Cloud offers shelter from financial storm

Despite the current gloomy economic climate, companies still need to get real work done. For information and knowledge management workers, this means rolling out collaboration platforms – particularly as companies look to freeze or cut travel budgets.

But in tough times, finance chiefs may not be too keen to release funds for an on-premises solution. This is a scenario in which cloud-based collaboration becomes an attractive option; it offers a cashflow-friendly alternative to on-premises installations for projects including email overhauls, wiki workspaces and web conferencing.

The option of obtaining services from a provider on a pay-as-you-go basis rather than spending upfront is something most chief financial officers (CFO) are very comfortable with – there’s nothing new about buying services. What’s new here is that cloud computing offers a delivery and financing alternative to one of the bastions of corporate capital expenditures IT.

To a CFO, IT capacity or an application purchased from a cloud-based service provider is an operating expense (opex) that can be scaled up to meet a rising business need, or turned off when the need no longer exists. The same solution hosted in the corporate data centre is a so-called sunk cost that includes a capital expenditure (capex) that must be carried on the balance as an asset that loses value as it depreciates.

A venture capitalist acquaintance of mine nailed it when he said: “I don’t invest in servers.” By using a cloud computing service to deliver applications, this investor reckons he will get his startup to market in 18 months for $5m rather than in three years for $15m.

While cloud computing is not yet ready for many enterprise IT needs, cloud-based collaboration services are a viable option for most firms today. And Forrester believes that cloud-based application services will become increasingly important as the providers mature.

Here are some of the benefits your finance chief will understand about cloud collaboration:

Better cashflow. The biggest financial benefit of cloud computing, particularly in these capital-constrained times, is that it enables businesses to avoid taking on debt and to keep cash in the company longer. When a project uses a cloud-based service provider, the finance chief does not have to write a big cheque upfront. Instead, cheques are written monthly or quarterly in alignment with the return.

Lower financial risk. A cloud-based solution means that you pay for only what you use, and you can terminate the contract. In contrast, on-premises solutions mean spending money upfront for hardware and software with an uncertain payoff. And that means more financial risk. After all, what if the benefits don’t materialise? Too bad, the money’s been spent.

Greater financial visibility. A cloud-based service provider can tell you how much it will cost to add a user or process another transaction. That visibility is a comfort to a CFO who has to keep track of where the money is going. In most situations, IT is hard-pressed to deliver that same kind of financial transparency.

Healthier return on assets. One of the advantages of cloud computing’s pay-as-you-go model is that the cost is incurred in the same period that the value is delivered. For CFOs, this means that the balance sheet doesn’t carry an ever-depreciating capital asset of hardware and software that lowers the important financial metric of return on assets.

Ted Schadler is a principal analyst at Forrester Research. Please visit www.forrester.com/computinguk for several complimentary reports made available to Computing readers by Forrester Research.