The Real Story Behind Cloud and Financial Transparency


Cloud financial factorsMuch of the discussion around cloud and financial transparency focuses on the need to expose the true cost of IT services to business users. With consumption-based pricing, business users need to understand how usage and behavior will drive costs. This requires IT finance to shift their focus from supporting an annual capex driven budgeting process to a monthly or quarterly opex based model.  This requires new processes, policies and tools to support showback or chargeback models, and a way of centrally tracking cloud services spend across the enterprise.

Unfortunately this all misses the bigger point.

The more significant impact that public cloud services have is that for the first time they expose corporate IT to the forces of market pricing.

In market-based economies, prices are signals are used to efficiently allocate resources. Vendors that are inefficient have higher cost structures than competitors, which ends up being reflected in higher prices.  If price is the primary driver of customer buying behavior, inefficient vendors are forced out of business.

Consider the former Soviet Union. Prices for most goods and services were determined not by market forces, but set by central planners and bureaucrats. With no market forces, limited incentives existed to improve efficiency and competitiveness. Once exposed to market forces after the collapse of communism, many industries exposed to foreign competition quickly collapsed.

While we certainly aren’t implying that CIOs are Karl Marx, IT hasn’t really been exposed to market forces until the rise of public cloud services.  IT historically set the internal prices for services, largely on a “cost plus” basis. While competitive pressures were brought to bear by IT on vendors, this same pressure was not brought to bear on IT itself.  What about IT outsourcing? At the end of the day it only provided the opportunity to exploit cross-border labor arbitrage.  Business users still lacked choice, and were locked into a limited pre-defined set of services. If business users didn’t like the services, pricing or quality they still had no real alternative.

Hence the challenge facing corporate IT as they rollout private cloud services with showback or chargeback mechanisms.  Now, internal services can begin to be compared on an “apples to apples” basis to external services that users can choose to deploy on their own.

Private cloud services pricing requires IT to accurately determine the fully loaded costs of the private cloud services they provide.  Underestimating costs and internal pricing for VMs or GBs of storage leads to unfavorable budget variances. Overestimating costs hurts the price competitiveness of the services. Unfortunately pricing analysis isn’t a traditional strength of the IT organization, though it will need to be in the future as we explored in an earlier post.

Even if It gets the TCO analysis right, the next question is how IT can truly be an efficient provider of private cloud services such as IaaS when competing against major public cloud service providers.  While this topic has been debated ad nauseam, the crux of the issue is that public cloud services expose where corporate IT will be able to offer competitive services and also where it won’t.  Accurate pricing will reflect where internal IT lacks the scale or skills to compete against 3rd party vendors.  While in the long term this ensures that enterprises allocate IT spend in the most efficient way, it will expose some uncomfortable truths in the short term.

With market pricing and choice, business users and the “market” will tell corporate IT where to focus its time and resources. The real question is whether CIOs will have the intellectual honesty to listen to what they’re hearing.

 

Comments

  1. Scott this is a very insightful post. It becomes imperative that with the advent of public cloud that IT also be able to effectively manage not only the internal costs of IT but do so in synergy with providing access to and cost management of resources deployed in public cloud as well.

    Certainly managing internal costs is important but without controlling and managing access to public cloud resources and accounting for this business spend leaves the IT group as totally competitive to public cloud as opposed to synergistic.

  2. Great post, Scott. Yes, CIOs need the intellectual honesty to get there, but they also need the ability to control what workloads get deployed into public cloud, allowing for a balance between compliance, security, risk management AND cost efficiency. I see enterprises deploying cloud management platforms that feature both a central policy engine and cloud billing and cost optimization features to help them balance these issues. While I see organizations in different stages of financial transparency, with the demand for IT-as-a-Service, it will indeed become another point of necessary transformation for IT. For more: http://www.servicemesh.com/cloud-it-resources/cloud-strategy-transform-it-blog/blog/dont-fret-pl-cloud-billing-and-cost-optimization-helps-it-manage-costs-revenue-profit/
    – Shawn Douglass, CTO ServiceMesh

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