Don’t Overlook Cloud: A Strategic Tool for CFOs

The role of the CFO is one that is undergoing rapid and dramatic evolution. Prior to the mid-1970s, one research study finds that less than 10% of American businesses had a chief financial executive. Today, the scope of the CFO includes much more than just accounting and finance. Many enterprises have offloaded the accounting expertise to a Chief Accounting Officer or to one of the CFO’s trusted lieutenants, the Controller.

CFOs occupy a unique position within the enterprise, deeply involved with the holistic strategy, operations and performance with the CEO. In fact a recent study estimates that 30% of CFOs are dual titled as COOs. This makes perfect sense when you consider that modern CFOs occupy a unique position within the enterprise. The CFO is interconnected with all parts of the business and is frequently seen by the board as a neutral arbiter in the C-suite. The CFO is often the “chief metrics officer” as well.

What all of this means is that the CFO is now charged with seeking new sources of value, fending off digital disruptors, and leading company-wide transformation. The CFO is no longer simply the steward of value preservation and is now the CEO’s partner in value creation. This strategic focus is of equal or greater importance than cost management. To meet this broad challenge, many CFOs are looking to cloud as a tool to support their strategy. In fact, cloud adoption by the CFO is gaining momentum, with 48% of nearly 3,000 finance leaders surveyed saying they view cloud as critical to the performance of their organization.

Cloud must provide significant cost savings, improved resilience, and improved security. I won’t attempt to convince the reader of any of those facts here, that’s not the point of this blog post. A common thread in my conversations with CFOs is that the cost savings, increased resilience and improved security provided by cloud are just table stakes. What CFO would adopt cloud if this wasn’t the case?

However, if there is any question, I have many talented colleagues that specialize in these areas and they are here to help you prove out these facts. You can find them at the Cloud Economics Center.

At Amazon we classify decisions into one-way and two-way door decisions. By this we mean that one-way door decisions are those that are not easily reversed, while two-way door decisions can be easily reversed at little or no cost. The significance of this is that two-way door decisions do not require the same level of analysis, and such decisions can be safely pushed down into the organization. This is one of the attributes that makes Amazon very agile.

Investing in AWS Cloud is a two-way door decision. AWS Cloud solutions can be turned on, tried, experimented with, and if desired, they can be turned off at any time. There are no large up-front costs, no minimum usage fees, and no exit costs. In addition, with AWS Cloud, there are no stranded assets to deal with. This is a very different paradigm to controlling investments in on premises IT solutions.

The implication of this becomes apparent when we compare this to the typical process enterprises go through to stand up new projects. The capital budget is finite, projects get stack ranked based on ROI or some other measurement, and only a limited number of projects are approved each year. With AWS Cloud, the same amount of limited capital could actually fund many more projects. In addition, because these projects can be stood up and shut down very rapidly, this leads to a form of experimentation we frequently refer to as “failing fast”. By this we mean run many experiments, terminate the ones that fail, and double down on the successes. Instead of “failing fast”, I prefer to call this rapid experimentation with a low cost of failure. This exercise of “failing fast” is a key component of how Amazon achieves business agility. The viability and profitability of new ideas can be determined quickly with little risk, and small consequences of failure.

Closely related to the concept of two-way doors, is the concept of making investment decisions at the margins. In the traditional IT environment, investing decisions are made once, when the capital is invested. These decisions are based on the total cost of a project and its expected ROI. There are significant risks in this approach. What if the costing estimates and other projections are incorrect? What if the project overruns its budget? There is usually significant time elapsed from project approval until value realization when the project (IT system, software package, etc.) is placed into production. In addition, these waterfall investing approaches are much less tolerant of any requirements changes. Finally, there is opportunity cost for potentially choosing to fund the wrong project.

This is where the Agile concept of the minimum viable product comes into play. Instead of trying to estimate the value and cost of the overall project, we break the project down into increments. At the end of each phase, the project must deliver value. If it fails to deliver the expected value, a decision can be made to end the project. Alternatively, we could estimate the cost and value of the next incremental feature we are planning to add, and decide whether the marginal feature is a good investment, given the value that has already been delivered.

Enterprises have been under increasing pressure to fend off digital disruptors. Business agility has become increasingly sought after in the wake of the COVID-19 epidemic. The ability of an enterprise to manage change and foster business agility is dependent on people, process and technology. The CFO has a unique role to play in leading the enterprise from state of low frequency change to one of high frequency change. AWS Cloud is a key tool to enable high frequency change. Investment decisions can be turned from big bets, to many smaller projects and/or software changes. In addition, without stranded assets, refactoring your IT environment to accommodate changes becomes a much simpler proposition. High-frequency enterprises embrace cloud computing as a flywheel for frequent value delivery. AWS Cloud can be thought of as a set of standardized building blocks that enable infinite possibilities. Likewise, because the IT environment is not tied to a specific set of hardware, the infrastructure never needs to be refreshed. This will reduce or eliminate technical debt that is holding the organization back.

A 2020 study by IDC estimates that the average enterprise IT budget is ~80% dedicated to “keeping the lights on”, and ~20% to new technology. The AWS customers I speak to report that once they go all in on cloud, they are able to flip this ratio. The average customer spends approximately 20% of their IT budget to keep the lights on with the balance split between savings and transformation. This happens for a number of reasons. First, not every dollar of capital becomes a dollar of operating expense in the transition to AWS Cloud. In fact, in my experience, customers typically spend sixty cents for every dollar that used to be capital. Second, because of the business value derived from the AWS Cloud (cost savings, staff productivity, operational resilience, and business agility), there are significant operating expense offsets. AWS Cloud pricing includes many categories of cost that the customer will no longer need to deal with separately: including power, space, cooling, operating system licensing, hardware and software maintenance costs. All of this adds up to more money for experimentation, transformation, and growth projects, etc., without necessarily having a negative impact on financial KPIs.

In large enterprises, IT charges are often held centrally in a cost center, or managed through an allocation/chargeback scheme. Most allocations are just an approximation based on cost drivers that often do not reflect reality accurately. Any changes in standard allocation rates often ignite fierce budget battles with business units that feel like they are not in control of their costs/usage. Shadow IT organizations often add to the complication of determining the real costs of IT services.

AWS Cloud is different. Through a number of mechanisms (e.g., account creation strategy, cost tagging, per second billing, etc.), it is possible to achieve cost attribution to the application level with almost no allocations. In addition these mechanisms allow many different permutations of cost attribution to any number of dimensions. Imagine being able to develop a P&L by application or by digital revenue stream. In addition, thanks to various AWS and or third party tools, much of the governance, reporting, planning, and forecasting for IT costs can easily be automated.

With standardized building blocks, and cost attribution down to the application level, AWS Cloud makes it possible to change the way the enterprise works. In the AWS Cloud, infrastructure is broken down into standard building blocks, and as a result software engineers, data scientists, and so on. can be embedded within each business unit or functional organization. Projects no longer require capital approval, so authority for projects can be moved to the P&L owners. Individual P&L owners have the ability to decide which projects and/or experiments they want to run, based on their own priority. As an example, at AWS, Finance has the technical skill sets required on the finance staff (software development engineers, data scientists, etc.). These people are funded by the CFO’s budget and the CFO decides where to allocate these resources and/or which projects to approve. But these resources are not unlimited and we still embrace lean principles and our leadership principle of frugality.

The AWS Cloud also has much to offer to the finance function itself for transformation. We understand that CFOs are often under pressure to do more with less, and Finance often leads the enterprise by example with digital transformation. In addition, CFOs are trying to be closer partners with the business units, by providing more forward looking analysis based on leading indicators. The AWS Cloud can help CFOs transform in a number of significant ways.

First, AWS Cloud helps CFOs break down data siloes. CFOs can become stewards of the data (not keepers of the data). Because of their position in the enterprise the CFO is uniquely suited to ensure data provenance. Data lakes provide a quick, efficient, low cost way to aggregate all data sources across the enterprise.

Second, AWS Cloud makes it much easier to monetize data-Pre-built capabilities in analytics, AI, ML, etc., allowing for less expensive data solutions that can be rapidly stood up with very little lead time. In addition, pre-built analytics solutions that easily bolt on to the data lake allow for data democratization, automated dashboards and reporting packages.

Finally, the AWS Cloud provides improvements in overall risk profile in a number of ways. It is possible to build in separation of duties into work flows, and couple these with automated compliance checks. Because every action by every user is tracked within the AWS Cloud, this improves the access control and auditability of the IT estate. It is also possible to reduce human error by embedding automated controls in end-to-end processes. Predictive analytics can be used to identify and flag higher risk transactions and AI/ML solutions can automate fraud detection.

This list isn’t meant to be exhaustive, but rather to start the conversation on the possibilities around finance transformation.

The AWS Cloud represents a powerful tool for helping CFOs empower transformation. CFOs also have an opportunity to lead the way on transformation by transforming the finance function first. Although the AWS Cloud will save money, this is not just an IT cost savings play. Utilizing AWS Cloud to its maximum advantage allows IT to move from a cost center to a strategic partner to the business units. AWS Cloud is a means of increasing business agility and future proofing the enterprise from digital disruptors. In addition, AWS Cloud offers multiple avenues of reducing risk: stranded asset risk, project risks, compliance and internal controls risks.