How are the finances of your company affected by a Cloud Migration? Showing a financial benefit of using the cloud can be a bit tricky. You need to show that shutting down an operating data center and moving that money to pay the bill of a cloud provider will, in fact, save you money. How can a cloud provider provide technical resources cheaper than doing the same thing in house?

The answers may surprise you.

Today on Modern Digital Business.

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Transcript
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Today on modern digital business.

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How are the finances of your company affected by cloud migration?

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The answer may surprise you.

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Are you ready?

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Let's go!

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Showing a financial benefit of using the cloud can be a bit tricky.

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You need to show that shutting down an operating data center and moving

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that money to pay the bill of a cloud provider will in fact, save you money.

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How can a cloud provider provide technical resources cheaper than

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doing the same thing in-house?

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Well, there are many reasons why, but first we have to understand a

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little bit about the different types of money available to a company.

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We have to understand the financials for the cloud are quite different than they

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are for an on premise infrastructure.

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Let's start with the basic lesson about money.

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Not all money is the same.

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Money comes in different types and the type of money you need

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to spend is critical to people like our chief financial officer.

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Understanding a bit about financial language will help you

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understand the financial costs and benefits of a cloud migration.

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Let's talk about the three basic types of expenditures a company makes.

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The first is a capital expenditure.

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A capital expenditure is the purchase of equipment that is expected

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to be used over and over again.

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Presumably for multiple years, the single purchase buys something that is used

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by your company over and over again.

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This could be the purchase of equipment , molds, hardware or buildings.

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Costs for capital expenditures are typically depreciated over many

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months, or years in order to make them easier to budget and tie their costs

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and value closer together over time.

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The next type of expenditure a company makes is a fixed expense expenditure.

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A fixed expense is a purchase of an item that is used or consumed by the business

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over a relatively short period of time.

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A good example of a fixed expense is buying an advertising spot.

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Money is spent for a particular period of time, the time the ad is run and usually

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that's over a relatively short period.

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Other examples are monthly SaaS fees, utilities, and some

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types of employee salaries.

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These are common expenditures that companies make

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. Fixed expenses are typically

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While, they can drive sales, like for example, marketing

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expenses can drive sales.

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Sales, don't directly drive them.

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You don't purchase something as a fixed expense because you made a sale.

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Instead, you typically pay the fixed expense to accomplish something that will

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hopefully eventually drive towards a sale.

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The last type of expenditure is a COGS expenditure.

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COGS stands for cost of good sold a COGS expenses is an expense

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that can be directly tied to the purchase of a particular product or

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service COGS go up as sales go up and they go down as sales, go down.

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If your company builds a product such as let's say a hammer, the cost

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of the material and the labor to assemble the hammer are all COGS.

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The amount you spend is typically in direct proportion to the

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amount of revenue you bring in.

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Given this close tie to revenue, COGS are tracked differently.

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The actual amount of COGS money you spend typically isn't as important like

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it is with capital or fixed expenses.

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Instead you care about the ratio of COGS spent to revenue.

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Keeping that ratio in mind is much more important than worrying about

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the absolute amount of money spent.

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COGS are typically easier to plan for.

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They're easier to budget and easier to consume than any of the

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other type of expenditures, since they're driven directly by revenue.

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It's relatively easy for companies strapped for money, for instance, to

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borrow money to pay for COGS, because there's revenue tied to that cost.

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And it's much harder to borrow money, to pay for fixed expenses where there isn't

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revenue directly tied to the expense.

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All of this matters because when a company builds out an on premise

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data center, they're spending lots of money on capital expenditures and

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some more money on fixed expenses.

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The two types of money that are harder to come by, and they're

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not tied directly to revenue.

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This is because you build the data center in advance in anticipation of needing it.

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You need to build a data center, whether or not revenue comes in or not,

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because you need to be ready to handle the traffic when revenue does come in.

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Building a data center onsite, or even in a co-location center requires significant

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upfront capital and fixed expenditures.

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But when you build out a cloud data center, you build out the pieces

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dynamically when you need it.

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When you have a small amount of revenue, you need a small data center.

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As your revenue grows, you can dynamically change the size of your

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data center easily and quickly.

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You allocate servers to handle traffic when traffic is high.

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You release those servers when traffic is low.

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You allocate storage and network resources in the same manner, your

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costs are typically directly tied to the pieces that you allocate.

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And hence, they're typically tied to the things related to revenue,

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namely traffic, data and networking.

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So really what you're doing when you move an application to the

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cloud, is you are transferring the cost of operating that application

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from using capital expenditures to using more COGS expenditures.

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Since how much you spend is tied more closely to the amount of revenue coming

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into the company, it is often much easier to justify a COGS expenditure

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compared to a capital expenditure.

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Understanding these differences and being able to communicate these

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topics effectively with your CFO and other financial individuals in

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your company, makes it easier for you to speak the language of the

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cloud in the language of money, the language that your CFO understands.

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Talk to your CFO, see whether they're concerned about the

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capitalized costs of a data center.

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Then ask them about the value of switching capitalized costs to COGS in your company.

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You may be surprised how important of a discussion this can be towards your

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decision on using cloud computing or not.

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Are you interested in learning more about cloud computing?

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How about taking one of my cloud courses on LinkedIn learning?

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My two course series "Framing Cloud Discussions for the C-suite"

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and "Presenting Cloud Migration Benefits to the C-suite" talks

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about this topic and many others.

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Take a look at leeatchison.com/courses for more information, or take