Cloud services overview: Pursuing a new business model
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Recent research suggests organizations continue to push decisively to the cloud. Survey results released last week by Insight Enterprises, a hardware, software, cloud and service provider based in Tempe, Ariz., revealed that more than 80% of organizations plan to invest in cloud services in 2016. Large and medium-sized organizations are poised to be the biggest adopters, but 72% of small companies are also ready to invest in cloud technology. The Insight-commissioned research is based on a survey of 403 IT professionals. But while adoption continues, many organizations lack a coherent cloud governance framework and financial management strategy for successful deployment. The result is cost overruns, which undercut the cloud's reputation as being less expensive than on-premises technology.
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In addition, enterprises watching the earnings before interest, taxes, depreciation and amortization (EBITDA) line may balk at cloud adoption because it contributes to operational costs. The ability to treat IT as an operational versus a capital expense has been frequently cited as an important plus for cloud computing.
Against this backdrop, managed service providers and other IT services firms operating in the cloud space are adjusting their thinking on cloud and offering services that address their customers' evolving needs.
Wanted: A cloud governance framework
A recent report from Softchoice, an MSP and IT services provider based in Toronto, found that 52% of the line-of-business and IT decision-makers it surveyed didn't have a formalized cloud strategy. The survey polled 500 respondents in the U.S. and Canada. In addition, 42% of IT teams lacked tools and processes to manage the new procurement model.
The lack of strategic focus has implications downstream. Softchoice reported that 44% of its survey respondents "struggle to hold the line of business accountable for cloud spending," while 57% of the participants said they have overshot cloud budgets in the past.
Craig McQueen, director of Softchoice's Microsoft Practice, pointed to the cloud governance framework shortcomings as among the most eye-catching survey results.
"People are moving to the cloud and they haven't really been considering how they need to manage that from a financial point of view," he said. "They need to change the way they think about budgeting and how they allocate the cost of the cloud to different business units."
Part of the problem, McQueen said, is that organizations may lack a financial model and associated reporting tools that show what business units or projects use which resources in the cloud. The lack of visibility impedes forecasting, so companies may well exceed their cloud budgets. And the absence of cloud governance means virtually anyone can provision cloud services, which can lead to unexpected expenses.
Jason Anderson, chief architect at Datalink, an IT services provider based in Eden Prairie, Minn., has observed similar patterns among his company's clients.
"With our customers … there is a continued interest in leveraging cloud resources, but a lot of incumbent IT organizations are finding it very challenging to adapt their process to be able to leverage the cloud," he said.
Anderson cited organizational structure and process as the biggest impediments in the path of successfully taking advantage of cloud computing.
He said IT organizations understand the advantages of the cloud -- greater agility and the ability to rent vs. buy infrastructure, for example. But they still find it difficult to "break out of the inertia" of existing ways of delivering IT services to the business, he added.
Craig McQueendirector of Softchoice's Microsoft practice
Ownership of IT resources is another issue, according to Anderson. Conventional IT organizations are accustomed to assigning compute, networking and storage responsibilities to different individuals within the IT shop. Do those same people own responsibility for the cloud-based versions of those resources? Who within the IT department will step up to the task of architecting and designing applications to run in the cloud?
Ownership of budgets can also prove ambiguous. Anderson noted that companies in the cloud are buying consumption instead of hardware. That difference complicates the cost allocation model and who is on the hook for paying.
"It can be a lot of little things that end up to a very large barrier," Anderson said of process and organizational issues.
The piecemeal way in which some organizations acquire cloud technology can also contribute to cloud governance framwork problems. Alex Miller, a business analyst covering cloud at Clutch, a market research firm based in Washington, D.C., said cloud newcomers tend to adopt the technology for a single, specific use rather than implement its full capabilities.
"As cloud resources blanket business units, usage rises and it becomes unclear which individual unit is responsible for the costs," he said. "When fully embraced, the cloud should be seen as an organization-wide tool, rather than a unit-by-unit resource."
Coming to terms with Opex
Also on the financial side, the cloud's Opex orientation isn't always a cost slam dunk. While the conventional view on cloud is that companies benefit from avoiding the upfront costs of on-premises technology, not every company is enamored of hiking Opex instead.
Companies concerned with EBITDA, or those compensating employees for keeping Opex down, may face barriers when it comes to cloud adoption, McQueen noted. He said he has seen companies slow down cloud adoption over EBITDA concerns.
"Anything that bumps up operational expenses is going to make that line suffer a bit," he said.
Anderson said the macroeconomic environment can push the pendulum back and forth on whether organizations prefer Opex or Capex. He cited the example of one customer that had a significant preference for Opex and started leveraging the public cloud. But that thinking eventually changed. The company's board of directors, under pressure from investors, determined a significant increase in its dividend to stockholders was in order. The resulting pressure on cash flow changed the IT department's mindset on the types of investments it could get approved. Opex became constricted and Capex was viewed more favorably.
That swing, Anderson said, completely changed how the company looked at two major initiatives: an ERP refresh and a new point-of-sale application. Those projects were likely headed for the cloud, but will now be deployed as on-premises systems, Anderson explained.
So, while some companies are already sold on the benefits of Opex, others may have to undergo a cultural shift to overcome their concerns. Any company in the cloud, however, will need to deal with the prospect of higher Opex spending.
"Organizations that understand the incredible benefits of the cloud must come to terms with a heavier Opex strategy," Miller said.
He noted the cloud may be worrisome to enterprises with a short-term financial perspective, since "operating expenses are almost certainly going to increase through migration."
But Miller believes this type of analysis runs into problems over the long haul. A strategy favoring legacy platforms will involve high capital expense and also incur operational expenses. The combination will result in a significantly higher total cost of ownership, year-over-year, compared with a cloud approach, he added.
The Softchoice report, meanwhile, suggests that the lack of an overarching cloud strategy makes the Capex-to-Opex transition more difficult. Sixty-four percent of the IT leaders who lacked a cloud strategy said they were struggling to move from Capex to Opex, while 32% of the IT leaders with a cloud strategy reported that shift as a problem area.
Even organizations highly motivated to move to the cloud face hurdles. The key obstacle for such companies may be the last mile to the cloud: the task of cloud migration. David Mayer, vice president of product management-software at Insight Enterprises, cited the example of smaller businesses.
"There is a very strong desire for the future state," Mayer said of small companies. "They want to get to the cloud, but … the process is arduous and, in many cases, not cheap. It's a big investment for a small business."
Small businesses lack the budget and resources of larger enterprises, so the task becomes bringing down the cost of cloud entry, Mayer explained.
Insight Enterprises offers a migration service, maintaining a centralized migration team in Plano, Texas. He said interest in the service is growing among a wider range of customers.
"We see the consumption of that [migration service] going further and further down market."
Service providers also emphasize offerings that help prepare customers for the cloud. At Datalink, Anderson said one of the company's major initiatives is its cloud enablement practice. The practice offers services to help customers align their decision making, budgeting and organizational process "around being able to leverage public cloud resources," he said.
For example, Datalink helps clients put together decision-making trees to determine which apps should remain on premises and which should go to the cloud. It also helps clients make the call on which cloud service to use based on such factors as vertical market presence and regulatory requirements.
Softchoice, meanwhile, offers a cloud governance workshop that assists customers in need of a strategy. McQueen said the workshop helps clients establish a cloud governance framework so stakeholders understand who is allowed to provision cloud resources, what security measures will be used and how the organization will track the consumption of cloud resources.
In another response to a shifting market, McQueen said Softchoice is now thinking about cloud maturity differently. In the past, cloud maturity was measured with respect to how many in-house applications a customer transitioned to the cloud. Softchoice's research data, however, has highlighted another way to assess maturity: How much has a customer changed its governance and budgeting to accommodate the cloud?
Today, Softchoice draws out this distinction -- the two axes of cloud maturity -- when it works with customers.
"We now ask questions along both dimensions so we can best counsel them on what they should do next," McQueen said.
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