is to move to an opex model.

"They can provide consistent service across all their locations without having to make sure there is a skills uniformity across their overall operational base of their own company," he said.

"Opex simplifies it; you pay for it once, it's then upon the service provider to deliver that across the world."

Given that there can be such cultural and structural impediments to rolling out chargebacks and moving to opex in some companies, are the vendors that pushed these benefits to prospective consumers somewhat disconnected from the realities seen in enterprises? Michael Barnes thinks cloud vendors have made some missteps in their offerings.

"I think many cloud providers have overestimated the perceived value of two things: Not only the financials, the shift from capex to opex over the near term, but also the importance and perceived value of pay per use and chargeback, and enabling that within the organisation.

"It's not like this has anything necessarily to do with cloud, per se," he said.

"Folks have been trying to improve their ability to monitor usage and do some type of chargeback facility for decades — it's not new."

Barnes said that as all of the traditional issues preventing chargeback still apply to as-a-service deployments, it's not a case of technical concerns getting in the way of monetary concerns.

"Folks have been trying to improve their ability to monitor usage and do some type of chargeback facility for decades — it's not new."

"A lot of what we are talking about is organisational issues, and different business units who have different financial incentives, and in many cases don't necessarily want full transparency of usage, and don't necessarily want to pay for what they're actually leveraging, because they may be benefiting from the status quo.

"You have all that organisational inertia and politics that come into play when you are dealing with things like chargeback."

The cloud is able to provide a circuit breaker for businesses looking to move toward a pay-per-use model, especially for organisations that are augmenting their existing infrastructure with a public cloud service.

"Organisations that are sourcing public cloud services are taking full advantage, because that is net new capabilities and capacity, it's things they weren't doing previously, so they are using that as a way to get comfortable with the notion," said Barnes.

"But I'm not seeing any large IT shops evolving towards a private cloud internally who are becoming effective cloud providers to their organisation, with that implying full chargeback capabilities."

But does an organisation need to make the jump from traditional IT to a full pay-per-use chargeback model? Duncan Bennet, VMware vice-president and managing director for Australia and New Zealand, said that IT is able to start down a path toward a chargeback model by calculating the costs incurred by business units and presenting those costs to IT's internal customers without any movement of money taking place. It's a process known as "showback".

"Some customers are doing chargeback, but showback allows them to have a discussion," Bennet said.

"IT needs to be able to show what they are doing, show who is consuming — we are moving to a consumption model, and like all of these things, it is a journey."

One company that has made the journey is Orica, a multinational chemical and explosives company headquartered in Melbourne that has implemented a chargeback system across its Australian business, and is looking to take the system worldwide in the near future.

Orica's global IT infrastructure and operations manager Hubert van Dalen told ZDNet that to implement a chargeback system, four stages are needed to effectively roll it out.

van Dalen's first stage is transparency, where business units want to know what they've spent their IT money on, which is something that can be achieved with showback.

"The second thing is that they mind paying for IT, as long as they only have to pay for the part that they use — which you can still achieve with showback," he said.

The third stage is allowing the business units to influence the cost that they are being changed. In this situation, the business units are able to see the effects of ramping up or ramping down their IT spend on their final bill.

"That you cannot really achieve with showback, you need to do an actual chargeback, otherwise you might get cost subsidisation," van Dalen said.

That final stage of van Dalen's technique is enabling the ability for business units to conduct "What if?" scenarios on their future IT spend.

Although chargeback is aimed at business units, van Dalen sees value in taking some of the approach to individual workers.

"The end user, they will get a bill every month for their personal usage, like mobile phone, personal phone, and PC costs, etc, to make them aware of the cost that they generate," he said.

"And it affects behaviour, and that is what we want to achieve as our ultimate goal, to make sure that people stay cost conscious."

In a previous role at NXP Semiconductors, a spin-off from Dutch Electronics giant Philips, van Dalen said he was able to implement a chargeback system across 40 countries.

"We had one billing engine, and we had one single chart of accounts in SAP. We linked it together, and we did a chargeout of €200 million a year with one person.

"So it does work, we can implement it."

The success demonstrated by van Dalen is still more the exception, rather than the rule. IT decision makers are choosing to take the pragmatic gains that are on offer in the realms of business continuity, disaster recovery, service levels, responsiveness, or increased rollout capabilities. It's something that doesn't surprise Michael Barnes.

"Whereas things like a shift to an opex model, or the shift towards a true pay-per-use chargeback, those are just longer-term goals because frankly they are more ambitious — and I think they are more potentially disruptive to the status quo."

"It's natural that they are going to start in the areas that have the biggest pain or the biggest potential value," he said. "Those are a lot more tangible, and typically, for organisations, a lot more quantifiable.

"Whereas things like a shift to an opex model, or the shift towards a true pay-per-use chargeback, those are just longer-term goals because frankly they are more ambitious — and I think they are more potentially disruptive to the status quo."

Barnes said that a cultural shake-up is needed to get a proper and true chargeback system off the ground, and the resistance is often seen in the chief financial officer of an organisation.

"One of the things mentioned to me is the internal concern and struggle with the procurement folks and the finance folks who are used to well-defined budgets, IT budgets, maybe it's not the most efficient way, but at least they know what it is.

"When you move towards a pay-per-use model, you're introducing a level of uncertainty, and potentially significant fluctuations month to month.

"Now, ultimately, it should be a net positive because you are spending less, but at the same time, it introduces some uncertainty, which people don't like."

From an industry point of view, Eric Hui, director of cloud, IT, and enterprise at Equinix Asia Pacific, said it will take time to see organisations embrace the financial change catalysts that the cloud is offering.

"We are talking about business transformation in cloud," Hui said.

"Transformation takes time to see the effectiveness and efficiencies behind it."

Having been through the experience once, and doing it again for Orica, van Dalen said that the chargeback process is worthwhile, because it has the ability to change the perception of IT as a cost centre for the business.

"The perception has changed," he said.

"First of all, they know how they can reach IT, which is a simple win. The second is to become more of a strategic partner, where new developments are not just rolled out by a single business unit, but are treated like a truly global platform.

"So we brought more business applications to the cloud, and the way we managed that, as IT, was by being the broker, by being the go-to person for operational issues and doing the billing. That has really changed their perception — they still might like to go out and shop themselves, but they understand that there is a critical broker in the middle, and that role we are fulfilling.

"We have the capabilities to manage our processes."

Being able to change the stereotype of IT from being a cost centre to a proper business partner looks to be a revolution worth waiting for.

Topics: Cloud, CXO

About

Chris started his journalistic adventure in 2006 as the Editor of Builder AU after originally joining CBS as a programmer. After a Canadian sojourn, he returned in 2011 as the Editor of TechRepublic Australia, and is now the Australian Editor of ZDNet.

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