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A New Key Financial Metric for IT’s Cloud Journey

Author: Mark Sarago

Working with numerous customers on their journey to the cloud has exposed the Accelerate team to a number of metrics that are used to determine an organization’s health and overall value to the business. Let’s focus on a new financial metric that is gaining popularity: private cloud versus public cloud cost per workload.

In their seminal paper, The Balanced Scorecard—Measures that Drive Performance, published in the Harvard Business Review, Robert Kaplan and  David Norton introduced the balanced scorecard as a performance measurement framework. It built on traditional financial measures by adding important non-financial performance indicators to the mix. As a result, it gives executives and managers a more balanced view of organizational performance.

The balanced scorecard has proven to be an effective method of communicating an organization’s overall strategy by establishing a balanced set of tangible goals and the framework of measuring progress toward those goals. The balanced scorecard suggests that we view the organization from four separate perspectives, and to develop metrics, collect data, and analyze the data relative to each of the perspectives, which are:

  1. Financial Perspective – To succeed financially, how should we appear to our shareholders?
  2. Internal Business Perspective (Process) – To maximize our business value, at which processes must we excel?
  3. Customer Perspective – To achieve our vision, how must we appear to our customers?
  4. Innovation and Learning Perspective – To achieve our vision, how will we sustain our ability to change and improve?

CIOs quickly saw the legitimacy of the balanced scorecard and have successfully used it when communicating strategy to their team members, and the value of their information technology activities in relation to their organization’s business executives and customers.

Each of the four perspectives is important, but the one that gets the most attention from business executives — and seems to cause the most concern and confusion for CIOs — is the Financial Perspective performance measurement. It can also be said that the Financial Perspective performance measures are the most important for business executives because the primary language of business is conducted in financial terms – How much will it cost? How much will this save over time? What is the financial break-even period? What is the ROI? — and so forth.

CIOs have responded to the Financial Perspective performance measures of their balanced scorecards by tracking financial metrics such as:

  • Actual to Budget: How does actual OpEx spend compare to the original OpEx budget?
  • Forecast Accuracy: Is the accuracy of the OpEx spend forecasts over the past 12 months within plus/minus two percent?
  • Cost-Per-Business-Unit Trend: Is the IT total cost of ownership (TCO) per unit of business output (e.g., airline seat mile flown, mortgage transaction count, automobiles manufactured) increasing or decreasing over time?

With the advent and popularity of cloud concepts and technologies for IT organizations, we now ask:  What would a CIO want to see as a financial metric in the balanced scorecard to represent their organization’s journey to the cloud?

A few organizations I have met with recently, and which have mature metrics tracking and reporting in place, have already answered the question. They measure their IT TCO per workload in their private cloud against the price of hosting the same workload on a public cloud service such as Microsoft’s Azure or Amazon Web Service’s EC2. When doing so, they also add data transfer into the cost, that is, the cost of communicating the data in and out of the service to computational workload costs incurred.

The metric that compares private cloud workload cost versus all-in public cloud workload pricing is extremely valuable to the CIO. If your private cloud workload cost is lower than public cloud workload pricing, you are showing immediate business value through your IT operation. Conversely, if your private cloud costs are too high, business management is certainly justified to ask: Why should we use your service if we can get it cheaper from a public cloud provider?

Some organizations are so confident in calculating the cost of their private cloud costs per workload and the efficiency of their operation that they have started to build in an added twist. These efficient operations are using the difference or spread in costs between private and public solutions as IT operational “profit.” In turn, the “profit” is used to acquire new equipment and software as they refresh their private cloud going forward. These organizations are truly running IT like a business.

If you aren’t familiar with the balanced scorecard for IT, please give it a deeper look. While doing so, also consider including a new metric to the Financial Perspective performance measures, and include the private cloud versus public cloud cost per workload.

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Mark Sarago is a strategist with VMware Accelerate Advisory Services.

VMware AccelerateTM Advisory Services can help you define your IT strategy through balanced transformation plans across people, process and technology. Visit our Web site to learn more about our offerings, or reach out to us today at accelerate@vmware.com for more information.

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