Settling the finances around your company’s IT requirements can be a fraught process, with information technology often at the bottom of the list of priorities when fixing budgets. Cloud computing has the potential to make budgeting for IT requirements far easier, but there are pitfalls along the way.

Budgeting for cloud services: the key difference

From a budgeting viewpoint cloud computing services is a game-changer because it essentially moves your budgeting process from CAPEX to OPEX; from capital expenditure to operational expenditure. Companies are now less likely to budget for large systems and software license purchases that reoccur at extended intervals. Instead, budgets are for monthly, quarterly or perhaps annual payments in the shape of service charges that are often based on actual usage.

This shift has the scope to take the effort out of budgeting as, in principle, the financial outlay under the cloud model, is more predictable and funds are paid out evenly. So, IT expenditure in a cloud environment is not likely to cause a cash crunch or require an expensive lease arrangement to facilitate financing and cloud-centred billings provide immediate analysis of demand peaks and troughs.  

What are the cost elements of cloud computing?

It is important to understand that cloud computing expenses cover a range of facets. A 451 Research project executed at the end of 2016 shows that on average 42% of a cloud budget goes towards SaaS (Software as a service) applications, with 31% on infrastructure, 14% on managed services, 9% towards security services and 5% spent on the professionals that enable cloud functionality.

Clearly, the largest part of your budget will go towards rolling monthly subscriptions, or a monthly bill that is based on usage. On the one hand, this covers infrastructure as a service (IaaS), including servers and perhaps network access and these costs are often based on usage. The other major part of the rolling expenditure is fees paid towards SaaS, which is more likely to be based on a fixed fee for the organisation or per user.

The story does not end here. When budgeting for cloud services, UK-based companies should have a budgeting process that also includes an allowance for implementation fees, which can be substantial as not all cloud solutions are an instant best-fit. To match, your users will need training on cloud services both at an initial implementation stage and as an ongoing arrangement due to the continuous improvements common to SaaS.

The impact of your deployment model: the hybrid cloud

Not every business embraces cloud computing with equal enthusiasm. The regulatory environment can require a business to opt for a hybrid model where some technology requirements are met through in-house delivery and other requirements are met via cloud providers. Hybrid deployment scenarios will entail a hybrid budget: some of your budgets will retain CAPEX elements as your company makes provision for hardware that is in-house, while you will also adopt OPEX elements to cater for cloud provisioning.

However, hybrid cloud deployments pose a different budget challenge in that the CAPEX element of your budget will have to cope with the implications of integrating on-premise equipment with cloud solutions. Cloud providers may have less patience with ageing on-premise equipment and you may find that your upgrade cycle is sped up.

Cloud computing costs can hide in other departmental budgets

From a cost allocation perspective, cloud computing brings in an additional layer of complexity in that some cloud services can hide under the expenditure of non-IT departments. Your marketing department may be subscribing to bulk mail software, for example, without reporting it to your IT department. This can cause an overlap in expenses as you may already have a bulk mail provider for other purposes.

Cloud services are notorious for a growing shadow IT function in many organisations, and your cloud budgeting process should find mechanisms to identify and eliminate unnecessary duplication and to centralise reporting of SaaS expenditure.

Forecasting your cloud budget - and the element of surprise

Evenly spaced payments make managing the cash requirements around cloud services easier than is the case with an on-premise, CAPEX model. However, forecasting is still important as cloud providers do not always allow contracted requirements to be ramped down instantaneously. Forecasting also helps prevent overcapacity: redundant cloud services that are still paid for is a common occurrence. Only by monitoring real usage requirements are you certain to reduce cloud expenditure when appropriate.

Budget forecasts should allow for a degree of risk and uncertainty – or you may be involved in difficult discussions when your cloud expenses overshoot significantly. As a case in point, the post-Brexit drop in the value of the pound has prompted substantial hikes in subscription fees to SaaS offerings, without much in the way of a warning. You could also find a keenly-priced solution provider suddenly goes out of business, leaving only more expensive alternatives in place.

Get the budget process right and enjoy the savings

Cloud computing has been an enormous success in large part due to the efficiencies created by pooling hardware resources. No longer does your business spend chunks of money on idle computer equipment, instead you pay for what you use. Neither are you stuck with unwanted computing capacity when your requirements change. However, to enjoy these benefits you must budget for cloud computing needs carefully, don’t assume that moving away from the CAPEX model reduces the need for rigorous budgeting.