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Cloud economics : How to get full value from the cloud

20 Oct 2021

The changing operating model leads to a long-term structural transformation of IT spending.

The cloud initially attracted the interest of businesses because of its promise to reduce infrastructure costs. However, equating hosting costs with the public cloud is simplistic. The characteristics of the public cloud – automation, elasticity, measurability, plus self-service and on-demand consumption – are the bases of the cloud economy revolution we are observing in the companies most advanced with their transformations.

The T in total cost of ownership (TCO)

When we talk about the total cost of ownership, the emphasis is on the word “total” – the more you transform, the greater the long-term gains.

Starting the transformation may result in direct and rapid impacts on the TCO:

  • Optimise expenses to meet real needs. The public cloud offers fine-grained configurations, resource elasticity, and innovations such as serverless, which brings consumption and resource requirements closer together. The more a cloud-native approach is used, the better the adjustment.
  • Implement smarter availability management. A large proportion of the expenses is, in fact, spent on the infrastructure for the disaster recovery plans; these costs can be streamlined through the intelligent use of the infrastructures made available by public cloud providers.
  • Achieve productivity gains in operational and development tasks by automating and facilitating the implementation of DevOps, which reduces the unit cost of maintaining and operating applications.

This last point is the cornerstone of the cloud business cases. The changing operating model leads to a long-term structural transformation of IT spending. To optimise its expenditure, the IT department must now control the current and future demands for services and applications. The service offer must adapt to the company’s business strategy.

Transforming the nature of IT costs

Transforming a CAPEX model to an OPEX model avoids upstream investments and smooths the cash out. However, we must look beyond the investment phase. Elasticity and on-demand consumption create the conditions to transform IT spending into variable cost – especially if IT spending is directly linked to product and service lines, and can keep up with the changes in the activity.

The move towards a product-oriented organisation, beyond but including IT, represents the true long-term impact of the cloud economy – the transformation of IT spending becomes a variable cost.

Top-line, top-line

Let’s go even further in the search for additional sources of value. These are more difficult to quantify in a business case, but become obvious when we compare the companies that have fully embraced the cloud with those that have not:

  • Given the autonomy that product managers and development teams may have with respect to a cloud approach, the speed of launching features and services is increasing rapidly. This is a key differentiator especially in the digital space.
  • The cost of experimentation decreases dramatically – a cloud approach removes most of the initial hardware and software expenditure to try new products, services, and applications. Expenditure stops immediately at the end of the experimentation when the consumption of services stops.
  • This increase in speed to market and the reduction in experimentation costs are accelerated by the investment in innovation by cloud providers. The constant flow of advanced services around data, artificial intelligence, IoT, etc., is accessible at very fine price levels allowing more experimentation and innovation at the same cost.
  • It is becoming clear that the return on investment is greater in the cloud.

Cloud transformation is not a technical challenge but a business challenge. Capturing its overall value implies coordinated action between businesses, IT, finance, and human resources.

The cloud economy, a dynamic balance

The nature of cloud self-service and on-demand consumption, especially in product-oriented organisations, implies a more distributed and diversified model of purchasing IT resources. Application resource requirements fluctuate, the cloud service provider changes, new services are adopted – all in very short cycles, making it difficult for current purchasing processes to keep pace, especially when speed to market is a key factor.

This is where the notion of FinOps – a continuous process of governance and optimisation of cloud consumption practices – becomes legitimate so that expenses are as cost-effective as possible considering the needs. To maintain the balance of costs related to the cloud, all levers are taken into account:

Operational models and policies

  • Architectural models and design choices
  • Contractual arrangements with cloud providers.

The cloud economy must be considered taking into account the entire transformation. Reduced to the sole aspect of outsourcing the infrastructure resource, a cloud business case will not capture all the value possibilities. In addition, the cloud world is highly dynamic, and controlling the business case involves monitoring closely both the value produced and the consumption of resources.

To find out how Capgemini can help you get full value from cloud, download our Cloud Transformation: The Keys to Success whitepaper, or contact our team today.