Preparing for what’s next: Financial considerations for cloud migration

In the kick off blog of this series, I shared our top recommendations to accelerate your cloud migration journey, one of which was around aligning key stakeholders across your organization. As you move through assessments and plan your migration, it is critical to get buy in from your CFO and other financial stakeholders—even more so in today’s challenging macro-climate.

IT and finance organizations need to be aligned around how to be agile to adjust to rapidly shifting demands while ensuring that their cost structure is lean enough to weather tough market conditions. With this dual focus, it is critical to understand not only the technical benefits of a cloud transition, but also the financial and economic opportunities associated with it. Today I'm sharing my own experience of partnering with finance along with the wisdom that customers have shared about their journey.

How can cloud migration affect CFO priorities?

Here are three key areas that IT organizations need to internalize and align on with their finance organization as they plan cloud migration:

1. What’s the holistic impact to the organization’s financial posture?
2. What will the impact be on external and internal finance KPIs and processes?
3. What operational changes are required during and after migration to ensure that budget/ROI controls are met?

How is the organization’s financial posture going to change?

Azure customers constantly unlock new, positive ROI projects previously not possible on-premises as they migrate workloads. By design, Azure is built to facilitate business agility, creating opportunities for true competitive advantage and substantial decrease in time to market. As a result, our customers recognize significant financial benefits driven in large part by cloud flexibility and elasticity and changes in businesses’ financial operating models that reduce asset purchases and upfront cash investments.

Cloud flexibility and elasticity

First, Azure customers can adjust their cost structure to improve their organization’s bottom line, which is table stakes in today’s environment. In recent earnings calls, CFOs of companies not leveraging the cloud mentioned their inability to reduce fixed expenses, which hurt profitability. As our customers migrate to Azure, they are shifting to a cost structure that is variable by design:

Figure 1: Cloud cost structure provides flexibility

Next, Azure customers can maximize resource efficiency. We have worked directly with large and small customers alike who were running on-premises workloads at very low resource utilization. These customers purchased assets for peak demand and lead-times, but most of the time those servers, and even some datacenters, were sitting idle and underused. By rightsizing and optimizing capacity when migrating to Azure, customers can realize economic benefits from cloud scale and elasticity. As an example, the built-in scalability in Azure has helped Maersk quickly scale up on demand eliminating the need to maintain idle resources during off-peak times.

“Scalability is one of the big benefits we get from Azure. In the past, it might have taken us months to procure and configure servers and get them into production. Now, we can scale up on demand in Azure in a matter of minutes." - Musaddique Alatoor, Head of Equipment Innovation, A.P. Moller - Maersk

Finally, shifting to a cloud model can reduce costs by enabling customers to consume resources only during peak usage periods, while reducing capacity when demand needs drop.

Changes in the financial operating model

Key financial benefits of Azure are driven by a fundamental shift in the IT operating model, which benefits the organization’s core financial statements in the following ways:

◉ Balance sheet: Prior to migrating to Azure, many of our customers owned or operated their datacenters. These were expensive long-term assets that limited the cash and capital required to grow the business, support strategic initiatives, and respond to market conditions. Once on Azure, our customers avoid buying equipment, repurpose expensive real estate, and shift datacenter operations costs into developing cloud applications and other projects that drive business growth. This makes their balance sheet more agile, shifting fixed assets to cash. This is what drove Maersk to move their five regional datacenters to Azure to lower the company’s risks and position them for continued growth.

◉ Cash flow statement: Azure customers save immediate cash by avoiding cyclical and sporadic IT asset purchases. With the “pay for what you use” model along with platform capabilities like policy and tagging that Azure enables, CFOs increase visibility, predictability and delay cash spend.

Income statement (profit and loss): Over time, Azure customers can improve profitability by reducing the cost to deliver equal or larger IT value by taking advantage of Azure’s flexibility, low management costs, its broad portfolio of services and pricing models.

"We're now saving about 30 percent a year on infrastructure costs just by moving to Azure, with more flexibility, better servers, greater customization, and more freedom to do what we want." - Darren Gourley, Chief Technology Officer, CYTI

How will financial KPIs and processes change?

When migrating from on-premises to Azure, there are several financial benefits that subsequently impact KPIs and finance processes. The two most prominent are: 1) budget and financial reporting processes: expense shifts from capital expenditure (CAPEX) to operational expenditure (OPEX); 2) Impact on EBITDA (earnings before interest, taxes, depreciation, and amortization).

1. CAPEX to OPEX: During an Azure migration, spend that was previously allocated to CAPEX is now being redeployed to OPEX. This is optimal from a cashflow timing and a balance sheet flexibility perspective but requires CFOs to shift budgets to support the new model. Capstone Mining used this approach to significantly lower their capital costs by moving to Azure.

"We wanted to eliminate $3 million (USD) in capital costs over about three years, and to reduce our operating costs by approximately the same amount. At the same time, we wanted to improve our quality of service. With Azure, we're confident about meeting these goals." - Jim Slattery, Chief Financial Officer, Capstone Mining

2. EBITDA: EBITDA is a financial metric that companies use to measure profitability. This metric ignores real costs like server spend. When moving to the cloud, EBITDA is impacted because the metric can no longer ignore costs like server depreciation. When moving to the cloud, if your company tracks EBITDA, it will likely be impacted from a migration shift. As opposed to overly focusing on EBITDA, many customers choose to identify additional financial metrics that better measure business value improvements (such as cash flows, operating income, or cost of goods sold efficiency).

Managing financial KPI’s and processes is a critical component of a CFO’s job. By creating a channel of communication with your financial stakeholders and highlighting symbiotic relationships of some of the KPI and process impacts of a cloud migration, you can begin working with your finance team to proactively reset expectations around both capital/operating budgets and EBITDA targets in a cloud vs on-premises world.

Implementing the business case: Ongoing cost-optimization and management

Once the cloud migration project begins, here are a few tips and best financial practices for success:

1. Reducing on-premises asset acquisitions: There must be broad internal alignment and processes to evaluate and control how and when teams buy new on-premises assets. Every new purchase will add fixed costs that will prevent cloud savings for a longer period.

2. Initial resource clean-up, rightsizing, and optimization: When migrating to Azure, consider which workloads are no longer needed and can be turned off. For workloads still needed, consider what can be done to optimize those resources and operational hours, leveraging tools such as Azure Migrate.

3. Continuous cost optimization: Workloads aren’t static. Once in Azure, leverage our tools (including Azure Cost Management and Azure Advisor) and establish processes to monitor resources and patterns to continuously optimize cloud costs.

4. Resource tagging and spend categorization: Azure allows for simplified resource tagging and cost allocation compared with on-premises. This helps increase spend accountability, while evaluating workload ROI. Through resource tagging you are able to better align your spend to cost categories like the cost of goods sold (COGS) or research and development and allocate costs of workloads directly to underlying business units. Targeted cost allocation can directly help drive efficiencies and reductions.

5. Billing models: Azure billing models like reserved instances and spot pricing are fantastic opportunities to save money. As an example, Azure three-year Reserved Instances (RI) do not require upfront payment, have tremendous flexibility, and provide discounts up to 72 percent.

6. Azure Hybrid Benefit: With Azure you can take advantage of your existing Microsoft licenses with Software Assurance to avoid incremental licensing costs for migrating workloads and maximize previous investments.

Figure 2: Well-optimized cloud usage can free up excess capacity

Aligning cloud spend with underlying workload usage

A) Idle capacity: Azure allows customers to eliminate idle capacity intended to cover future growth across workloads. Actions like rightsizing or eliminating unnecessary workloads can help you reduce your idle capacity when moving to the cloud.

B) Variable workloads: Azure customers only pay for the hours they need when demand temporarily peaks above average levels on variable workloads. Taking advantage of tools and actions like VM scale sets and “snoozing” can help you only pay for the resources needed.

C) Predictable workloads: Azure customers can minimize costs of predictable workloads by taking advantage of Azure Reserved Instances and Spot prices.

Source: microsoft.com