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More and more Private Equity funds and their portfolio companies are having to evaluate the merits and approach to moving their technology to the Cloud. While the Cloud offers numerous financial and operational benefits, the underlying technology and decision-making process behind a Cloud migration is not simple, nor is it easy to understand. It is essential to consider a mix of analysis including: existing business requirements, current IT infrastructure, opportunity cost, business agility, and the quantification of business risks associated with security, compliance, and data privacy. This is part 1 of a 2 part series.

Opportunity Cost

Opportunity cost, along with Capital Expenditure (CAPEX) and Operating Expenditure (OPEX) calculations, identifies the real benefit of transitioning IT spend from on-premise resources towards Cloud services. Opportunity cost analysis provides insights into how invested capital can be utilized for the next-best alternative.

Traditional on-premise IT spend is both capital and time intensive – hardware purchases and software licenses are upfront expenditures that need to be carefully planned based on the projected growth of a business. However, predicting the exact IT requirements is complex due to external factors, such as market demand and competition. In addition, the capital used for CAPEX purchases cannot be redirected, even in the case of underutilized IT resources. Thus, they are sunk costs.

Cloud computing provides the ability to match supply and demand; alleviating over-investment or under-investment on IT resources. Additionally, Cloud services offer subscription-based pricing models that incur IT spend as an OPEX, due to their pay-as-you-go pricing structure. This allows optimal resource utilization and greater budget flexibility with the ability to manage costs at a Line of Business (LOB) level, or on a subsidiary level.

Business Agility

Business agility is essential for faster revenue growth, sustainable cost reduction, and for the adaption of business model changes that result from disruptive innovations. Due to the incredible rate of technology innovation, the digitization of businesses is rapidly becoming a core driver for competitive advantage. For businesses in fast-paced markets, disruptive innovations from new entrants has become the new-norm, and the slow-to-compete are often faced with an imminent decline in market share.

Most organizations deal with an infrastructure landscape filled with legacy applications that cannot be easily adjusted/upgraded to handle the latest innovations. This results in companies falling behind the technology adoption curve; gradually losing control over the core business. However, with Cloud offerings, the time to implement innovation is reduced drastically. Many Software-as-a-Service (SaaS) offerings, the defacto service model for the Cloud, provides added value to companies by offering a continuous stream of upgrades. These recurring enhancements add new functionality, utility refinements, and leaps in performance through updates. Thus, SaaS enables companies to focus on their core business activities rather than actively manage their own IT infrastructure.

Cloud services enable rapid advancements for innovation and cost optimization efforts.  Cost optimization is achieved by eliminating the sunk costs that result from the legacy IT spend that required upfront capital investments. Capital commitment for subscription-based pricing grants the flexibility for companies to choose the right solutions at the LoB level, along with best-of-breed vendor solutions.  In the event business costs or resources must be slashed, OPEX can be reduced in a relatively short timeframe.

Business Risk Associated with Security, Compliance and Data Privacy 

Security, compliance and data privacy have become increasingly critical for business environments. The fast-paced evolution of new business models has created a requirement for digital transformation, and to proactively manage risks associated with this transformation, the Cloud has become the most effective tool. At a high level, economies of scale allow Cloud-based service providers to invest heavily on the state of the art security standards to meet the growing demands of cyber security and intrusion threats – benefiting the customers of these providers.

Due to the ease of entering and exiting a subscription-based contract, it is critical for service providers to maintain their customer’s trust to ensure customer stickiness and improved customer lifetime value. Cloud service providers invest heavily on security aspects, and in fact, network security and cybersecurity are considered core competencies of Cloud service providers. Business risk can be mitigated by strategically partnering with a trusted cloud service provider that can demonstrate high standards of security and compliance requirements though certifications and regular external audits.

Many companies who have undertaken a traditional ERP integration can testify, on-premise IT spend is both capital and time intensive – hardware purchases and software licenses are upfront CAPEX that need to be carefully planned based on the projected growth of a business. In contrast, Cloud computing provides the ability to match supply and demand; alleviating over-investment or under-investment on IT resources via pricing models that incur IT spend as OPEX. Cloud allows optimal resource utilization and greater budget flexibility, with the ability to manage costs at a Line of Business (LOB) level, or on a subsidiary level.  

co-authored with Sean Epstein and Sean Kibbe.

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