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Thinking About the Cloud? Don’t Forget These Financial Considerations

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by John Cawyer

Much is made of the importance of Cloud Computing, the endless options for what can be sourced to the Cloud, and the vast dollars that can be saved by moving services to the Cloud. But very little is said about what consideration should be given to specific financial structures and terms of a Cloud-based services agreement.

Here are the TPI Top 5 financial considerations not to be overlooked when making Cloud-related decisions:

1.  Current contractual agreements should include commercial terms and pricing considerations to enable easy migration to the Cloud without financial penalty. Update termination language to include termination assistance for moving workloads or applications to Cloud-based solutions.

2.  Don’t expect the same terms and deal structures that you get in your existing hosting or outsourcing agreements. There are three distinct camps in the current Cloud space:

•   Traditional service providers supplying Cloud services (IBM, HPES, CSC, etc.)

•   New providers specializing in Infrastructure as a Service (Rackspace, Navisite, Terramark, SFDC, Workday, and hundreds of other Software as a Service companies and their acquiring companies)

•   Traditional consumer companies rapidly evolving in the enterprise space (Microsoft, Google, Amazon, etc.).  Each of these firms is coming from differing backgrounds and experiences and has different contractual terms and pricing models based on their unique legacy experiences.

3.  Costs shift from capital expense (CAPEX) to operating expense (OPEX). You no longer own the software and hardware, so asset depreciation is removed from the book.  This is great news for companies trying to reduce CAPEX, but it requires better forecast and demand planning to ensure proper allocation of OPEX budgets.

4.  Expect greater transparency but more inconsistency in Cloud pricing. There tends to be different pricing structures based on whether Cloud is public, private or a hybrid.  Provider A may charge by processors reserved while Provider B charges by the CPU hour.  New total cost of ownership (TCO) calculators (examples below) and provider models are lending better insight into specific components of pricing, but be aware that these calculators only provide certain components of the pricing and that additional costs are likely.

•    CloudSizer.com (IDEAS International)
•    Microsoft Azure Pricing Calculator
•    Gogrid.com
•    Amazon Elastic Compute Cloud (Amazon EC2)

5.  The TCO, not just the base services price, needs to be fully understood when moving to Cloud solutions. While there can be great detail to the pricing, analysis of Cloud Computing models will usually be more difficult than legacy business case analysis. Whether produced from a vendor TCO calculator or not, the initial provider pricing will likely not include all expenses that will be incurred. Examples of costs frequently not included in Cloud solutions are:

•    Internal Level 1 service desk and technical resources to interface with the provider’s Level 2 desk
•    Migration costs to the Cloud
•    Additional network bandwidth (data transfer rates in and out)
•    Remaining book value of stranded assets and software
•    Remaining amortization of applications
•    Additional staff to manage new contracts
•    Cost of fulfilling minimum volume commitments in current contracts
•    Costs of partial termination of existing contracts

TPI Financial Analysis experts can help you make the most informed strategic move to the Cloud through objective advice, knowledge of your industry and experience with arrangements from simple to complex. For more information, contact John Cawyer, Director, TPI, at +1 972 342 1993 or john.cawyer@tpi.net.

About the author

John Cawyer, a director in ISG’s advisory organization, has over 25 years of experience in the Information Technology industry as both a supplier and an advisor, including 15 years with TPI/ISG. His strong analytical, communication and evaluation skills produce quick understandings of his clients’ needs and effective direction and recommendations. John offers expertise in all aspects of the sourcing evaluation lifecycle ranging from front-end internal cost analysis, strategy and assessments, contract structuring and negotiation, service transition management, contract financial management, and contract restructuring and renegotiations, John has assisted over 40 global and regional clients spanning across North America, Europe, Middle East, Asia Pacific and Latin America. Industries have included financial services, retail, commercial goods & services, manufacturing, telecommunications, energy and travel.