Will Outsourcing Cloud Impact Your Bottom Line?

money clouds

Making it rain for your organization with the cloud can be achieved a few different ways.

Cloud computing has many benefits, one of which can be accessed through the model of delivery a business uses. Let us know what model works for your business and why on Twitter @CloudGathering.

There are good reasons to outsource your cloud computing needs, and there are good reasons to maintain a DIY cloud internally. One of the very first things a company needs to assess is whether IT is a cost of doing business or a profit center. This is an important distinction, and for 60%+ businesses, IT is still a cost of doing business.

Whether a cost or profit center, the IT dept. is going to have two kinds of expenses: operational and capital. With capital expenses, Finance depts. will depreciate IT assets, an accounting treatment that reduces the company’s tax burdens by creating a non-cash expense for the technology.

For this reason, clients looking at installing new systems may prefer to buy the technology in order to access depreciation benefits. However, with the advantages of depreciation come some notable downsides, including:

  • Requiring capital budgeting, which could delay purchases and/or make purchasing approvals more difficult
  • Restricting infrastructure flexibility (If you spec something incorrectly, need more capacity, need to change a setup, etc. you have to go buy more equipment….that requires more capital budget.  It is easy to end up way over budget and in hot water.)
  • Lifecycling equipment every 3-5 years
  • Accurately forecasting costs for customer-owned equipment is notoriously difficult:  Forecasts must include colo, power, cooling, the humans to manage the gear, software/license upgrades, add-on technologies required to achieve the use case.

One very good reason to move to an outsourced, managed cloud is the benefit of moving from a capital expenditure to an operational expenditure. Particularly if IT is a cost center, shifting to Opex can more closely tie costs of doing business in IT to your actual projected revenues. Some Opex advantages include:

  • No requirement for capital budgeting approvals, making expenditure more easily managed internally
  • Highly predictable- low likelihood of exceeding budget
  • No equipment lifecycles required
  • High infrastructure flexibility

There is another major consideration in the decision to outsource IT infrastructure and services:  Some cloud hosting providers and managed service providers can structure service contracts like a capital lease, allowing you to enjoy the best of both worlds.  In this scenario, your Finance Department treats the service contract as if it were a capital asset, allowing for depreciation of the IT infrastructure, so you can access the advantages of depreciation while retaining the managed services and the other benefits of the shift to an OpEx model.

As we’ve discussed previously, this shift to an outsourced model can also increase your organization’s ability to access new innovation and shift internal focuses away from IT upkeep. Ultimately it comes down to how the financial requirements of the organization impact how IT lays out its technology acquisition vs. vendor strategy.

Agree/disagree with outsourcing cloud? Let us know on Twitter @CloudGathering.

By Jake Gardner

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