The Finances of a Cloud Migration

Today on modern digital business. How are the finances of your company affected by cloud migration? The answer may surprise you. Are you ready? Let's go! Showing a financial benefit of using the cloud can be a bit tricky. You need to show that shutting down an operating data center and moving that money to pay the bill of a cloud provider will in fact, save you money. How can a cloud provider provide technical resources cheaper than doing the same thing in-house? Well, there are many reasons why, but first we have to understand a little bit about the different types of money available to a company. We have to understand the financials for the cloud are quite different than they are for an on premise infrastructure. Let's start with the basic lesson about money. Not all money is the same. Money comes in different types and the type of money you need to spend is critical to people like our chief financial officer. Understanding a bit about financial language will help you understand the financial costs and benefits of a cloud migration. Let's talk about the three basic types of expenditures a company makes. The first is a capital expenditure. A capital expenditure is the purchase of equipment that is expected to be used over and over again. Presumably for multiple years, the single purchase buys something that is used by your company over and over again. This could be the purchase of equipment molds, hardware or buildings. Costs for capital expenditures are typically depreciated over many months, or years in order to make them easier to budget and tie their costs and value closer together over time. The next type of expenditure a company makes is a fixed expense expenditure. A fixed expense is a purchase of an item that is used or consumed by the business over a relatively short period of time. A good example of a fixed expense is buying an advertising spot. Money is spent for a particular period of time, the time the ad is run and usually that's over a relatively short period. Other examples are monthly SaaS fees, utilities, and some types of employee salaries. These are common expenditures that companies make Fixed expenses are typically independent of sales. While, they can drive sales, like for example, marketing expenses can drive sales. Sales, don't directly drive them. You don't purchase something as a fixed expense because you made a sale. Instead, you typically pay the fixed expense to accomplish something that will hopefully eventually drive towards a sale. The last type of expenditure is a COGS expenditure. COGS stands for cost of good sold a COGS expenses is an expense that can be directly tied to the purchase of a particular product or service COGS go up as sales go up and they go down as sales, go down. If your company builds a product such as let's say a hammer, the cost of the material and the labor to assemble the hammer are all COGS. The amount you spend is typically in direct proportion to the amount of revenue you bring in. Given this close tie to revenue, COGS are tracked differently. The actual amount of COGS money you spend typically isn't as important like it is with capital or fixed expenses. Instead you care about the ratio of COGS spent to revenue. Keeping that ratio in mind is much more important than worrying about the absolute amount of money spent. COGS are typically easier to plan for. They're easier to budget and easier to consume than any of the other type of expenditures, since they're driven directly by revenue. It's relatively easy for companies strapped for money, for instance, to borrow money to pay for COGS, because there's revenue tied to that cost. And it's much harder to borrow money, to pay for fixed expenses where there isn't revenue directly tied to the expense. All of this matters because when a company builds out an on premise data center, they're spending lots of money on capital expenditures and some more money on fixed expenses. The two types of money that are harder to come by, and they're not tied directly to revenue. This is because you build the data center in advance in anticipation of needing it. You need to build a data center, whether or not revenue comes in or not, because you need to be ready to handle the traffic when revenue does come in. Building a data center onsite, or even in a co-location center requires significant upfront capital and fixed expenditures. But when you build out a cloud data center, you build out the pieces dynamically when you need it. When you have a small amount of revenue, you need a small data center. As your revenue grows, you can dynamically change the size of your data center easily and quickly. You allocate servers to handle traffic when traffic is high. You release those servers when traffic is low. You allocate storage and network resources in the same manner, your costs are typically directly tied to the pieces that you allocate. And hence, they're typically tied to the things related to revenue, namely traffic, data and networking. So really what you're doing when you move an application to the cloud, is you are transferring the cost of operating that application from using capital expenditures to using more COGS expenditures. Since how much you spend is tied more closely to the amount of revenue coming into the company, it is often much easier to justify a COGS expenditure compared to a capital expenditure. Understanding these differences and being able to communicate these topics effectively with your CFO and other financial individuals in your company, makes it easier for you to speak the language of the cloud in the language of money, the language that your CFO understands. Talk to your CFO, see whether they're concerned about the capitalized costs of a data center. Then ask them about the value of switching capitalized costs to COGS in your company. You may be surprised how important of a discussion this can be towards your decision on using cloud computing or not. Are you interested in learning more about cloud computing? How about taking one of my cloud courses on LinkedIn learning? My two course series "Framing Cloud Discussions for the C-suite" and "Presenting Cloud Migration Benefits to the C-suite" talks about this topic and many others. Take a look at leeatchison.com/courses for more information, or take a look at the show notes.