Financial perspectives on cloud decision-making

16th January 2013

You need financial insights and expertise if you want to get the timing right when moving to the cloud, reports FSN writer Lesley Meall, even if you are considering economic concepts such as opportunity cost.

 

 

 

Discussions about the benefits of using public cloud software and services often focus on scalability, speed of deployment, and the cash flow implications of taking the ‘pay as you go’ approach (in its various guises). But whilst the decision to use cloud services can be made without the involvement of finance (and paid for from departmental/operational budgets) if organisations are to maximise the financial benefits of the cloud many of them will need to time their transition carefully – particularly if they need to consider existing investments in hardware, and maintenance contracts, or software licenses and the cost implications of switching to cloud. Start-ups may be able to leap straight into Infrastructure as a Service because they have no legacy investments to take account of, but for established entities the decision making process can be more complex. 

‘If you have a vanilla, Windows server-based infrastructure at the end of its useful life, then it’s an easy decision to move to the cloud,’ suggests John Milward, a director with the solutions provider Northdoor, ‘but if you have standard, vanilla, Intel hardware and you’ve only just bought it, it doesn’t make much sense to ditch it,’ and deciding when during the useful life of the equipment this does become economical is not always straightforward. ‘Professional judgement is key,’ says Brian Singleton-Green, corporate reporting manager with ICAEW (the Institute of Chartered Accountants), because whilst accounting standards set out what to consider to determine an asset’s useful life, there isn’t a specific requirement to say that the life of an asset has to be a certain number of years for the purposes of the accounts – though many businesses now adopt a rolling three-year write down policy. 

You may also need to consider economic concepts such as ‘opportunity cost’? ‘The question might be, do we spend $4,000 buying a server or do we host it externally, which costs $100 a month, freeing cash to deploy in other areas such as sales or product development,’ says Pratik Sampat, accountant and chief executive with Horizon Accounts. To properly assess the possibilities you also need a planned budget going forward over a sensible time frame, and for a going concern, some history to help gauge trends. But how do you put a price on the advantages associated with being able to access infrastructure, information and other resources at any time, from anywhere and exploit its elasticity by scaling up and down to meet your requirements? Cloud resources may come with a high total cost of ownership figure, but their short-term benefits may outweigh the long-term cost.

 

Clearly, equipment write down policies and opportunity cost are not the only thorny issues that can affect the timing of a transition into the cloud – for infrastructure, software, computing platforms and various other ‘as a service’ technologies. The many other issues that are crying out for consideration from a finance point of view range from maintenance costs and contracts, through software licenses and the associated obligations, to national tax laws, regulations and practices (in individual or multiple jurisdictions) that dictate how money spent on computer equipment and software and services must be treated in the preparation of statutory accounts, and in periodic returns for personal, corporate and indirect taxes such as value-added tax – and their relative significance is informed by all sorts of factors too. 

These include the type of cloud service being considered, organisational structure (operationally and financially), plus all of the software, hardware, infrastructure and managed services components in your existing technology architecture, and the financial implications of the cloud alternatives – and considering just tax hints at the complexities. ‘The tax implications can be thoroughly assessed only by breaking down the supply chain to identify the location of services provided and sourced, and isolate the component parts and transactions,’ says Deborah Green, tax partner, KPMG, and ‘it is important to strip back any underlying contracts to fully understand what may lie beneath,’ – which may even extend down into how much of a bill for a service is attributed to power consumption, where it was consumed and when. So maximising the benefits of a move into the cloud seems to demand financial insights. 

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