What CFOs Need to Hear about Cloud Computing and Consumer IT

The march of technology is starting to shake up one of the most important relationships that CIOs have—the one with the chief financial officer.

CIOs need to start changing the way they talk with CFOs, not just at budget time, but throughout the year, CIOs and experts say. Cloud computing and consumerization trends, especially, are changing the nature of corporate IT and, with it, the way CIOs structure their IT budgets.

This shift is in its early days, but forward-looking CIOs are beginning to think of themselves as providers of services rather than infrastructure. As such, they supervise operating expenditures, not capital expenditures, and they approach the CFO as partners, not supplicants, in business-investment decisions.

Robert Petrie, vice president of IT at Pharmaceutical Product Development, which runs clinical trials for big drug companies, says decisions about provisioning new technologies are made based on “what makes the most sense from a business standpoint and from a financial standpoint.” But thanks to cloud-based infrastructure, software as a service and employee-supplied devices, these decisions have different budget implications than they used to, including how IT investments are governed and who pays the bills.

Questions of Cash Flow

Cloud computing offers CIOs the opportunity to transform investments in corporate computer systems from capital expenditures into operating expenditures. Instead of making a multimillion-dollar up-front investment in software licenses and computer-room servers, companies can arrange to pay for the same capabilities with monthly per-user contracts. That means that when you want to deploy a new system, you have more funding options.

Getting new technology in monthly installments may benefit companies that need to cut capital expenses. For example, Joe Drouin, senior vice president and CIO at temporary-­help giant Kelly Services, says that when he joined the company three years ago, “We were suffering from a depreciation hangover” caused by a huge PeopleSoft ­implementation. That project won’t be completed until 2014, at a 10-year cost of between $100 million and $110 million.

Years of heavy investment in servers and software had tied up millions of dollars, leaving Kelly with a limited ability to make new investments when business slumped during the Great Recession. The dramatic revenue declines during the recession had a painful effect on companies with high fixed costs. Many found that multi-year depreciation of capital goods can result in big operating losses when gross profits shrink. Fixed costs and cyclical revenue are a bad combination.

When temporary hiring dried up, Kelly reported huge losses. It slashed capital spending, most of which goes for IT, from $31 million in 2008 to just $11 million in 2010.

Drouin says cloud computing provided a way to wean the IT department from capital spending right when Kelly needed it. Kelly now uses Salesforce.com for CRM and the Force.com platform as its principal development environment. The company hosts its Microsoft email and SharePoint collaboration applications in the cloud as well. All the software is paid for as an operating expense.

“The necessity of the recession, when our capital pool dried up, fueled our acceleration into the cloud,” Drouin says. The capital spending in his budget this year is about half what it was at its peak in 2007, even though Kelly is implementing what he considers a normal amount of new IT initiatives.

Many companies also prefer to devote capital expenditures to revenue-generating projects like new factories or rail cars, rather than spend the budget on computers that don’t have a measurable impact on revenue.

But for some companies, avoiding capital spending isn’t a priority, and options such as leasing or making annual payments to an outsourcer provide a way to avoid making capital expenditures up front. Especially for large organizations, which have access to low-interest loans and predictable depreciation schedules, whether to lay out capital for IT may simply be a question of cash flow.

In some cases, expensing might even be a mistake. Chris Potts, an independent IT strategist based in London, says that if an IT plan is part of a major corporate project like building a big factory, trying to expense IT could affect depreciation schedules for the whole plan.

The decision depends on “the current cost of capital and alternative investment vehicles,” says Craig Symons, an analyst with Forrester Research and former CIO at Gartner. Still, he says, the cloud provides flexibility to scale up or down. When a company controls its own infrastructure, “either you spend a lot up front and depreciate or you commit to multi-year operating leases.”

Bill Bowers, CFO of Newline Products, a maker of whiteboards and bulletin boards that does $15 million in annual sales, says that when he joined the company in 2008, it was planning a $250,000 installation of an ERP system from SAP. As he investigated the costs and funding dried up, he switched to NetSuite’s cloud-based ERP solution. Now Newline pays $99 per user per month, after an up-front $85,000 investment for customization and training.

Bowers, who used to work in finance for Motorola, overseeing corporate IT functions in Asia, says that for big companies, the cloud may not have a significant financial benefit. When evaluating the alternatives, he found that “maybe from a payback analysis it’s a toss-up,” between buying or renting. But he says, “When you’re in the cash-flow world, cloud is the way to go.”

Who Makes IT Decisions?

In addition to conversations about cash flow, the cloud raises questions of governance and cost allocation. Potts, the London-based consultant, notes that many companies stipulate board-level review for expenditures of a certain size, which assures that major IT initiatives get a careful vetting. He says that with piecemeal spending on cloud initiatives, the amounts spent might never trigger the appropriate review. “If the CIO is being responsible to investors, then they should want that kind of review,” he says. “The discipline of thinking about the budget creates governance.”

Steven Finnerty is vice president of technology and vendor services with Global Information Services at Applied Materials, which makes semiconductor, display and solar photovoltaic equipment. Finnerty likes paying for cloud services “by the drink” because the company’s business is cyclical, and he can adjust IT costs as business conditions change. But he agrees that the ability to expense IT monthly using a credit card could allow a business unit head to bring in new technology without giving the IT staff a chance to clear it and make sure it fits with the company’s security standards or data-preservation policies.

“When business units take things into their own hands, they aren’t conscious of the need for architectural compliance or having a continuity plan,” says Forrester’s Symons. CIOs need to make sure the CFO understands why such rogue purchases could threaten the company’s regulatory compliance or affect the value of other investments. But, Symons says, CIOs also “need to view themselves as solutions brokers based on the needs of business and deliver the optimal solution.”

Drouin at Kelly Services says that the flexibility the cloud gives IT to move quickly can eliminate one excuse business units use to provide themselves with technology on their own. That helps assure that IT spending goes through the IT budget. “It’s made the rogue IT thing become kind of moot” at Kelly, he says. Rogue IT spending by department heads was “in some ways our own fault because the businesses stopped asking us for quick things. We didn’t deliver.”

But the cloud doesn’t only change the conversation about who decides what technology to buy; it also shifts the discussion of how IT costs are allocated. CIOs are divided on whether the new IT architecture always makes assigning costs easier.

Chargebacks, for example, are the bane of many CIOs’ existence. They can lead to contentious arguments with business group heads who think they’re being overcharged for IT, hurting their profitability measures.

To hear some CIOs tell it, one of the greatest benefits of cloud computing may be that it puts a stop to such arguments. “With cloud adoption and pay-per-consumption, we’re able to very granularly capture costs and charge them back to the point of value,” says Drouin. “It’s a real shift.”

In the past, he says, the IT department calculated charges primarily by multiplying total costs by each business unit’s percentage of corporate revenue. Then “you’d have discussions with people arguing that some divisions were more data intensive, so they should pay more.” Now he can charge more precisely, based on the services business units consume. “If you need 200 seats of Force.com, here’s what it’s going to cost.” Drouin adds, “The COO, who I report to, and the CFO saw it drove a lot more rigor around the investments. When you pay on the expense line, you can’t have a three-year time to ROI.”

But others say it complicates the issue. Like many other IT organizations, The Hartford Financial Services Group has been consolidating data centers and centralizing IT to gain economies of scale. That has increased the pressure over chargebacks, because division heads view IT as a service rather than as part of their domain, says Jim Eckerle, executive vice president for strategic initiatives and technology.

Eckerle’s company has gone from seven data centers to three and will soon have just two—one of its own and a failover site run by IBM. The company takes advantage of cloud-based services to simplify chargebacks, Eckerle says, wherever “we can identify a reliable metric…to correlate consumption with charges.” The Hartford uses Salesforce.com in its wealth-management practice and recently announced that it will move to virtualized desktops hosted by IBM. Yet he says cloud architecture makes chargebacks more difficult. Because Hartford pays on a monthly basis, it’s a challenge to estimate its needs to assure the lowest possible price, he says.

Similarly, Otto Doll, CIO with the City of Minneapolis, says that while pay-by-the-sip services such as software are simple to allocate, cloud infrastructure increases the confusion over billing for shared services, including the costs incurred by the IT department in managing its cloud provider. Another problem comes when costs rise due to unforeseeable increases in infrastructure use, such as when citizens flock to city websites for information.

“The general public doesn’t have a direct account,” Doll observes. “If an election is close, and demand [from the public] for access to results leads the cloud provider to increase to 10 servers from five, the cloud provider has to send somebody the bill. Somehow I have to marry up the bill from the cloud with what I pay, and share it equitably across my client base.”

Catching Up to Consumers

While you’re figuring out how to govern and budget for cloud services, you also need to help CFOs wrestle with the implications of consumer IT. Like cloud, consumer devices that employees and customers use, along with online applications such as social networking that people use to get their work done, are changing how IT decisions are made and altering the company’s IT footprint.

Corporate IT isn’t just the computers in the data center anymore. Considered broadly, it’s also the personal smartphones that employees use to book a business flight and the home PCs that they use to read emails late at night, says Potts, the independent strategist. “The technology doesn’t appear on your books, but it’s part of your infrastructure.” Consumer IT, therefore, offers CIOs an opportunity to explain that IT’s role is much bigger than its annual spending.

“If a CFO starts with the IT budget as evidence of the value of IT, that’s a problem. There’s an opportunity to redirect people from the size of the budget to the value of the consumers using IT,” Potts says.

The CFO needs to know, however, that the value of consumer devices and applications to the enterprise isn’t always easily measured. Sure, you can avoid some investments in end-user devices by letting employees select and use their own smartphones and tablets, says Scott Archibald, IT practice leader with Bender Consulting. “Enterprises are looking to make this move because it involves less capital and labor investment.”

He notes that supporting consumer devices and keeping them secure can be costly. But he thinks “it seems safe to say that the corporate savings will be sufficient to move forward with these models even with an uptick in support costs.”

Nevertheless, CIOs say the real value of enabling the use of personal devices is employee satisfaction, which, though it can be measured, is hard to quantify financially. “We’ve tried to shift to letting people bring their own” devices, says Drouin of Kelly Services. “With SharePoint and email in the cloud, that enabled us to use tablets and smartphones. We could assure proper security.” (Read “What CFOs Care About Besides Your IT Budget” for advice on talking to CFOs about cloud and consumer technology security.)

The popularity of collaboration tools for consumers also affects IT decision making. CIOs say it’s important for CFOs to understand the need to invest in corporate collaboration applications, even if it’s hard to understand the ROI. Consumers who are used to Facebook chat and sharing videos on YouTube expect to have the same capabilities at work. If the company doesn’t provide them, they will use consumer networks if they think it will help them do their jobs more efficiently.

While using consumer applications may sometimes be appropriate, such as when communicating directly with consumers about your company’s products or services, CIOs may need to educate their CFOs about the trade-offs. Companies often worry about employees communicating about business over Facebook simply because it’s so easy. Recently, a Rhode Island hospital dismissed a doctor because she had discussed a patient, without naming him or her, on Facebook.

Notes Finnerty of Applied Materials, “If it’s in social media, you have to get out front and say, ‘We have an offering.’ Then we can put controls in place for security and compliance.” Even clear policies against using public social media will be violated if there isn’t an alternative. “If you say ‘no,’ it will probably still happen,” Finnerty says.

Ken Corriveau is CIO at ad-industry giant Omnicom, where workers are encouraged to use social media in order to keep up with the consumer world. For him, as for other CIOs, the new IT landscape of consumerization and cloud raises a host of questions, including financial ones. The company may start supporting employee smartphones, but that will require a monthly expense for reimbursements of phone bills. In the cloud, allocating storage expenses is a challenge.

“I’m having those conversations with the CFO,” he says.

Bill Bulkeley, formerly of The Wall Street Journal, is a freelance writer based in Massachusetts.