Information Technology Reference
In-Depth Information
Developing a robust business case that demonstrates the return on invest-
ment of cloud can benefit all parties in a cloud venture. The cloud customers
and consumers can justify the investment in terms of costs and benefits of the
key technology features and the new operating models. This exercise needs
to identify any interdependencies and trade-offs. The output of this exer-
cise will also serve as a key ingredient of the strategic planning process. It
will also serve as a good performance benchmark tool and metric to monitor
the investment effectiveness and determine if the cloud provision is deliver-
ing both the business and technology promises, while also identifying any
potential scope for fine-tuning and improvement.
In this chapter, we discuss some of the pertinent financial and accounting
techniques that form an important aspect of measuring or appraising invest-
ment decisions. It is important, however, to emphasize that no investment
decision should be based purely on financial metrics. Organizations need to
consider both financial and nonfinancial indicators to determine the value of
cloud. Some contributing factors to this value will be qualitative and chal-
lenging to express in monetary value.
However, as technology and business models mature, IT will continue on
its path to commoditization. Most approaches build a business case for cloud
that is predominantly viewed through operational efficiencies, focusing on
cost optimizations that are evaluated using cost-based calculations linked to
resource utilization. The metrics often used (especially by SMEs) are linked
to cost efficiencies achieved as a result of a perceived shift from CapEx (capi-
tal expenditure) to OpEx (operating expenditure), TCO (total cost of own-
ership), and at best, looking at ROI (return on investment) and NPV (net
present value) of cloud investment.
For traditional IT, the organizations invest in infrastructure assets such
as hardware and software code, which requires capital expenditure. Capital
expenditure poses some risks:
• Capital is limited, especially in the case of public sector or SMEs.
• CapEx raises the barrier for entry by making it difficult to access the
latest technology, especially in the case of SMEs.
• Precious capital will be tied down in physical assets that rapidly
depreciate, and there is the associated cost of maintenance and
upgrade. This poses an opportunity cost as part of this capital that
could be invested elsewhere to drive innovation.
• Large investment in physical IT hardware and software, especially
in the case of large enterprises, risks vendor lock-in that reduces
business flexibility and agility.
• For growth or scaling, in addition to the need for modernizing old
technology, substantial investment in the infrastructure, architec-
ture, and integration is needed.
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