In the traditional on-premises financial model, CapEx constitutes almost all costs, including rent for infrastructure space, electricity, servers and other IT equipment, while OpEx includes maintenance and support for that physical equipment. The cloud model, however, shifts the majority of costs to OpEx. Eliminating the need for most on-premises equipment and infrastructure, the cloud utilizes a subscription-based financial model in which the organization pays for usage of the cloud resources it adopts. Migrating to the cloud therefore replaces both the CapEx and OpEx costs of an on-premises IT shop with the OpEx costs of cloud resource consumption.
We have identified two leading practices for managing this new, cloud-usage-based financial model:
- Develop an effective tagging strategy.
- Focus on the three key financial management pillars of visibility, governance and optimization.
A tagging strategy encompasses how an organization assigns attributes to its cloud resources, enabling the company to effectively group usage and costs into certain buckets. Resources can be tagged by many attributes, such as resource type, business unit, application owner and business function. Creating a robust tagging strategy as resources are created will not only make daily cloud usage reports more meaningful, but will also enable the organization to understand usage and cost shifts over time and to forecast accurately. Implementing this strategy and enforcing mandatory tagging will require discipline from IT owners and the business. The tagging strategy should therefore be made highly visible when the organization focuses on the foundational pillar of visibility. Under this pillar, the organization will ensure that IT usage and costs are properly understood. Usage of cloud resources should be continuously monitored and reported on; utilization of tagging attributes will enhance the business value of executive-level usage and cost reports. A tagging strategy will also enable the cost transparency needed for the Governance and Optimization pillars.
Under the governance pillar, an organization builds on the foundations set forth with Visibility and establishes accountability for the IT landscape. Here, the organization will define financial and technical policies and controls, budget and plan for future IT spend, and enable monitoring and alerting for potential compliance violations.
Under the optimization pillar, the organization will utilize the foundations established in the Visibility and Governance pillars to identify savings and improvement opportunities within the IT cloud landscape. While it is important to remember that a move to the cloud does not always lead to significant cost savings, it does allow for increased financial control of IT spend. Enacting the optimization opportunities will help organizations achieve this control, which will, in turn, bring forward cost savings and gain additional value from their IT spend.