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Appendix B
Executive Scenario for
Cloud Migration
This narrative discussion will help you to understand the decisions that
must be made by members of a corporate executive team when considering
a move to cloud-based operations. In our scenario, consider a situation
which the Acme Widgets company has increased production from $12M in
revenue to $120M over the past five years. Facing a projected growth of
20% in sales ($144M in the next year), the company infrastructure has been
stretched to the limits of capacity and there are demands for more from
both internal users and from external clients and vendors.
Susan, the CEO, has been lauded for bringing the company phenome-
nal growth. Increasing a company’s revenue stream 10-fold over a five-year
period gets notice from a lot of people, especially shareholders. The board of
directors has been very generous, so keeping up the growth has made the
CEO feel like the proverbial duck swimming on a calm pond—no one sees
how fast the feet below the water line are moving to keep the duck afloat.
Susan knows from conversations with each of her team members that the
company is at a point where it cannot continue without making some
changes, and she has assembled the executive team to discuss how to pro-
ceed with a proposal made by Jim, the CIO, to reduce operational costs by
using cloud services.
Murray, the CFO, knows that administrative costs, labor, and accounts
payable and receivable are struggling to keep up, expenses are lopsided and
far too high on the sales side, and there is not enough staff to do the job
without having people stay until 9 or 10 p.m. every night. Trying to balance
profitability, cost of sales, and management of operational costs has become
Murray’s favorite daily exercise. Making a cut that may impact the flow of
revenue could cause a burp in the system that the company cannot afford, so
any changes are made only after lots of study and meetings, when a general
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286 Cloud Computing
consensus has been reached among the management team that it is the right
course of action. Murray realizes that something needs to change.
Danny, who is Executive Vice President for Sales, truly believes that he
has succeeded in every facet of his role and in bringing home the business.
He doesn’t care what it takes to make the deal—as long as the deal is booked
and his sales team gets compensated for the sale, he gets his spiff and
demands that the rest of the company support him, regardless of the inter-
nal struggles it may take to keep customers happy and buying widgets.
Spending money for advertising and marketing is part of the cost of making
the sale, just like travel, lunches, dinners, hotels, conventions, etc. These are
necessary costs of business to get the widgets into the hands of customers.
Customer support, service-level agreements, cost of goods sold, delivery,
maintenance, and installation costs are all things that are taken care of by
someone else. Danny believes that nothing needs to change on his watch,
since sales are doing so well.
Linda, the Vice President for Human Resources, has during the last five
years gone from a job that was almost boring to one with not enough hours
in the day. She is swamped with paperwork, and the state mandates many
documentation requirements. She could certainly use more staff to help her,
but the budget does not allow for non-revenue-generating head counts that
are not absolutely essential for operations. Human Resources is also respon-
sible for the population and data maintenance of directory services (Active
Directory and Lightweight Directory Access Protocol), and she has to battle
for everything with Murray, the CFO, to get something done. As a result,
Linda has become afraid to ask for much. She has resigned herself to taking
lots of work home at night and on the weekends to catch up, and focuses
mostly on recruiting and hiring processes during the normal workday.
Jim, the CIO, has seen the IT department become a 24/7 operation.
Customer support requirements now demand that continuous operations
be supported, and company growth has outpaced the technology being
used. While the company has grown from 25 people in the first year to 700
currently, only one-fifth of the technology used company-wide is less than
one year old. There is not enough staff to do the job without having people
stay late and work well beyond their normal work shift. Most of the com-
puters are three to fours old and are recycled from desktop machines to be
used as file or print servers and in the customer support center as vendor
and customer access data stores. Some have been converted from Windows-
based platforms to Linux servers to save costs. The cost of replacing obsolete
Appendix B.fm Page 286 Tuesday, May 26, 2009 2:09 PM
Appendix B 287
machines and buying new equipment amounts to about 15% of the total IT
budget. Costs for telephone-related equipment, support, and networking
are about 20% of the budget.
1
Corporate software licensing accounts for
about 30% of this budget. Labor accounts for most of the remainder of the
budget, leaving only a very small discretionary fund for use by IT to opti-
mize operations. Jim knows that something needs to change.
Following is a transcript of the executive team meeting.
Susan:
Ok, folks—let’s get the meeting started. Please take a seat
and let’s begin. We have a few other things to cover today,
but I want to start with a proposal Jim brought to my
attention that may be useful in cost cutting and helping
us keep our numbers from falling back.
Danny:
All they do is go up on my watch ...<grin>
Susan:
Jim, why don’t you tell everyone what you are proposing?
Jim:
Sure. I think we can make some changes that will help us
in nearly every area. By getting rid of our data center and
outsourcing the services and equipment from the cloud,
we can save a lot of money. I have been researching how
moving away from desktop licenses for software could
impact our budget, and I believe we can get the same fea-
tures for a lot less money and have the same capabilities
provided. There are many areas to cover, so I thought we
should start first with customer-facing solutions, as they
have the most impact soonest.
Murray:
That sounds very interesting. I believe I heard some scut-
tlebutt about how one company did that and cut opera-
tional costs by more than half.
Susan:
Jim, what areas did you have in mind?
Jim:
Well, to start, the way we manage customer data is not
very efficient.
Danny:
Well, I’m not going to have customers see any negative
effects of a change. I have to deal with those, and my
1. Advances in VoIP, VoWLAN, softphones, and dual-mode cellular/wifi phones are coming to
the rescue here, as costs go down and mainstream production goes up.
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288 Cloud Computing
team will have to be convinced this is something really
good if we’re going to go along with it.
Susan:
Danny, none of us want to see customers view us in a bad
light. Go on, Jim.
Jim:
For every customer, the sales guys use the contact man-
agement software to enter the customer data into their
laptop. That data gets synchronized to our central cus-
tomer database when they connect through our dedicated
VPN lines back to the office. They sync that data and we
have data scrubbing software that performs integrity
checks. That data is used by the marketing department
for reaching out to current customers, new customer
prospects, and even former customers.
The contact management software licenses for 150
sales team members amounts to about 75K per year in
license fees and maintenance costs. The cost of maintain-
ing a dedicated VPN line is about 6K per month, or 72K
per year. The cost of maintaining a staff to manage 24/7
the database servers and network servers for the VPN and
database amounts to an average cost of 120K per year for
each IT contractor, totaling 8 bodies for those functions,
or 960K.
By replacing the contact management software and the
database back office, we can save over $1M a year by
using a cloud-based CRM product called sugarCRM. We
wouldn’t have recurring license fees, no cost for the soft-
ware to run it on, the back-office staff to run the contacts
database can be released, and the rest of my team can
function without them. The dedicated VPN line won’t be
necessary, since we can secure a connection over normal
Internet for using this product, and the data would still
be housed with us on site.
Murray:
You really think we could shave $1M in costs just by
dumping the contacts software? Jim, in my former CFO
roles I’ve seen many problems with the risk factors associ-
ated with IT systems, because they’re notorious for failing
to deliver their promised benefits, and a large percentage
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Appendix B 289
of projects end up scrapped due to poor user acceptance.
How will this be different?
Jim:
Absolutely. Good points Murray—that’s precisely why
we’re exploring cloud computing. The use of cloud com-
puting matches cash flow to system benefits more appro-
priately than the packaged software use model. In the old
way of doing things, a large investment is made early in
the project, prior to system build-out, and well before the
business benefits, presumably financial in some shape or
form, are realized. This model is even more troubling
given the risk factors associated with IT systems that
you’ve highlighted. In contrast, cloud computing is a pay-
as-you-go or, as we call it in our shop, pay-by-the-drink,
an approach in which a low initial investment is required
to get going, and additional investment is incurred only
as system use increases. This way, cash flows better match
total system cost.
Murray:
That’s interesting, Jim, but doesn’t this concept use open
source software?
Jim:
Yes. it does. What I described mirrors the use of open
source software versus proprietary software— and, in
fact, that’s no accident. Cloud computing infrastructures
are built, by and large, from open source components.
After all, the cloud providers don’t want to make large
investments upfront without knowing the financial out-
comes, either. One might say that cloud computing is a
proxy for end-user open source adoption, since it acts as a
middleman to “civilize” open source for end users.
Murray:
Ok, but do you really want to take the risk of outsourcing
our critical resources to a third-party provider?
Jim:
Not at all, Murray. Cloud computing provides a way to
outsource noncritical applications to organizations that
are better suited to run them, which will allow our IT
department to focus on critical applications. This should
be very attractive to you from a cost perspective, and this
concept has already been applied throughout companies
in many different areas.
Appendix B.fm Page 289 Tuesday, May 26, 2009 2:09 PM
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