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Your Unexpected Partner In Solving The Cloud Paradox: The CFO

Forbes Technology Council

I am the co-founder and CEO of Azul, with 30 years of experience as an entrepreneur and executive in the technology industry.

Cloud computing represents one of the tech industry's biggest success stories over the last 20 years. By adopting the cloud, many companies have transformed their business. Gartner, Inc. calls the cloud "the centerpiece of new digital experiences" and predicts global cloud revenue to grow from $400 billion in 2021 to nearly $600 billion in 2023.

However, as Sarah Wang and Martin Casado of Andreessen Horowitz pointed out last year in their groundbreaking analysis, the move to the cloud carries a significant cost. As a company grows, the excess cost of cloud cuts into profit margins, which drags down a company's market cap. How big a problem is it? Wang and Casado estimated that in the "broader universe of enterprise software and consumer internet companies, this number is likely over $500 billion."

That's the frustrating paradox that growing companies now face: They can't afford to not start in the cloud, and they can't afford to stay there. If technology got us into this dilemma, can't we use technology to get us out? Certainly, tech leaders can find ways to make their company's cloud deployment more efficient, but they can't bring down these astronomical costs on their own. They need to team up with an unexpected partner: the chief financial officer.

Chief accountant. Head of back-office activities. "Dr. No." These CFO stereotypes no longer apply. Today's CFO is a digital transformation leader with a laser focus on harmonizing revenue growth and cost optimization. As a central piece of the company's leadership team, the CFO occupies an ideal position to apply an enterprise lens to align the priorities of IT, line-of-business managers and the executive suite.

As a business's use of cloud increases and becomes more decentralized, the need for centralized oversight also grows. The cloud is a transformation engine, often adopted in an ad hoc fashion from line-of-business leaders responsible for driving growth at all costs. This creates an increased need for aligning technology budgets with the organization's board-level priorities around margins and market capitalization—the ideal role for the CFO.

The CFO and technology leaders must be more closely aligned. A collegial approach is increasingly the norm, but regardless, the center of power is shifting to the CFO. Gartner expects that in two years, "widespread adoption of cloud will raise the CFO's influence over the chief data officer's (CDO) decisions due to explicit linkage of workloads to cost, bringing disruption to the CDO role."

Tech's partnership with the CFO is an effective strategy for balancing revenue and cost. Here are three ways CFOs can partner with technology leaders to solve the cloud paradox.

1. Set The Right Priorities

Financial operations (FinOps) is an iterative and continuous process that applies the principles of DevOps to the financial management of cloud assets. It calls for tight collaboration between the finance, tech and analytics teams to continually evaluate cloud resources on price, performance and business value, but the result is a more accurate budgeting model. Cloud cost governance becomes a shared goal by creating a strong correlation between cloud optimization and business results.

As Gartner's Lydia Leong writes: "Decisions about cloud expenditures are ultimately business decisions. Unnecessarily high cloud costs are the result of business decisions about priorities—specifically, about the time that developers and engineers devote to cost optimization versus other priorities."

A shared understanding of technology's effect on corporate financials and how sound financial management supports (rather than hinders) digital transformation is the key to success in this area.

2. Manage The Shift From Capex To Opex

A typical CFO looking at a cloud infrastructure bill will likely turn red at the spiraling operational expense (opex) costs. IT budgets historically have come from capital expense (capex), allowing CFOs to amortize resources for a tax advantage.

The financial hit on earnings lands especially hard on hypergrowth SaaS startups, which often are measured based on the Rule of 40: "A SaaS company's growth rate, when added to its free cash flow rate, should equal 40% or higher." McKinsey data shows that "investors reward companies that are at or above the Rule of 40 with consistently higher enterprise value (EV) to revenue multiples." Further, the increased popularity of EBITDA for financial reporting shines a spotlight on cloud costs, which do not depreciate or amortize like traditional on-premise hosting environments.

Accepting the opex model to manage cloud costs can create flexibility in funding, funneling resources toward the most critical business capabilities. That shift means a focus on value rather than strict costs.

3. Create A Culture Of Cloud Cost Awareness

Because cloud adoption has grown so quickly with its advantages of immediate infrastructure, automatic updates and improved security, companies often soar into the cloud too far and too fast before realizing costs are out of control with no processes in place to manage them.

As the one paying the bills and answering to shareholders, the CFO must work with technology leaders to raise awareness of cloud costs throughout the organization. This involves creating a coherent set of metrics that tie technology KPIs to financial outcomes in order to drive a culture change. Wang and Casado's article suggests making cloud spend a first-class metric because it has an outsized effect on gross margins and market capitalization. Their analysis reached a startling conclusion: Because a company's market cap is valued on some multiple of a bottom-line number, for every single dollar of gross profit saved, a company's market cap rose by 24x-25x.

It's possible to optimize cloud costs as your company grows, but it takes a combined effort from business and technical teams. Together, they can identify unused resources that eat up costs, eliminate unneeded storage fees and define the right size for computing resources. The result is a huge decrease in cloud expenses with no impact on performance or customer experience and an enormous boost to market value. That's an outcome that everyone can get behind.


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