Five questions CFOs should ask about their organization’s cloud strategy

July 10, 2018

A blog post by John Tweardy, principal and technology strategy and business transformation leader, Deloitte Consulting LLP.

Last month, Gartner Group released its annual forecast of the worldwide public cloud market. The research firm expects revenue to grow more than 21 percent this year, but then stabilize as cloud cements its status as an information technology services standard.

With adoption maturing, now seems like a good time for chief financial officers (CFOs) to weigh in on their company’s cloud strategy. The CFO is, after all, uniquely qualified to address the accounting, financial, and investor-related considerations of cloud computing. Here are five key questions to get the conversation going.

1. What is the fee structure?

Cloud service fees can be tricky to recognize. If the fee is for a specified period, for instance, the typical approach would be to recognize the related expense ratably over that period. But that could change if there is evidence you did not receive the benefit in a ratable way. Another consideration is the payment options that the Cloud Service Provider (CSP) offers, such as a discount for paying upfront. This can complicate the expense timing determination process, including when to recognize a related asset or liability. The bottom line? It can take judgment to expense cloud service fees in a manner consistent with accrual accounting.

2. Are we using third-party software applications?

Many organizations turn to the cloud for additional processing power to support their own algorithms or applications. However, it is also common to deploy third-party applications in the cloud. The cloud might be private (that is, set up inside your organization’s firewall) or public (meaning the application resides on a CSP’s servers and people are accessing it through the public Internet). Either way, you will need to record each purchased application and amortize it over its expected useful life.

3. Are there other incurred costs?

Cloud computing often involves costs for consulting and other types of labor. The applicable guidance for recording such costs depends on the type of cloud implementation you have (Figure 1). Keep in mind there may be tax implications as well, which we’ll discuss in a separate blog. Often these arise from timing differences between book and tax bases resulting from a shift from a capital expenditure (CAPEX) model to an operating expense (OPEX) model. Other conditions with a potential tax impact include transfer pricing and receipt of energy credits.

Figure 1: Considerations for accounting treatment of different cloud structure

Source: Keeping your head in the cloud: The vital role of CFOs in strategic cloud computing decisions, Deloitte Consulting LLP.

4. What are the strategic benefits of cloud adoption?

Companies often focus on cloud’s cost-reduction opportunities. But it is also worth thinking about—and tracking—the more strategic benefits of a cloud investment, such as new lines of business, more market share, or greater customer satisfaction. For instance, one major manufacturer moved its after-sale customer service operations to the cloud, where the technology was more advanced than what was available in-house. This significantly improved customer service because it enabled the company to proactively contact customers about their equipment and perform maintenance before problems occurred.

5. How should we make the case with investors?

Because it can involve a shift to more variable costs, some CFOs worry about cloud’s effect among analysts and investors. To gain some insight into this dynamic, Deloitte looked at the filings, commentary, and analyst discussions of a group of public companies that had invested in the cloud. They revealed little concern about the increase in operating expenditures due to cloud adoption. But analysts did show interest in specific revenue opportunities from cloud adoption, underscoring the vital role CFOs can play in providing a persuasive story to share with the investment community.

The move to the cloud is in full swing. Compelling as its benefits are, cloud computing also raises important issues related to financial reporting and disclosure. CFOs have the opportunity to bring their insights to bear on these issues and work with stakeholders to deliver services with greater efficiency and speed.