Nearly half of CIOs think twice about moving to the cloud for accounting reasons. An informal poll, Thursday, at the Innovative CIO conference showed about 50% of the audience preferred buying software and hardware – as opposed to leasing it from an outside provider – because their companies prefer capital expenditures to the operational expenditures associated with cloud. And that’s not the result of just one anecdotal test.
Whenever Equinix CIO Brian Lillie speaks to groups of CIOs, he says, he asks whether they prefer incurring operational expenses or capital expenses. “It’s always 50/50,” he says.
Some research shows CIOs can get a better return on investment using cloud services. But many CIOs are concerned about the way that cloud services – recorded as expenses on the income statement – impacts corporate cash flow.
Much of the decision about the extent to which companies move to cloud can depend on their individual financial priorities. Cloud “works very well where people are not concerned about the operational expense of yearly subscription fees,” Chet Mandair, vice president of IT and process excellence at solar panel manufacturer SunPower Corporation told CIO Journal. “If they value keeping a lot of cash, people think twice before they sign up for cloud services,” he said. That’s because most companies tend to finance capital expenditures with debt rather than cash.
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Chief financial officers at companies in ultra-competitive industries such as semiconductors often want to preserve as much cash as possible on the income statement to make Wall Street and investors happy. One way to do that is by limiting operational expenses such as cloud services. Capital expenses are depreciated over several years rather than hitting the income statement all at once, boosting a company’s current year profits.
The desire to preserve cash to placate Wall Street isn’t new. In fact, the impulse to limit operational expenses in the past has been so strong that it has led to several accounting scandals. For example, in 2001 when WorldCom began to suffer from a price war in the long distance market, the company instructed a company controller to illegally take fees paid to other telephone companies and improperly reclassify the operational expense as a capital expense. “It meant that the costs did not hit the company’s bottom line,” according to an October 2002 Wall Street Journal article.
Still, companies that decide to limit moving to the cloud to make the short-term seem better may sacrifice financial gains in the long term. Cloud applications deliver 1.7 times more return on investment than on-premise ones, according to a September report by Nucleus Research. The report concluded that not only do companies save on the initial cost of purchasing software and associated hardware, but they spend 40% less on consulting and 25% less on personnel in a three-year-period than companies deploying and running their own applications.
“Financially, it’s better to invest in cloud applications,” said Rebecca Wettemann, vice president of research at Nucleus Research. Wettemann also told CIO Journal that many CIOs hide behind accounting arguments because it’s convenient, but are really intent on protecting their turf; if software and equipment is run in-house, someone needs to manage it, and that represents job security.