Theo Lynn and Pierangelo Rosati explain the important role Chartered Accountants can play in helping organisations build the business case for the cloud.
We are in the throes of a major transition. Social media, big data, mobile and connected devices are driving business and society to an internet-of-everything where everyone and everything is increasingly connected. And at the centre of all of this is cloud computing.
Every day, billions of people and millions of businesses use cloud computing and there is a headlong rush for greater adoption. The accounting sector is no different. Accountancy firms and their clients are adopting cloud technologies to complement and substitute existing IT investments to achieve cost savings, greater flexibility or other benefits. IT, whether hardware or software, is a core part of nearly all businesses and for many is a significant investment. It is, therefore, all the more surprising that many businesses do not conduct a thorough cost benefit analysis before making the decision to adopt cloud computing or seek to measure whether they are achieving the full potential of their investment post-implementation.
For many, cloud computing is simply a fog and calculating return-on-investment can seem more time consuming and difficult than its worth. Accountants can play a role in helping firms build the business case for the cloud and help ensure that they realise the full potential of their investments.
Dispelling the fog of the cloud
The Irish love talking property. Accountants may not understand the minutiae of IT but they understand property. Cloud computing is like deciding whether to build or rent premises. It can be as simple as that. If you decide to open a new accountancy office, you might consider building it. You have to find somewhere to locate it and decide what size the building will be – how big will your firm grow or scale up to? You don’t want to run out of space. You will have an architect designing the building for your existing and future needs, and ultimately you will be responsible for all those design decisions including fitting out the property. You will also be responsible for utilities, security and maintenance of the entire building.
In the case of disaster, you will need to have back-up plan. More critically, you are responsible for the upfront capital expenditure as well as the operating costs for the building. And if you decide to sell, you may or may not make a profit but until you do, your money is tied up in that property.
Now when you rent, you share the property with other tenants and the landlord is responsible for the architecture and maintenance of the building. The landlord is also largely responsible for making sure the power and utilities are connected, for the security into the building and possibly for your offices. You decide on how much space you need and if you need more, you can negotiate with the landlord to scale up or down as your business changes. You pay a monthly rent but you can leave when you want.
Cloud computing is the IT equivalent of the rental sector. It is an on-demand, multi-tenant, utility-based computing model. You are outsourcing IT infrastructure to cloud service providers whose core competence is building, maintaining and securing IT infrastructure, whether it is hardware or software, so that you can focus on your core competence.
Building the case for the cloud
The benefits of the cloud are well documented. Figure 1 divides these in to four main categories: cost reduction, revenue growth, competitive necessity and reliability. These categories can drive operational efficiencies or strategic competitive differentiation, depending on the centrality of IT to a given business. The issue is not identifying the benefits of the cloud but rather, measuring these benefits in such a way that allows comparison with the status quo and alternatives. Based on our experience and anecdotal evidence, the knowledge and ability to measure the wide range of costs and benefits, tangible and intangible, to justify an investment in cloud computing is neither common nor used widely to assess the efficacy of cloud investments a priori.
Furthermore, when such an assessment is undertaken, it is not done in a comprehensive and robust way.
Measuring the measurable and making measurable what is not so
Accountants have historically played a critical role in mapping the value consumed or created within organisations. Migrating to the cloud typically requires significant resources in terms of investment, time and effort. Therefore, the decision to adopt cloud computing should be based on a careful assessment of the value it can create. This involves an in-depth recording of current and estimated costs and benefits for both current and future scenarios using comparable measures.
Building a case for cloud computing adoption requires a clear understanding of what to measure, over what time horizon, and how. Total cost of ownership (TCO) and of return on investment (ROI) are well-established management accounting concepts for evaluating IT investments. The full range of costs (i.e. tangible and intangible) needs to be considered along the entire investment lifecycle (i.e. from adoption to termination). Cost components vary by organisation context (e.g. size, sector, etc.), cloud service (e.g. infrastructure-as-a-service, platform-as-a-service, software-as-a-service, etc.) and deployment models (e.g. public, private, community or hybrid clouds). It is therefore important to tailor calculation methodologies to the specific business case. In a cloud environment, IT operational costs are based on consumption. As long as the consumption of IT resources is predictable, these costs can easily be estimated. Cloud service billing, by the nature of the cloud business model, allows for greater transparency on consumption at levels of granularity and frequency that simply is not provided by conventional IT departments.
Estimation time frames may vary across industries and sectors but ideally, it should be long enough to recover the initial investment and to fully exploit the potential benefits the investments generates, but short enough to provide reliable and realistic estimations. Three, five, 10 years; it is hard to tell what is the best option. Business-specific knowledge should inform this decision.
As discussed, costs are only one side of the story and from a calculation perspective, probably the easier side – thus the popularity of TCO in the wider cloud community. However, if you view IT as a strategic driver of business growth, then ROI is a much more nuanced measure. In addition to accurate cost estimation over time, it requires significant time and effort to understand and measure both tangible and intangible benefits, both upfront and on an ongoing basis. Identifying and agreeing measures for benefits, and especially intangible benefits, that can be represented in monetary values requires the specialist knowledge and expertise that accountants have.
ROI helps organisations not only to build the business case for cloud computing, but allows management to evaluate the investment against expectations and take corrective action. ROI is not just a destination, it’s a way of life.
The accountant as cloud sense-maker
Accountants have the opportunity to play an important role in the IT modernisation of business. As a trusted advisor, they can act as a sensemaker – operating between the IT department and the wider executive team to help management define, collect, interpret and communicate data on the costs and benefits of cloud computing before, during and after migration.
If effective measurement is a prerequisite of effective management, then effective use of cloud computing mandates more effective performance measurement against strategic and tactical key performance indicators. This is a critical role accountants can take in the headlong rush towards digital transformation.
Theo Lynn is Professor of Digital Business at DCU and Principal Investigator at the Irish Centre for Cloud Computing and Commerce.
Pierangelo Rosati is a post-doctoral researcher at The Irish Centre for Cloud Computing and Commerce.
This article was originally published in the February 2018 issue of Accountancy Ireland.