Wednesday, June 17, 2009

Define quote-unquote success

So you just signed a statement of work hiring contractors to help you transform from the parochial, siloed organization you are to the lean, plugged-in, "cloud" organization you want to be. How will you know when the job's done? And once it is, how will you know if you succeeded or failed?

There are three steps you need to take verify that your company has benefited from implementing a cloud solution.

First, identify key performance indicators. KPIs can include such puddle-deep thoughts as "Reduce IT infrastructure costs," "Improve operating costs," "Improve business process efficiency," or "Improve customer service and satisfaction." The trick is to get away from the warm-and-fuzzy and into hard numbers.

The second step is to capture metrics that support these KPIs. The surest ways to "Reduce IT infrastructure costs " are, of course, to reduce the number of servers and the number of people. Each box and each belly-button has an incremental cost. Do you know what those costs are? That's where it all falls apart, you see. Not a lot of gthe IT departments I've worked with excel at determining how much they'll save by taking one server off the floor. They do tend to understand the savings of taking back a system administrator's badge, but at some point you run out of people who actually know something about computers. A person who gets the same amount of money deposited in her checking account twice a month is easy to understand from a cost perspective. But what about that incremental server? How much does that standard hardware build cost? How much does that standard software stack cost? Oh, you don't have hardware or software standards? Or you do, but you don't understand how to burden the network or storage components? Or you're not sure how to distinguish between physical and logical servers? Or you're not sure how the software is licensed? If you have any of these problems, I'd recommend gaining a clearer understanding of your costs before you proceed with cloud computing projects or any other supposed cost savers, or you'll never know for sure if you've made good decisions.

The last step is the investment analysis. I don't like the term "ROI". I've got an MBA with a finance specialization and I'm not sure what it means so, I'm here to tell you, the sales rep from your vendor doesn't have a clue. A colleague of mine from IBM's IT Business Management community of practice tells me that there are at least 23 accepted formulas for "return on investment". (The one I mean when I use the term is also called "return on invested capital," and applies more to corporate financial reporting than to anything I ever found in a data center.) So what do your decision makers mean by ROI? Net present value? Internal rate of return? Payback period? What's your discount rate? What's your hurdle rate? Again, if you don't have a handle on these, good luck getting anything -- cloud or otherwise -- greenlighted. I assure you, the number-crunchers who work for the lines of business know this stuff inside-out and will have a much easier time justifying their pet projects to the CFO than you will.

Whether you use ITIL or CoBIT or PRM-IT or whatever process mapping system you choose, there's a big block that deals with how well you understand your costs. If your capabilities in this area are not as mature as they should be, this could be a huge barrier to your ambitions to grow into the cloud.

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Have a better day,

Bill Freedman


  1. OK, but how does this approach apply to internal clouds in very large organisations? Some people would say you can get the same financial effect with in-house cloud computing above a certain scale - is this true and if so where is the tipping point?