Avoiding the top 4 FinOps misconceptions about cloud migration

By Rich Hoyer | Director of Customer FinOps

Note: This article was previously published on The New Stack

It’s no secret that the pandemic caused many organizations to move rapidly to the cloud. In 2020, 61% of businesses migrated business workloads to the cloud, and as of this year, 94% of enterprises are using cloud services. However, many cloud migrations begin with this simple question: Why should we migrate our IT infrastructure to the cloud? The initial question is usually followed by a steady stream of additional questions that may have caused decision-makers to feel like they’re running in circles:

  • What are the pros and cons of a migration?
  • If we migrate, which workloads should be moved first? Which ones should follow? Which should not be moved at all?
  • What will it cost? Will this impact our users? Will our staff be able to handle the work? Do we need outside help?

Drafting a well-structured business case for the migration will help answer these questions. Many organizations initiate this process by racing to their favorite spreadsheet application to generate financial projections of cloud costs compared to the status quo. While this instinct is understandable, beginning with financial projections is the wrong way to draft a cloud migration business case.

Instead, enterprises should start by documenting the qualitative elements of the migration. The qualitative aspects of migration are the key to scoping discrete workloads that can and should be moved. These workloads are often migrated in waves, with each wave scoped out based on conclusions drawn during this crucial part of business case planning.

We commonly encounter several misconceptions about the process of generating the financial model. Here are the top four:

Misconception #1: The financial model should be a total cost of ownership (“TCO”) comparison between the on­premise environment and the projected cloud cost.

In contrast to the cloud, the expenses of most on-premise environments are usually in the form of upfront capital expenditures expensed as depreciation over time for accounting purposes.

Theoretically, the “total cost” of the on-premise infrastructure would include non-cash expenses like depreciation, amortization, and out-the-door cash costs like maintenance and support contracts, facilities leases, and electricity. These accruals are, however, entirely sunk costs that will not be avoided when the migration occurs. As such, the financial model should not be in the form of a “TCO comparison,” but rather, it should be a cash-based analysis comparing the cash cost avoidance in the data center to the costs incurred in the cloud (including the costs generated by the migration itself).

Using this method, the enterprise only analyzes costs that will be impacted directly by the migration.

Misconception #2: The financial projections must show the cloud to be less expensive than the legacy data center environment.

While it may be the case that cloud offers cost savings, it is not always true that cost savings are the only potential business justification for a cloud migration. A more holistic approach must be taken to consider overall business value, including revenue and cost. Cloud technologies may offer various benefits that accelerate and augment revenues, for example, by reducing time-to-market times or allowing rapid expansion of operations into new geographies. The potential range of these revenue improvements should be weighed against the projected costs of the cloud to evaluate the projected return on investment (ROI) for cloud in scenarios where the costs of cloud are expected to be higher than legacy environments.

Misconception #3: The financial benefits of the cloud need to be realized within a year for the migration to be justified.

While some enterprises realize financial benefits from their cloud migration in under 12 months, it is more common for most business value to be realized after this timeframe. Whether the objectives of the migration focus on cost savings, revenue augmentation, or other benefits, decision-makers should have a time horizon of more than 2-3 years to realize those benefits.

Migrations to the cloud from legacy environments take time and resources. During many migrations, it is common to have legacy and replacement cloud environments running simultaneously for a period of time, resulting in a duplication of some costs known as the “double bubble.” And, of course, enterprises incur direct migration-related costs such as professional services fees, migration tool licensing, audits, etc. Once this transient period is over, enterprises will benefit for many years from the lower costs, higher revenues, or a combination of the two provided by their new cloud technologies.

Misconception #4: The business case is complete once the decision to migrate has been made.

While migration is underway, things may change. New products or services may open the door to capture additional value. And even when the migration plans stay relatively consistent, it’s vital that enterprises continually re-evaluate actual outcomes with their predictions such that projections for future waves of the migration can be adjusted as necessary. With each wave of the migration, variance analysis must be conducted so that the causes of any variances are well understood, and that future waves benefit from past learning. The qualitative and quantitative portions of the business case are living documents continuously updated until the migration is complete. As part of this rolling analysis, a disciplined process must be in place for tracking the movement of discrete workloads from the legacy environment to the cloud.

By taking the time to generate a comprehensive business case with a strong focus on qualitative factors, enterprises can ensure a successful migration with an optimal mix of workloads that are best positioned to benefit from the cloud.

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