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Apparently, the love of money is the root of all evil. But simply ignoring it can get you into pretty serious trouble, too.

 

Lately, I've been finding myself in more and more conversations that touch on the financial aspects of cloud-based computing. I find it perplexing (and sometimes annoying) that during these conversations financials often seem to be an afterthought.

 

"Oh, and then, when everything is set up and running in the cloud, we'll figure out the costs and implement chargebacks."

 

Uh. Wrong. It really kind of STARTS with money. In fact, whether you like it or not, ultimately, everything in IT has to do with money.

 

And cloud-based computing is no different. Now, don't get me wrong. I'm not arguing that decisions about cloud-based computing should be done solely (or even primarily) based on money. But it's a critical part of the decision making and ongoing tracking process.

 

Let's start with three basic questions.

  1. Should we implement a private cloud or leverage public cloud offerings or even use a mixture of both?
  2. What services or components should we move to cloud-based computing, and in what order?
  3. How much are we saving (or not) based on cloud?

 

Unless you've started by thinking through the financials, you really can't answer those questions. Every one of those questions has some pretty serious financial implications. And being able to answer any of those questions starts with needing to understand what it costs to provide the services you're providing today.

 

And it gets even more important if you're thinking about charging customers for use of those IT services. You definitely can't think about chargebacks if you haven't mapped out what the cost of goods (including labor) are to provide a service.

 

Imagine that you own a sandwich shop. And one of the things you sell is a turkey sandwich. And currently, you roast whole turkeys on premises as your specialty. Before you actually put that turkey sandwich on the menu, you went through a process to figure out a price for that sandwich which is theoretically based on cost of goods such as the raw turkey, the bread, and the condiments like lettuce, mayonnaise, cranberry sauce, and different kinds of cheese. Plus the labor costs associated with roasting and slicing the turkey and in preparing the sandwiches themselves. Those are examples of directly attributable costs for that sandwich. Whew! Just a plain old turkey sandwich has a lot of components in it. Oh, wait! We forgot to factor in general indirect costs such as utility costs to cook what needs to be cooked and keep cool what needs to be kept cool. Plus the labor cost of a cashier and general overhead like rent, permits, cleaning supplies, and things like advertising. And then there are indirect costs such infrastructure, such as the cost of the oven, and utility costs for the gas to roast the oven and electricity to keep things that need to be refrigerated nice and cold.

 

Without going through that financial analysis up front, it would be like deciding you were going to sell those turkey sandwiches for $5 because that price "feels about right" or because "that's about what the sandwich chain down the street sells them for.” But chances are the big national chain down the street is getting things at volume discounts. Can you really profitably sell a sandwich for $5? Maybe there's a reason they use the processed stuff themselves!

 

Now, imagine that you decide that rather than roasting your turkey fresh, you're going buy pre-processed turkey from a wholesale deli down the street. Unless you've mapped out the costs of the meat, and the labor, are you really saving as much as you thought?

 

Returning from the realm of footlongs … at some point, someone on the business side is going to ask you to answer those three questions I listed above. Or worse, they're going to ask you to reallocate staff and resources based on your savings. Could you do it you haven't thought through the financials ahead of time? Dangerous.

 

So, what do you think? Does $5 feel about right for what we'll charge for that turkey sandwich? If we're undercharging, don't worry. We can always make it up in volume!

 

 

To weigh in, comment below! I'll begrudgingly read your thoughts. To suggest a rant - email me at cloudcurmudgeon@bmc.com.