Monday, 29 March 2010

The importance of a Business Perspective on Cloud Computing

The following is a working extract a soon to be published paper for The Open Group for the CBA Project team.

The extract here covers the business value and the financial metrics of cloud. This and other aspects are planned to be in the Cloud ROI white paper to be published in The Open Group Rome in April 2010 Conference.

The importance of a Business Perspective of the Cloud

From a business perspective, the way an organization operates critical business processes and their quality of service QoS is key to business operating success. Identifying competitive business processes as well as standard commodity operations will improve the focus of innovative market growth and cost of service optimization activities made possible by cloud opportunities.

Just focusing on infrastructure improvements may result in cost rationalization but may miss the impact and value of applications and business processes to the end customer. Quality of Service QoS is an essential ingredient in evaluating the business effectiveness. The elements of QoS are made up of infrastructure, resources, activities and services spanning the whole life cycle of business.

In cloud computing the operating challenges experienced from one customer can be proactively fixed for all the other customers of the cloud service through using a shared platform. So value can be leveraged from amortizing economic economies of scale across the collective membership potential of a service ecosystem created by the cloud.

Just looking at cloud computing from a technical infrastructure point of view is potentially missing the wider picture of the impact of technology on the business.

Overall what matters is defining the Value to business. Value can be defined in many ways, not just financial value of the total cost of ownership and return on investment but can also mean customer value, seller provider value, broker value, market brand value, corporate value as well as technical value of the investment.

What is important is to take a portfolio management viewpoint such that all these value factors consider the impact and value to business.

The work of the CBA Project in The Open Group is seeking to identify the key cloud buyer questions and a Meta data lexicon that is in a language business can understand and use to target solutions to meet real business requirements.

In search of Cloud Business Value : Moving from Capex to Opex and Pay-as-you-go, a financial viewpoint

Software as a Service SaaS, utility computing and cloud computing are recent themes in information technology that seek to change the provisioning and utilization of IT.

Key to this is the change in cashflow and cost of capital investment.

Moving to a pay-as-you-go model means the cashflow of your business is changing. Sources of revenue and outgoing cash expenditure are on a usage basis. Cash flow (Cash Flow after Taxes CFAT) is a financial measure of a business ability to generate cash flow through its operations. Moving to an Opex model drives revenue increases, cash and working capital changes. Adopting the cloud computing paradigm seeks to make more money (increase revenues) while driving capital costs down through greater efficiencies of working capital. Net present value (NPV) of investments often need to consider the discounted cash flows of the cost of capital to assess the value of the investment return.

Moving from Capex to Opex is a change in the basis of capital investment usage as upfront and ongoing costs are changed by the cloud computing business model. The focus is on the ability to maximize the leverage of that capital while minimizing the risk to the business in Capital used for initial investment and ongoing maintenance charges. Using an Opex model can potentially remove and release capital that would otherwise be used for initial investment and ownership of IT assets. Alternatively investment in a cloud computing platform may require capital investment and changes to the payment and funding of the service as it is amortized over a wider shared service model for economies of scale. The cost of capital from sources of equity and cost of debt point of view can change for private and public federal companies sources of funding. The overall goal is to maximize the use of capital by best use of the debt and equity funds. In cloud computing the use of Opex moves the funding towards a an Opex model for leverage and risk management.

This white paper examines some of the metrics and performance indicators that drive business towards the cloud computing value model.

A finance viewpoint

What matters is defining Value

Weighted Average Cost of Capital WACC

The issue between the use of capital investment and the weighted average cost of capital (WACC) outlines the issue around debt and equity funding in private companies(. Public federal companies also have sources of funding that are from government sources of funding.

WACC describes the company cost of capital from a equity and debt view point. The cost of equity and the cost of the debt to the organization can be examined through the weighting of how the financing of equity and financing the debt are managed over time.


Cash flow after Taxes CFAT

Focusing on the uses of the investment funds is the flows of inbound and outbound cash.

Cash flow (Cash Flow after Taxes CFAT) is a financial measure of a business ability to generate cash flow through its operations.

Net present value (NPV) of investments often need to consider the discounted cash flows of the cost of capital to assess the value of the investment return.



  1. I wanted to research on the author, after reading the article on The Open Group, when I came across your Blog. Interesting perspective on how measuring the economical benefit of cloud computing on businesses. You should post more often on your blog.

  2. After carefully reviewing the document Building Return on Investment from Cloud Computing : Building Return on Investment from the Cloud, I still don’t understand the metric you defined under Dynamic Usage – Elastic Provisioning and Service Management. In the text you say: “The impact of dynamic provisioning on the Cloud Computing ROI business case is that the façade of service management becomes more “digital”.” How can I translate become more digital into financial metrics?
    Thanks and regards,

  3. Many thanks Francisico, very kind comments. Great question, the best way I can describe measuring Dynamic provisioning is the Speed of sourcing and provisioning execution. The Cost of Acquisition is a measure plus the recover cost/time of the service asset/capability. "More popular" services can be a measure of how effectoive the Service portfolio is. In effect I have said to Service Management teams that in the future they will be measured by how Attrac6tive their Portfolio is and how much it sells, up/cross sells. So dynamic provisioning is not speed of the burst but what you do with that frm an ARPU, AMPR , and CAR metric basis.
    Hope this helps.

    I am getting my iPad tomorrow and will try to be a bit more proactive in my blog and twitter.
    Best wishes

  4. Great blog and seems good source of information about Cloud Computing for Business . The blog helped me a lot.

    Thanks for sharing the post....


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