Saturday, September 7, 2013

How to Define Cloud ROI

 It would be great if IT could tie investments directly to the business value.

IT ROI is always a controversial topic, with the difficulty of defining "value’, as there is the problem that IT spending never achieves anything in isolation and value is more than just ROI. Now the organizations are already concerned about cloud ROI with emerging cloud computing. What is the definition of business value in this context and how to define Cloud ROI? What are principles to follow when measuring IT investment? How to bring different perspectives cross-functional boundary?

1. Tie IT Investments to the Business Values         

 It would be great if IT could tie investments directly to the business value. What impact does an IT project, such as cloud-based solution, have on revenue if you could come to market six months earlier than the competition? How much did you save in overhead by an IT project that yielded optimized processes? Besides efficiency, how to measure agility. It is soft, but it's also real... and you may never know the true ROI of any investment until you can answer some of those questions, as hard as that may be.

Well governed organizations usually measure the value of an IT service in terms of how well it meets the requirements of desired business outcomes (outcomes linking IT to corporate strategy), the availability, capacity, continuity and security of the service, the "warranty.", the agility (potential benefit from Cloud). The service valuation is supported by information from IT financial management processes such as IT accounting, IT budgeting and IT charging, including measurements such as NPV and ROI. 

An investment can be validated only as the initial business case. The fact that most IT organizations are unable to put their head around (or does not want to) ROI and coherent metrics, the cloud is not an excuse not to do so. Any investment on the business side would require a clear non-politically motivated business case. Within IT Financial Management, Total Cost of Ownership, consumption and chargeback needs to be clear.

2. Cloud ROI 

ROI can certainly be derived in using cloud services, such as IAAS and may be even PAAS for software testing, training and for other nonproduction activities. One can certainly demonstrate significant cost savings using these on-demand type services.

Cloud pricing models are still on the way to maturity. The creation of a detailed cost model is one of the first steps toward calculating it in the old fashion way, especially if the costs are categorized in a way that makes it easy to map them to a well-structured revenue model. Cloud pricing models are still primitive, compared to traditional models, even if they incorporate utility or usage based billing, Cloud contracts are also weak where the warranty of a service is concerned.

Cloud services can also potentially deliver a number of "soft" benefits that are difficult to quantify in terms of their financial/ROI impact. Are you considering ROI to be strictly quantitative? You can still measure soft value, too (though it's harder). You can and should still measure things such as employee productivity, improved time-to-market, customer satisfaction, etc., and can certainly attempt to convert any benefits observed into dollar values. Even if you can't easily do that conversion, however, it doesn't negate the business value of these and other soft benefits.

Focus on delivering business values. If you can demonstrate "hard" cost savings by using cloud services, it might be tempting to pigeonhole them as good ROI for the IT department and its budget, rather than as something that delivers "business value." But doing so would be limiting the concept of business value to only those things that deliver increased revenues, make customers happier, etc. Sometimes you just need to make IT decisions based on common sense rather than hard financial data. If cloud services are making employees more productive and customers happier, maybe measuring the precise ROI of the services isn't a critical necessity.

TCO studies should cover both mid-term and long-term as well. In a mid-term cost model certain cloud computing options may prove to be more economical, but if you do a longer term (such as five-year study), could the cloud solution still present the competitive advantage. What if you need to integrate the new application with other IT systems (on-premises or cloud), for example, you need to determine the respective IT effort/skills/costs of doing that integration for an application deployed on-premises versus doing it for a cloud service

3. IT and Finance Professionals need to Work as a Team 

An ROI analysis and a TCO analysis can be done on a whole new initiative or just on enhancements. IT and business executives should be managing IT as a business and allocating funds and resources where they make the most sense. Hence, it’s important to do ROI and TCO analyzes. One needs to look at the models from a pure IT cost viewpoint as well as a business view. The latter determines whether or not the business should invest in the opportunity while the former determines what implementation approach to satisfy the business requirement is best.

Sometimes ROI has been mistreated by finance and IT professionals alike. Sometimes because finance has no idea what bill of materials really goes into making IT work, and from a financial point of view, there is no such thing as a value outside of quantifiable returns; and sometimes because IT simply sell the benefits using a lot of jargon and buzzwords. One of the problems is that IT generally has a very difficult time coming to grips with the true cost of a service. IT needs to start with a simple service catalog for financial management purposes and define a set of sub-services and cost elements. When you have that kind of a financial model that actually represents what IT is building, you can get to a reasonably accurate value (ROIC).

Doing detailed ROI analysis helps. You need to know your organization and what you're getting for all your investments - either intuitively or literally. Then you can make (or try to make) informed decisions moving forward. Without solid financial numbers, abstract things like business value are not very meaningful.

ROI is neither the magic number nor trendy or old phrase, it also takes the time  to understand how to measure true value or total cost of ownership of cloud computing, IT organizations need to walk the talk, manage better through measuring and calculating effectively, keep business goals in mind and achieve organizational agility.


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