Six cloud migration questions for CFOs

January 7, 2020

A blog post by Matt Schwenderman, principal, Deloitte Consulting LLP, Raj Chhabra, managing director, Deloitte Consulting LLP  and Whitney Horner, senior manager, Deloitte Consulting LLP

Cloud technology’s ubiquity may have reached the point where the biggest risk for CFOs is not having a strategy in place for adoption of cloud-based solutions.

In addition to the technical and operational challenges of staying tethered to on-premise technology, companies face a fundamental business risk: keeping pace with competitors in an environment where the cloud represents a dramatic shift in how technology solutions are developed and delivered.

Knowing the stakes, CFOs typically ask less about the when and if of cloud implementation and quickly start focusing on the how and what. In Deloitte’s 2018 Global Outsourcing survey, 93 percent of respondents say their organizations are adopting or considering the cloud. Addressing these six questions—among those which CFOs commonly ask—can help finance leaders and their organizations make more effective cloud decisions.

Our CIO wants to move to the cloud over the next three years. Should we do it now or wait for the market to mature?
We see few companies today that do not have some sort of cloud initiative underway. Many are working on cloud pilots, some are pressing ahead with full migration, and the rest are somewhere in between. That means the question of whether to begin to move may be moot. Instead, companies should be asking: What benefits should we expect from our investments? How can we manage our cloud footprint more effectively? And how will our organization be able to pivot to the cloud most efficiently?

Leaders get excited about the cloud for many good reasons. They see the real promise of lower costs but, more importantly, the strategic value:

• Reduced time to market. Cloud platforms enable companies to scale and launch new products and services quickly—and assess their impact in real time.
• Scalability. By being able to provide extra resources when required, businesses can effectively manage spikes and lulls in demand.
• A way to drive agility and innovation. Major cloud vendors are bundling significant new capabilities with their offerings, providing more ways to stay nimble and innovate.

Is the cloud’s value proposition mostly tied to cost savings, or are there other advantages?
While the cloud is often less costly to operate than on-premise technology, there can be pitfalls along the way. The business case might be easy to build, but without accompanying changes in people and processes, it can be challenging to realize. Be sure to look at savings that may be associated with the value of agility and time to market as well as the impact on innovation.

Bottom line? Some companies are achieving returns of more than 10X on their cloud investments when they account for all the costs and benefits.

Finance itself is a promising cloud opportunity for some companies. For example, with cloud capabilities in hand, finance could produce and deliver real-time reporting and analysis to help business leaders make better decisions more quickly. The cloud can also enable finance to standardize and simplify processes. Given the challenges we’ve seen at some companies, these capabilities might be considered almost priceless.

I’m having a hard time getting my head around the accounting and tax implications of moving to the cloud. What are others doing?
Reporting and tax regulations for the financial treatment of cloud investments are complicated and have changed significantly in the past year. They will likely continue to evolve. Companies can find the latest technical information on Deloitte’s website, but here’s a high-level overview. For most companies, hardware costs are considered capital expenses. When a company moves to the cloud, those costs can become operating expenses. Cloud software is typically—but not always—bought and paid for on a monthly or annual basis.

Infrastructure services, on the other hand, can be billed in real time based on usage (i.e., per gigabyte of storage used or per minute a server is turned on). A company’s current tax structures can be affected by moves to the cloud. Allowable tax treatments, for example, vary for different types of costs associated with cloud services. They also vary across tax jurisdictions and may depend on the designated location of the company, the cloud service provider, and cloud assets and transactions. Make sure the tax department is involved in discussions from the outset. Also, be sure to align any accounting treatment decisions with auditors.

I’ve heard the security risks associated with the cloud are not better or worse—they’re simply different. How so?

Consider several broad areas of risk when contemplating cloud migration:

• Data security and privacy: The security concerns CFOs heard about five years ago are largely nonissues with the cloud today. In fact, the risk management practices of major cloud providers are often more sophisticated than those of their customers. Just be sure appropriate controls are established and enforced. Get security, legal, and compliance people involved early, but don’t let these considerations become roadblocks.
• Lock-in: Since the premise of cloud is pay as you go, companies often assume it’s easy to change providers. That’s not necessarily true. Migrating a large IT portfolio from one cloud platform to another provider can be challenging and costly. In terms of contracting, being locked in can mean significant financial penalties for terminating services early—or an inability to adjust pricing if commercial costs change.
• Compliance and regulatory risks: Cloud-related compliance requirements can involve a broad range of regulations. In many cases, companies may be giving some level of control to a vendor, which can be a challenging situation for auditors. There are also industry-specific regulators and considerations to keep in mind. CFOs should approach the cloud in a way that preserves their good compliance and regulatory standing.

We’re looking at a new core finance platform. Are cloud versions of ERP software ready for a company like ours?
Major ERP providers are favoring the cloud-optimized versions of their software, while some offer only cloud-native options. Though they’ll likely continue to support on-premise technology for several years into the future, much of their investment in innovation is now tied directly to cloud services. As a result, cloud solutions should be the default starting position for most companies looking at core finance platforms today.

For software as a service (SaaS), implementation timelines and complexity have been greatly reduced. While integrations across components or platforms still need to be built, two of the most time-consuming requirements have been cut dramatically. First, the time spent developing custom objects and functionality has been reduced with the availability of standard business processes and enhanced configuration capabilities. And second, the time required to develop reporting templates has shrunk. These templates are largely available out of the box, ready to go on demand.

The momentum building around cloud-based ERP promises something that finance organizations have long desired: the ability to uncover and share business insights faster and more easily. Cloud and on-premise versions of major ERP software solutions are inching closer to functional equivalency. That said, change management is an even bigger deal than it was in the past. Companies have to adapt to standardized processes because there’s little room for customizing their own processes. And with frequent updates and releases, teams will need to adopt a culture of continual improvement. That’s a good thing.

What cloud-specific issues should we be thinking about as part of contract negotiations for cloud services?
Volume discounts, service levels, security, and customization are just the beginning. Other issues such as lock-in, liability, indemnification, and intellectual property can also be considerations. Finance—as a partner to the business and a steward of the company— has a unique and indispensable role in working through all these issues.

To conduct effective contracting, it’s important to create an integrated team of finance, legal, procurement, IT, and targeted business functions to work together. Outside advisors can help too, particularly if the organization lacks in-house talent with experience in cloud contracting.

Cloud vendors typically build their services and pricing models around standardization, which also extends to how they handle contracts. They will likely resist requests for significant changes to standard agreements. However, cloud providers are in a race for market share. That means companies may be able to negotiate for additional benefits and service capabilities. With standardized approaches at the core, the way companies use these additional tools can be a key source of competitive differentiation.

Cloud services are continuing to evolve, with contracts changing regularly to include new considerations, terms, and conditions. A CFO’s own skills and awareness need to evolve accordingly, which is also true of nearly every aspect of the cloud journey.

This article first appeared on the WSJ.