What not to like about cloud computing? It allows companies to use effectively and efficiently shared hardware, software and other services as needed. The cloud model moves generally the responsibility for the property, maintenance and IT services by an internal IT organization to an external provider. Just ask any software, infrastructure or platform as a service provider on the benefits. They can spout from memory as the Pledge of Allegiance: efficient scalability, high availability, greater agility, disaster recovery, labor mobility, increased security, reduced investment, and the list goes on. It sounds like great news for any CIO whose license plate is overflowing with 'wake up in a cold sweat' challenges in all these areas. Where do I sign, right?
"not so fast!" Says the CFO
The companies that are considering a move to cloud computing must fully understand the decision could have possible effects on the Company's key financial metrics, including EBITDA. What is EBITDA? EBITDA is defined by Wikipedia as: company earnings before interest, taxes, depreciation and amortization. EBITDA is an accounting measure calculated with net income of a company, before interest expense, taxes, depreciation and amortization are subtracted as a profitability measure current of a company.
Because a CIO be worried EBITDA? The EBITDA is widely used in many areas of finance when assessing the performance and valuation of a company. In many cases, the EBITDA is also a key metric used to determine incentive bonus of an executive team, including the IOC. Now I have your attention?
If a company is not using cloud computing and decide to purchase hardware, software and other technology infrastructure spending is financially reported as capital expenditure and is depreciated over time. Essentially, capital expenditures have no negative impact on EBITDA. However, cloud computing fees are recorded as an operating expense. Services recorded as an operating expense can have a negative impact on EBITDA because this metric is adjusted for the amortization of investments, but not for operating expenses.
The CIO PARADOX
Investing in cloud computing can provide many benefits to the business, including reducing the overall expenditure. However, as cloud computing costs are treated as operating costs, they have a negative impact on EBITDA, and possibly you and your boss compensation. On the contrary, the purchase of hardware and software in a business-as-usual model will cost more, but have no negative impact on EBITDA.
What is a CIO DO?
First, it is more important to the CIO, CFO, CEO and other decision-makers to discuss and understand the Cloud Computing - Paradox EBITDA. Given that the financial implications for the company can be significant, it is imperative that the executive team to be aligned on all substantial IT spending decisions EBITDA impact. Second, cloud computing solutions could / should reduce the resources required to run IT operations. Since the operations personnel is typically reported as operating expenses, this reduction in staff could offset the impact of cloud computing spending on EBITDA. Finally, there may be hope on the horizon as financial accounting standards continue to evolve to include more guidance on the reporting of cloud computing costs, potentially making these decisions easier. Until then, all CIOs must continue to carefully consider all the financial implications of their IT purchases.
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