Cloud Computing and Modelling of Cash Flows for
Full vs. Fractional Adoption of Cloud
Easwar Krishna Iyer, Venkatesh Tilak, Varuna Narayanaswamy and Tapan Panda Great Lakes Institute of Management, Chennai
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This paper does a revenue–neutral cash flow modelling for fractional cloud computing adoption. The aim is to find out a mathematical fraction, other things being equal, for which the Net Present Value (NPV) maximizes with respect to cloud adoption. The impact of both deferred capital expenses and reduced operating expenses on NPV are treated in the model. The paper posits that the revenue generation and growth of the firms under consideration are independent of the way the IT resources are managed between cloud vs. traditional.
In addition to NPV modelling, the paper also examines the fraction of the total product /solutions options that can be moved to the cloud today from the total universe of IT assets by running a statistical analysis of data collected from a vendor sample space.
Keywords: Cloud Computing, Fractional Cloud Adoption, Revenue-Neutral NPV Modelling, Capital vs. Operating Expenditure
Huge capital outlays for setting up 3600 Information Technology (IT) infrastructure have always been a deterrent for firms, particularly new ventures, from the optimal capital utilization point of view. Firms would prefer to use up their precious high-cost initial seed capital to build assets that drive their revenue growth. In such a capital constrained scenario, any option of deferring capital investment will ease out the initial cash flow pressures and help in better Net Present Value (NPV) modelling. Modern business paradigms like leasing, asset co-ownership and infrastructure outsourcing are all aimed at easing out the upfront capital investment problem. The ‘pay-as-you-use’ cloud computing model is another business model which gives firms the option to partly convert their immediate capital expenses to deferred annual operating expenses. With state of the art innovations, cloud computing has today made possible the migration of applications, software, storage and even platform management to the ethereal cloud, thereby giving a multi-vector capital investment downsizing. Over and above the aforementioned deferred capital expenses gains, cloud adoption also offers the possibility of lowering the total IT operating expenses. This reduction of operating expenses with higher cloud adoption has a gainful impact in the calculation of the present value of future cash flows and acts as one more modelling component in the NPV modelling. This paper splits the total IT operating expenditure into non-cloud related operating expenses and cloud related operating expenses. The paper also posits that there is an unknown risk component associated with cloud adoption and its monetization will critically determine the NPV modelling.
The key mathematical variable used in the paper is α which is a fraction varying from 0 to 1 and is, in a behavioral sense, an indicator of the willingness of the market to adopt more and more of available Copyright © 2012 IESS.
Cloud Computing and Modelling of Cash Flows for Full vs. Fractional Adoption of Cloud
cloud technology and practices. α = 0 indicates one extreme of the cloud deployment spectrum – zero acceptance of cloud as a solution. At the other extreme is α = 1 which indicates a deployment of all possible and available cloud options. The movement of α is a reflection of the consumer / market acceptance of a new technology platform. NPV modelling is done as a function of this fraction α. As mentioned in the abstract, the paper posits that the revenue cash flows and the growth of the firm are independent of the way in...