In general I think cloud computing is a great thing. Elsewhere I have talked about the benefits that it can bring to many organisations. Many of the positive financial benefits of cloud computing are well-known: pay only for what you need or use; cost certainty; being able to reduce the cost of ICT as the demand for ICT services reduces; reducing the need for massive upfront investment in infrastructure and so on. One of the benefits that I have been more sceptical about, however, is the way that cloud computing moves the cost of ICT from capital expenditure to operational expenditure. From my point of view money is money. Merely moving it from one line on the budget (capital expenditure or capex) to another line on the budget (operational expenditure or opex) seems to me to be no benefit at all. On investigating the issue further it seems that there are some unusual circumstances where this is a bad thing. These situations really only exist for large enterprises or government agencies rather than smaller users of cloud services. But for these organisations these problems can be significant disincentives to the adoption of cloud services. Understanding these factors can mean the difference between a cloud adoption initiative succeeding or failing.
If your organisation is capital rich and opex poor then the financial model of cloud computing does not work for you. In particular many government departments have capex and opex allocated separately by the central treasury (this is how the New Zealand Government works, and I would be surprised if other governments don’t also use this model). If your organisation has large chunks of funds allocated to capital expenditure and it cannot effectively move it to cover operational expenses then the cloud computing economic model of moving costs from capex to opex is a tricky thing for your organisation to manage. This can be an effective barrier to the adoption of cloud computing services in central government and will be something that treasury departments throughout the world will be looking at as the trend towards governments adopting the cloud continues.
Even if an overall organisation doesn’t work like this individual business units often do and if business units fund IT projects (as is often the case in large organisations) then similar considerations apply. Sometimes organisations pool the capital expenditure at the organisational level, and allocate operational budgets to lower level business units. Anything that increases the operational expenditure of that business unit will probably be viewed negatively. Business unit X is unlikely to go for a project that will be solely funded from its operating budget as opposed to one that is funded from the central pool of capital funds.
In some situations (and in some jurisdictions) capital expenditure may qualify for Research & Development tax credits. If the capital expenditure on ICT is part of a research or development effort to come up with a new product for instance, some governments give tax relief on that expenditure. The same is unlikely to apply to opex spent on cloud services. This can mean that such capex is more effective (i.e. it is worth more) than equivalent money spent on opex. So, this in turn may be a disincentive to use cloud services.
Capital costs are also usually depreciated over time. Depending on the organisation and the asset that might be over three, five or even ten years. Any initiative that moves cost into operational expenditure before the asset it is replacing has been fully depreciated is likely to mean an increase in the financial costs to your organisation (unless the cost savings are so substantial as to outweigh the depreciation amounts). Particular cloud initiatives therefore need to be carefully aligned to the investment and refresh cycles of existing ICT assets.
In short, if you are considering a programme of cloud adoption you need to understand your organisations funding, cost and expense models to ensure that there are no financial or management disincentives to the adoption of these services. It would be a great shame if a fantastic cloud initiative that could deliver costs savings and improvements to business agility and effectiveness foundered on the way that operational budgets and costs were allocated.