Your IT purchases are moving from a flat, all-you-can-consume bar bill to a by-the-drink tab.
We have all heard that migrating to the cloud will save us tons of money. This is partially due to the great efficiencies in on-demand, serverless environments where users can access compute, storage, software, and connectivity with a few keystrokes. What we don’t hear is how this new way of acquiring technology is impacting companies financially.
In the days of yester-year, finance had only to approve big-dollar purchases for software, equipment, and support to meet the predefined mission. This expense was budgeted, terms negotiated, and the sale finalized. This cost was then put on a balance sheet and deprecated under whatever GAAP (General Acceptable Accounting Principles) would allow. Fast-forward, x-many years, this process would be repeated — need, budget, negotiate, and buy.
This is how most companies are structured and systems designed. IT focused on initial compliance, Procurement focused on negotiation, and Finance focused on paying and reporting on whatever was approved in AP (Accounts Payable).
Then, along comes the Cloud and things started to go awry.
There is a never-ending supply of cloud companies to include the likes of AWS, Azure, and Google. For cloud applications, there are SAAS and IAAS (Software/Infrastructure-as-a-service) providers including Salesforce.com, Microsoft Office 365, Zoom, and many more. The big change when using services from these organizations is that you don’t buy their cloud products,you rent them. The service rental concept is becoming so popular with investors (and company valuations), that even organizations that used to sell their products are migrating to this model. This includes equipment provider Cisco and software maker Oracle.
Why is this a big deal for companies? You cannot deprecate things you do not own; they are instead operational expenses. Purchases that once were on a boring balance sheet for 3 to 25+ years and had a slow and predictable burn to an organization’s P&L (Profit and Loss statement), are now unpredictable recurring expenses that can quickly drive down margins and profitability.
This new economic model was adopted so fast and was such a fundamental change to how businesses buy, nobody in the organization was given the responsibility of adult supervision. None of the historic roles (IT, Procurement, Finance) had a responsibility for keeping track of the services use or need. It wasn’t required. The bar cost was flat — drink it, don’t drink it, costs remain the same. But now that each drink has an individual and varying price tag — you don’t want your crazy cousin to randomly start ordering 21-year-old scotch (it’s expensive) for all 500 guests at the party. Such an action would be simply wasteful.
The Change — Be Purposeful
The popularity and ease of acquiring cloud-based services has distributed internal ownership throughout the organization. Often these owners, the need, the volume, and active utilization are unknowns. So, how does a business predict its future cost?
First, the level of effort must increase. Companies must want to get these costs under control. Just like there is a Director of Sales that reports the organization’s weekly sales pipeline, there should be a Director of IT Cost Containment that reports the organization’s cost and utilization pipeline. Sound ridiculous? If you were to put these two divisions in a competition and measure which had a bigger impact to the companies bottom-line (profitability) within a 90-day period, smart money would be in favor of the Director of IT Cost Containment..
Why isn’t this being done? Simply, it’s hard. Tracking cloud-based (i.e. all recurring) services, without direct ownership/responsibility, is a “hope” strategy. To do this effectively requires a knowledge of all vendors and your commitments to each of them. Most companies aren’t even sure how to find their vendor portals, so knowing how to obtain and read their service data is like asking someone that doesn’t know how to add and subtract to do calculus.
Also, once inventories are identified, they need to be aligned to internal elements such as employees, employee departures, facility closings, acquisitions, and the calendar (i.e. commitment dates). Don’t forget that this process should repeat daily/weekly/monthly as many cloud services have commitment terms that do not align to one another.
To put a cherry on top of this headache-riddled cloud sundae, most vendors don’t make it easy to identify services, or align them to users or costs. It is not in the vendor’s best interest to tell customers when they are not using their services and how much they can save. Therefore, there is no magic button, API, or consultant that can do anything about it.
This leaves companies with two choices. They can continue to pay an unknown amount every year to vendors because they have limited visibility into what they have, how much they spend and who has access. Or they can leverage their data and technology to help guide their decisions. By gaining control of their vendor obligations, companies will no longer be in the dark and be held financially responsible for never-ending, often unused or underutilized, liabilities. Moving away from the IT open bar can be a good thing, just make sure that you check the tab as you go.
