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Cloud economics: Keeping your head in the cloud
The vital role of CFOs in strategic cloud computing decisions
For many companies, the cloud computing debate is over. They are no longer asking if they should move to the cloud; instead, they are asking when and how. According to a 2017 survey report, 93 percent of organizations already use cloud services in one way or another.
For many companies, the cloud computing debate is over. They are no longer asking if they should move to the cloud; instead, they are asking when and how.
Cloud adoption traditionally has been driven by chief information officers (CIOs). But as companies explore cloud’s various potential impacts and business uses, chief financial officers (CFOs) have an opportunity to help define and drive their company’s cloud strategy. Specifically, CFOs are uniquely qualified to address two areas:
- Accounting and financial impacts that should be considered, and how different cloud models may affect them
- Making the case to Wall Street – i.e., communicating those cloud impacts to analysts and investors
According to a 2017 survey report, 93 percent of organizations already use cloud services in one way or another.1 No wonder, since migrating to the cloud not only helps companies to reduce IT costs, it also enables new strategies and business models, new product and service offerings, and new forms of revenue generation that simply haven’t been possible before.
Accounting and financial considerations
Cloud computing can have a variety of subtle impacts on a company's accounting and financials. Carefully considering these impacts can help CFOs understand and communicate the positive effects while addressing any negatives.
It is important to know that accounting for cloud computing services costs can be complex and challenging. The structure of the cloud and the cloud model selected by a cloud customer may significantly affect pricing, costs incurred, and the related accounting treatment for both the cloud service provider (CSP) and the customer. In this paper, the discussion largely focuses on customers of the cloud, not CSPs.
Since each cloud arrangement can be unique, CFOs should carefully evaluate their specific facts and circumstances, including the structure of the cloud, the terms of the arrangement, and the use of software, when determining and applying the related accounting guidance.
Fees for cloud services
For use of the cloud services, a customer may pay a subscription fee based on a contractual rate in an arrangement with the CSP. Depending on the specific pricing terms of the arrangement, the fee may be:
- Billed periodically (e.g. monthly or annually);
- Fixed or variable; or,
- Based on some measure of actual usage (e.g., per user, per services, or per click).
Making the case to Wall Street
CFOs may hesitate to champion the adoption of cloud computing because it often involves a shift from capital expenditures (CAPEX) to operating expenses (OPEX) models. The perception is that this shift can have a negative impact on Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), which in turn can be received negatively by analysts and investors.
To better understand this dynamic, Deloitte identified a group of public companies that have invested in the cloud. We studied how they communicated and positioned those investments to Wall Street and, in turn, how the Street reacted to and valued the investments. Specifically, we looked carefully at whether analysts were interested in the increase in operating expenditures due to cloud adoption.
Deloitte studied how a set of public companies communicated their cloud investments to Wall Street and how analysts responded. The CAPEX/OPEX issue did not appear to be a significant consideration in filings, commentary, and analyst discussions. In fact, companies may be underselling and underutilizing their cloud investments. Analysts appear to be more interested in how cloud adoption can lead to potential new revenue streams or revenue enhancement than in its potential for cost-reduction.
Time for CFOs to weigh in
Clearly, cloud computing's demonstrated benefits are compelling in many situations. Its cost-reduction potential and perhaps its ability to give organizations access to greater IT capabilities than they could justify maintaining on their own are compelling parts of a business case for cloud. Cloud adoption enables organizations to focus more time and resources on their core business activities outside than IT while providing the flexibility to scale computing resources up or down in response to changing market needs.