The CFO holds the key to a successful cloud migration
Tangent Solutons’ Niël Malan: Tech savvy CFOs are essential to a successful digital transformation.
Any company planning a journey into the cloud needs to first bridge the gap between its technology and accounting departments. The CIO and the CFO rarely understand each other’s worlds, and the company as a whole becomes the loser.
For example, if an organisation needs to replace its Wide Area Network, or upgrade its Wi-Fi, the responsibility typically falls under the scope of the CTO. If an organisation needs to perform an independent financial audit, that responsibility typically sits with the CFO. But how would these typical responsibility allocations change if the new product or service being considered is the result of radical innovation in an area which does not fall under the same area of responsibility?
This is precisely the case when it comes to cloud migration, which involves far more than the old debate about Capex versus Opex when investments in your own IT infrastructure are replaced by a pay-per-usage model, using infrastructure owned and maintained by a global hyperscale cloud provider.
The cloud provides benefits way beyond cost savings
The ability to scale up and down instantly in order to handle unexpected workloads and avoid losing business through a surge in demand is a major benefit of this platform. It also allows companies to become more agile and market-responsive by using the opportunity to redesign their processes and apps to be ‘cloud native’. The increased agility lets them create and launch new products and services more quickly, and use new cloud-based software to analyse their data more effectively.
A lesser-known benefit is the ability to eliminate costly database licensing fees by migrating their data to one of the purpose-built cloud-native databases. This can mean a significant saving, since database licence fees often cost millions of rands a year.
The cloud also enhances a company’s risk, compliance and disaster recovery profile, which are again operational rather than IT concerns. That combination of cost savings, increased agility and stronger governance should excite any CFO.
Old accounting models don’t apply to new technology
But the cloud also affects how companies manage their balance sheets, and many projects fail, stall or are never approved in the first place because the CFO resists the change to traditional accounting practices or simply isn’t aware of the overall business benefits and associated changes in accounting practices required.
It’s a two way street, however, and often the CIO is unaware of what guides financial decisions, leaving him or her unable to challenge the traditional notions of how technology should be paid for. Generally, the IT department is given Capex to invest in the infrastructure that supports the company. Said Capex must cover the cost of the equipment, long-term maintenance agreements and licensing to support it, hopefully with sufficient capacity to cope with peak demand periods.
Moving to the cloud eliminates all that. The IT department simply rents all the processing power, licenses and data storage it needs, scaling up and down as necessary and only paying for what is used. The cost thus moves from Capex to Opex, and frees up cash that would have been committed on infrastructure for value-adding projects elsewhere.
Yet the CFO rarely champions a cloud migration because accounting best practices favour capital investments, which are seen as enhancing the assets of the business, rather than increased running costs, which are viewed negatively.
If an IT team lacks sufficient Opex, accounting practices alone can scupper the organisation’s ability to benefit from the cloud’s numerous potential benefits. Some CIOs/CTOs work around this by paying upfront for a fixed amount of cloud services for a multi-year period, which qualifies as capex. But that defeats the whole point of being able to scale up and down as necessary.
What is required is an education process so a CFO can step back from ingrained best practices to scrutinise both the financial and operational benefits of the cloud. And in general, they’ll find it’s much better for the business financially, even though it rewrites the rule-books.
The funding around a cloud project must be resolved from the start, because the IT budget may increase initially. This could occur through R&D, rebuilding the apps to be cloud native, and training costs for employees. Yet increased costs in one area will be more than offset elsewhere, giving the organisation net savings.
Successful migration needs a multidisciplinary approach
A recent Forbes survey found that around 70 percent of digital transformation projects failed to reach their goals, largely due to a lack of cross-functional teams and little involvement from the finance department. The root cause of this gap comes from seeing innovations around the cloud, robotics and artificial intelligence as lying firmly in the CIO’s domain. Yet these are all business model innovations as much as IT innovations, and their potential impact on the business should be a key focus for the CFO.
Unfortunately, the disconnect between the IT and accounting departments has defeated or diluted the impact of cloud adoption in many organisations. Without the financial team supporting and championing these future-facing trends, the promised benefits are rarely achieved. Companies that have successfully become ‘digital first’ operations have achieved it because the innovations have been supported, or even driven by, the business and financial leaders, not the techies. Reaping the rich business benefits depends on the CFO becoming more technology-literate.
The best approach is to create a multidisciplinary centre of excellence within any organisation that wants to start a cloud adoption or migration. That can begin with an education session led by experts in the field, to help a business adopt the cloud in the optimal way. Without that guidance, the tendency is to try to squeeze cloud services into the existing business without changing any of the rules.
Once the ground has been laid for a shift in mindset and accounting practices, the company can undergo a cloud readiness assessment and follow a cloud adoption framework to successfully launch and manage this business-changing journey.