Cloud and the Consumption Model: Does it Make Sense?

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I feel like I’m having this conversation on an almost daily basis. Organizations want to move to cloud, modernize their data centers, and find news ways to create efficiency and infrastructure savings. Cloud computing has been a great way to make this happen. Moving to a subscription-type model isn’t only limited to software or cloud solutions. Organizations can now leverage hybrid cloud options and offload entire data center operations into an OPEX model.

Growth around cloud will only continue to increase. Specifically, IT spending is steadily shifting from traditional IT offerings to cloud services (cloud shift), according to Gartner. The aggregate amount of cloud shift in 2016 rose to $111 billion, and is projected to increase to $216 billion in 2020.

Furthermore, Gartner analysts said that by 2020, cloud, hosting and traditional infrastructure services will come in more or less at par in terms of spending.

“As the demand for agility and flexibility grows, organizations will shift toward more industrialized, less-tailored options,” said DD Mishra, research director at Gartner. “Organizations that adopt hybrid infrastructure will optimize costs and increase efficiency. However, it increases the complexity of selecting the right toolset to deliver end-to-end services in a multisourced environment.”

Gartner predicts that by 2020, 90 percent of organizations will adopt hybrid infrastructure management capabilities.

There is no question that IT and business are inextricably linked. Ever since the internet revolutionized the business world in the 90s, companies around the globe have turned to technology to increase business efficiency while boosting their competitive edge. The link between business and IT has created unprecedented growth and opportunity across all industries, making IT a key discussion topic in the boardroom of most companies. With this in mind, let’s take a step back and understand consumption models. Let’s look at OPEX and CAPEX from a CFO’s perspective.

Not surprisingly, Information Technology is now at the top of the CFOs agenda. According to Gartner, 26 percent of IT investments require the direct authorization of the CFO and 42 percent of IT organizations now report to the CFO.

Modern data center solutions and cloud offers enterprises, governments, and various organizations across all verticals and industries the freedom to manage their business, not their IT assets. In the theoretical world of cloud and data center providers, businesses would no longer have to make costly capital and operational investments in building and maintaining their own back-end technology infrastructure. Instead, they would have instant access to the best, most innovative business technology solutions that would be paid for by use, just like a utility.

A well-executed cloud and data center strategy can yield significant and long-lasting business benefits. This is why it’s critical to involve your senior management when it comes to infrastructure and data cener planning. There are some serious benefits which come with moving some of your infrastructure to an OPEX model. Consider the following:

  • Moving your operations from CAPEX to OPEX. The most obvious and frequently cited financial benefit of working with a cloud data center provider is the freedom it allows to shift capital expenses to operating expenses. The transformation to metered (pay-as-you-go) rather than upfront costs has the potential to offer increased budget flexibility through management of variable costs. It also offers a much clearer mechanism for cost-allocations across the business with usage-based reporting available from cloud providers. This flexibility and accountability can be particularly valuable in periods of economic uncertainty or reduced profitability.
  • Speed and flexibility: Traditional IT models come with a significant level of capital investment that most CFOs accept as a necessity of doing business in the information age. However, a large fixed cost base does not support the speed or agility today’s business world demands. Sudden or rapid changes in capacity needs and resource usage can be impossible to fulfill. This lack of agility can mean the difference between competitive differentiation, quality service or accurate business decision-making and can have major impact on the fortunes of an enterprise. Not only do cloud and data center providers scale as needed, their resources can also be deployed rapidly. The risk of project failure can be significantly reduced, along with the costs and frustrations that come with it.

When you’re planning out your infrastructure or are conducting an evaluation around some type of upgrade – look to OPEX models as a real option. Organizations no longer want servers sitting on premise with only 50 percent to 60 percent utilization. Why should they have to pay for that 40 percent that’s not being used? Consumption models allows IT the ability to scale as needed, be extremely agile, and remain on the latest technologies.

In reality, however, there are still clear scenarios where you need to buy gear. In those cases, capital expenditures are necessary. Still, working with good partners will allow you to design great leasing options that will help you rotate gear every 3-4 years. This allows you to still consume the environment as needed and get upgraded as a part of your consumption contract. To that extent – you can deploy a completely OPEX framework spanning on premise systems and cloud environments. The key will be understanding your use-case, leveraging financial benefits, and aligning with your business goals.

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