14 signs your cloud journey may be off track
Despite offering a pay-per-use cloud service to your business, are you finding it difficult to compete with your existing on-premise solutions? If so, then read on and we will discuss why this is a problem and what you can do about it.
Nothing comes for ‘free’
In many organisations, the IT department is responsible for a large budget. Each year, the department is allocated budget to cover headcount, software, services and a certain amount of infrastructure. The scope of the budget is hard-fought but, once settled, the department is then funded (in theory) to service the needs of the business. This is BAU.
Every now and then the business will request a service not offered by IT. To add this service, a project must be spun up. IT will estimate the cost of the service, it will be included in a business case and, if the business case is successful, then IT will go about standing up the service as part of an IT delivery project. Once the project is complete, the service is ordinarily included in BAU and cost for upkeep is added to subsequent budgets.
Unfortunately, this funding model can create perverse incentives, causing problems for the business such as reduced agility and increased costs. In future articles, we will explore two serious issues in depth (1) encouraging empire building and (2) fostering monopoly behaviour around a “strategic” asset or service. For the purposes of this article, we will deal with a third problem that arises from the funding model: The impression that IT services are ’free’.
Of course, IT services are not free; their true cost is hidden deep within the overall IT budget.
What does this mean for your cloud service? First and foremost, it turns one of the key value propositions of your cloud service, pay-per-use, into a liability. Assuming your cloud team plan to pass on the cost, why would the rest of the business move to cloud when they can use the ‘free’ services offered by IT?
It’s time to change your funding model
How to solve this problem? First, acknowledge its source. In traditional IT departments, IT costs are not accurately allocated to the business. Many organisations have acknowledged this problem and have attempted to solve it via a chargeback mechanism. In fact, many traditional IT solutions include chargeback as a feature of the service.
Introducing a chargeback mechanism to correctly allocate IT costs is a good start—even without cloud services—as it will make it possible to accurately estimate the real value of traditional IT solutions
However, this solution shines a light on a second problem; the fact that for any new IT service, the first IT project to use the service will pay for most of it, whilst subsequent projects will only pay a small proportion to cover the delta. As a result, every project team has an incentive to wait until another project team pays for the IT service.
This often leads to horse-trading between project managers as each attempt to shift costs to others, wasting everyone’s time. To solve this second problem, your business will need to re-imagine how to deliver IT services to apportion the costs fairly across projects.
Fortunately, this is where the pay-per-use nature of cloud-based services becomes important. By providing a pay-per-use cost model for your cloud service, you will remove the incentive for project managers to horse-trade and provide a fair way to allocate costs.
Of course, delivering your cloud service will require funding and ordinarily it would be provided via an IT project – so we are back to the horse-trading problem. However, in the earlier blog, "Sign #1: You’ve built a cloud landing zone and no-one is using it", we explained why the IT project delivery model is a problem for cloud services and recommended your cloud team move to a product development model instead.
In that article, we proposed your cloud team focus on delivering features to meet the needs of your users. Here, we propose you change your funding model and introduce a cloud business case. A cloud business case is designed to complement the product development model by funding new features on an incremental basis. Compared to the traditional business case that is designed to fund a time-boxed project, there is no end date for a cloud business case. Instead, funding is ongoing, like BAU activities.
Tip: You will need to work with your finance team to build a financial model to support your cloud business case.
Of course, there is nothing magical about a cloud business case: You must still demonstrate that the benefits outweigh the costs. So, in addition to charging your customers, you will want to implement new methods for tracking progress such as feature utilisation, feedback from users and even bug fixes.
Introducing a cloud business case and charge-back will enable your business to compare costs between cloud services against traditional IT solutions. At DigiRen, we have years of experience building cloud solutions. We specialise in building Cloud Operating Models that enable businesses to take advantage of their cloud investment. Implementing a cloud business case to complement the product development model is an important component and if you would like to learn more, please contact us at solutions@digiren.com.au and follow us on LinkedIn.
The next article in this series will explore why business cases that involve IT are so large and why this poses a problem for company agility. Stay tuned...