October 13, 2022

OPEX is the new battleground of cloud for listed companies

By Mark Ardito

OPEX is the new battleground

I recently wrote in CloudTweaks about how cloud is forcing CIOs to work more closely with their C-suite colleagues to sell the benefits and its role as a business driver – and in particular with CFOs.

However, it’s possible that some CIOs in publicly-listed companies don’t yet fully understand what the move toward cloud is going to mean for their business and its bottom line. The potentially worrying thing is that all the benefits that cloud brings – even the financial ones – may get lost if analysts focus solely on the balance sheet.

The reason for this is that cloud is an operating expense (OPEX). Organizations that historically ran their own in-house data centers were able to depreciate and amortize those capital costs (CAPEX) and this was something CFOs could easily manage to ensure the finances were right.

But an OPEX is a monthly cost that sits on the balance sheet every month. Starting in this financial year, for example, businesses listed on the London Stock Exchange (LSE) have had to change their accounting treatment for cloud implementation that in the past would have been capitalized and depreciated, but now must be treated as OPEX.

This is due to an IFRS-driven (similar to the US’s GAAP accounting standards) accounting change, which is specific to the LSE. However, businesses listed on US markets like the NYSE or NASDAQ are going to face similar challenges.

Stock analysts (and CFOs) may get twitchy

The move to cloud does not change any economics, ROI or true revenue metrics – and in fact will often make businesses more resilient and cost-effective in the long run. However, it might change their reporting requirements and can also be seen to lower their reported profitability. Again, despite the fact that nothing actually changes economically or in terms of cash flow.

Many CFOs may not be as worried about the ROI of cloud or shifting the board’s mindset to understand the benefits. Their main concern will instead be explaining to investors and markets that their business has not changed despite the significant impact on their P&L reporting of profitability.

CFOs and CEOs have to attend regular stockholder calls and meetings and talk to the analysts whose opinions drive share prices. Without any context, an analyst might determine that operating costs are up and therefore profits are seemingly down. The CFO and CEO will have the frankly unenviable task of persuading those analysts that the lower numbers they’re seeing aren’t ‘real’ lower numbers.

CIOs are therefore going to have to justify their cloud investments in a way that their C-suite colleagues can buy into, and then easily explain to those markets and investors. How cloud strategy brings value to business outcomes. Linking a cloud strategy directly to your corporate business strategy is crucial to ensure the right outcomes for the investment.

And the thing is, this is not going to go away. Cloud has become the new normal for how organizations manage their enterprise software. Those monthly bills are going to keep appearing on P&L statements and CFOs are going to have to keep explaining why.

A change of skillset

The migration to cloud is also leading to another factor that may have financial repercussions: the skill gap.

Organizations used to running their own data centers 24/7 will have employees used to running those data centers continuously. But when you pay for every minute of cloud you use, the appeal of running them constantly drops away sharply.

Some businesses will want to hire cloud experts to manage that transition, but are the cloud gurus and natives going to want to work for a bank or an insurer when Silicon Valley comes calling? Probably not, so those organizations are going to have to upskill their people and invest in their existing employees.

And yes, that’s potentially another cost – even though it’s also a very real investment in the future of the business – that the CFO will have to explain to stock analysts on the monthly call and so will need the CIO to justify.

The truth is that investing into the upskilling of your organization’s workforce is critical. This workforce is loyal to your organization and understands your business, so retooling them is key to becoming a cloud native company.

Cloud is about money as well as tech

As I mentioned, this is not going away anytime soon. As more and more businesses undergo digital transformation and move to cloud services, more and more CFOs and CEOs are going to have to field angry calls from investors wondering why the P&L has taken a hit.

Their CIO colleagues are going to have a new job, to add to all their existing responsibilities – ensuring that their responses to those investors make sense and demonstrate that the business is still in fine financial health.

By Mark Ardito

Mark Ardito

Mark is a seasoned IT Executive with many years of experience specializing in transforming large enterprises to become Cloud Native companies. Mark’s proven track record with Cloud Strategy, Cloud Migration and Digital Transformation leadership makes him a leader in the area of cloud technology.
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