How to Explain Cloud Computing to Your CFO

Forrester has just released a report outlining the CFO-ish benefits of cloud computing. The report, entitled “Talking to Your CFO About Cloud Computing,” is aimed at communicating the benefits of cloud computing to him or her. (Someone a bit more cynical than me might say a companion report, to help you communicate cloud computing’s benefits to a CIO, is in order as well).

A couple of things about the report (see the executive summary on Forrester’s site) stood out for me.

First, Forrester emphasizes the fact that use of cloud computing matches cash flow to system benefits more appropriately than the packaged software use model. In the old way of doing things, a large investment is made early in the project prior to system build out, and well before the business benefits (presumably financial in some shape or form) are realized. This model is even more troubling given the risk factors associated with IT systems: they are notorious for failing to deliver their promised benefits, and a large percentage of projects end up scrapped due to poor user acceptance.

By contrast, cloud computing is a pay-as-you-go (aka pay by the drink) approach, in which a low initial investment is required to get going, and additional investment is incurred as system use increases. In this way, cash flows better match total system cost.

This mirrors use of open source software versus proprietary software and, in fact, that’s no accident. Cloud computing infrastructures are built, by and large, from open source components. After all, the cloud providers don’t want to make large investments upfront without knowing the financial outcomes, either. One might say that cloud computing is a proxy for end user open source adoption, since it acts as a middleman to “civilize” open source for end users.

The second thing that stood out for me: the report makes the argument that cloud computing provides a way to outsource non-critical applications to organizations better suited to run them, allowing IT to focus on critical applications. This makes a ton of sense and is already applied throughout companies in many different areas.

For example, many companies use outside service providers to run their mail rooms and copy centers. Other companies use fleet management services to run their vehicle fleets. Cloud providers, according to the report, are more efficient at IT operations, using fewer man-hours for standard tasks. In addition, cloud providers get better pricing on hardware because they buy in such volume. This core vs. periphery discussion is a long-established one; perhaps the biggest challenge to it is IT organizations more focused on process than outcomes and therefore insistent on controlling (and running) everything.

One thing Forrester does not address is the, perhaps, logical outcome of making a case for cloud computing to CFOs: If cloud computing is so good and more efficient and responsive than central IT, why not bypass IT entirely and use an outside service provider to deliver cloud-based systems?

This approach, sometimes labeled “shadow IT” (usually by the disgruntled, bypassed IT organizations) is, perhaps, the biggest IT organization challenge posed by cloud computing. By removing infrastructure ownership from IT, suddenly IT no longer has control over key business resources, making it possible for someone attuned to a cost/benefit approach, like, say, a CFO, to cut down IT’s power.

Cloud computing definitely holds the potential to upend the long-established organizational pecking order and certainly puts IT in a much more precarious position. Any time the case for a technology innovation is made to the CFO, you know things are going to get interesting.

Bernard Golden is CEO of consulting firm HyperStratus, which specializes in virtualization, cloud computing and related issues. He is also the author of “Virtualization for Dummies,” the best-selling book on virtualization to date.