If you missed part 1, I provided an intro and outline about this series on managing the Cost of Cloud Transition for the Architecture, Engineering and Construction Industry. As a reminder, whether you plan to stay with your current IT solution, go 100% cloud, or somewhere in between, this series will provide you with a modular approach that will be of value either way. To do this, Finance, Operations, and IT professionals may need to learn a bit about each others worlds. The most common problems I see in evaluating costs are caused by this lack of cross functional understanding and communication. With a little time spent exploring each others perspectives; cost, quality and requirements considerations can be more clearly baselined and carried forward into an evaluation. This series is focused on costs, so to get all stakeholders headed down the same road, here's a few definitions you will need for reference:
On the IT side, the only one you need for this is the NIST Cloud Definition [Link]. This contains a number of definitions in itself, which we will primarily use for categorization vs. talking pros and cons of Cloud. I use it throughout this site and for daily business. So far it has passed all the tests in helping communicate cloud transition concepts between IT and non IT professionals.
On the Accounting side, it's a good idea to have a basic understanding and if possible some practical exposure to Generally Accepted Accounting Principles (GAAP) [Link] and key financial statements such as Income Statement/Profit & Loss (P&L) [Link], Balance Sheet [Link], Cash Flow Statement [Link]. I am also throwing in Chart of Accounts [Link] because if nothing else, this will be helpful to make the tie between Operations and Finance disciplines. Beyond typical accounting, a few acronyms you may here thrown around like magic are Capital Expenditure (CAPEX) [Link] and Operating Expense (OPEX) [Link].
Traditional do it your self advocates will usually lean toward CAPEX. Proponents of hiring vendors or Cloud providers will usually lean toward OPEX. From a cost perspective, neither opinion is a magic bullet. You have to find the bottom line cost to the company to make a good decision. If your interested in a thorough run down of the CAPEX/OPEX debate related to cloud computing, here's a great article from CIO Magazine [Link] back in 2009. Don't let the date fool you, not much has changed.
On the Cost Modeling side, Amortization [Link] is a key concept. Most people know this term from taking out a loan to buy a house or car. It's important to understand this concept as it applies to business and converting CAPEX to OPEX or Lump Sum to Periodic Payments on an annual, monthly or smaller incremental period. I like to refer to these as Annualized, Monthilized, etc... ultimately you will end up with a Total Cost of Ownership (TCO) or Cost of Solution [Link] over a period of time. The difference between the options will be your Return on Investment (ROI) [Link].
On the Evaluation side, once we have worked out our cost model we can create any number of units for comparison and parity check across the options. Some of my favorites that focus on the Software Application Layer are Average Cost Per User (ACPU), Average Cost Per License (ACPL), Average Cost Per Application (ACPA), Average Cost Per Application - Desktop (ACPA-D), Average Cost Per Application - Web (ACPA-W). These averages that tend to be useful in comparison to multi-application solutions like an existing server farm.
I also like using Cost Per Application (CPA), Cost Per Application User (CPAU), Cost Per Application License (CPAL), Cost Per Project (CPP), Cost Per Project Application (CPPA), Cost Per Project User (CPPU), Cost Per Project License (CPPL). These tend to be more useful in comparison to single application solutions like a SaaS offering. Feel free to make up your own, as these are not listed in any wikipedia article but you will need some basis for comparison.
While the above points may seem void of AEC Industry specifics, once we get into the other parts of the series I will start to fill in the examples using Construction specific Software Applications from Autodesk, eBuilder, Oracle Primavera, ProCore, Sage, Trimble Buildings, Viewpoint and more. I will also use some of the more general Software, Platform, and Infrastructure layer products from Citrix, EMC, Microsoft, nVidia, Okta, RSSBus, Salesforce, The Cram Group (My Company), VMWare and more.
That's it for definitions, stay tuned for AEC Industry Cloud Transition Cost Management: Part 3/7, Baselining Traditional IT Costs.
Wesley Smith CEO