What I do not like about cloud computing? companies are allowed to use effectively and efficiently shared hardware, software and other services as needed. The cloud model generally shifts the responsibility of the ownership, maintenance and service operations IT internal IT organization to an external supplier. Ask any software, infrastructure or platform as a service provider about the benefits. They can peak memory as the Pledge of Allegiance: The efficient scalability and high availability, increased operational agility, disaster recovery, labor mobility, increased security, reduced capital costs, and the list goes on. It sounds like great news for any CIO whose plate is full of ‘waking up in a cold sweat’ challenges in all these areas. Where do I sign, right?
“Not so fast!” Says CFO
Companies who are considering a change to cloud computing should fully understand the decision could have possible effects on the financial indicators of key enterprises, including EBITDA. What is EBITDA? EBITDA is defined by Wikipedia as: a company’s earnings before interest, taxes, depreciation and amortization. EBITDA is an accounting measure calculated using the net profits of the company, before interest expense, taxes, depreciation and amortization are subtracted, as a measure of current operating profitability of the company.
Why would a CIO be concerned about the EBITDA? EBITDA is widely used in many areas of finance in assessing the performance and valuation of a company. In many cases, the EBITDA is also a key measure used to determine incentive bonus of an executive team, including the CIO. Now I have your attention?
If a company is not using cloud computing and decides to buy hardware, software and other technology infrastructure, spending is financially reported as a capital expense and the asset is depreciated over time. In essence, capital expenditures have no negative impact on EBITDA. However, cloud computing rates are recorded as an operating expense. recorded as operating expenses may adversely affect services EBITDA because this measure is adjusted for the amortization of capital expenditures, but not for operating expenses.
The CIO PARADOX
Investing in cloud computing can provide many benefits to the business, including reducing IT overhead. However, due to cloud computing costs are treated as operating expenses, negatively affecting EBITDA, and possibly you and your boss compensation. On the contrary, the purchase of hardware and software in a business model as usual will cost more, but will have no negative impact on EBITDA.
What is a CIO to do?
First, it is more important than the CIO, CFO, CEO and other decision makers to discuss and fully understand Cloud Computing – EBITDA Paradox. Due to financial consequences for the company can be significant, it is imperative that the executive team will line up in all spending decisions substantial that the impact of IT EBITDA. Second, the solutions cloud computing could / should reduce the resources required to run IT operations. Since operations personnel are often reported as operating expenses, this retrenchment could offset the impact of the cost of cloud computing in EBITDA. Finally, there is hope on the horizon as financial accounting standards continue to evolve to include more guidance on reporting on cloud computing costs, which could make these decisions easier. Until then, all CIOs must continue to consider carefully all the financial consequences of their IT purchases.
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