Leveraging the Cloud for operational and financial streamlining of your business (Part 1)
Pieter Kemps works for Amazon Web Services and interacts closely with leading VC’s and fast growing tech startups in Asia. He is passionate about startups that combine product innovation with strong business model economics.
How are companies leveraging the Cloud to streamline their businesses?
It is well known that Cloud enables startups to launch with lower costs, get to market faster, and scale up more easily. In India, companies that have benefitted from Amazon Web Services’ (AWS) Cloud include BubbleMotion, Mig33, Perx, Wego, Viki, PropertyGuru, and many more. However, beyond startups, there are also significant benefits when companies have reached more mature stages of their lifecycle. In these stages, when they might be backed by late stage Venture Capital firms or even Private Equity firms, the focus tends to be less on scaling and more on efficiency and profitability.
Back in the days, the VC / PE firms often worked with the CFO’s of these companies to recapitalize the business and improve the balance sheet and income statement through smart financial engineering. Nowadays, late stage VC’s and PE firms tend to go beyond financial engineering, and have started to act as full-fledged operators to increase margins. And they expect their CFO’s to work with them in these endeavors. As such, CFO’s are now expected to not just improve the capital structure of the business, but to get deeply involved operationally and drive value creation in two key areas:
Financial Streamlining – streamline the balance sheet & P&L by reducing operational costs and moving assets off balance sheet
Operational Streamlining – so as to make companies more agile, grow revenue, and simplify operations
CEO’s and CFO’s are increasingly looking for ways to achieve this streamlining. Traditionally, the focus has been on production: streamlining the manufacturing process through process improvements. What we are seeing at Amazon Web Services (AWS), is that IT can be a very powerful tool in both financial and operational streamlining, and that by harnessing the power of the Cloud, CFO’s can create tangible and significant value for their business and their investors. The Cloud enables streamlining in several ways:
In the remainder of this post, I will explain more about how to leverage Cloud for Financial Streamlining. When doing this, it is important to understand the key benefits of AWS’ business model: strictly Pay-as-you-Use, with no CAPEX, no long term contracts, no commitments, and no lock-in.
Running your IT off-balance sheet
A first key benefit of this model is how it enables you to run your IT infrastructure off-balance sheet. Rather than invest CAPEX in physical IT assets that are on the balance sheet, your key IT resources are completely converted into OPEX. A research of AWS customers conducted by IDC that was published in July 2012 entitled “The Business Value of Amazon Web Services Accelerates Over Time” showed that “…companies were able to replace US$3.66 in capital costs with US$1 in new operational expenses in their annual budgets”. Beyond analysts, our customers are seeing how this works in practice. Said Mr. Chun Kang, Principal Engineer at Samsung Electronics, “With the AWS cloud we were able to avoid US$34 million dollars in capital expenses.”
Secondly, CFO’s can leverage the Cloud to increase capital efficiency and Return on Assets (RoA). Many IT assets are highly underutilized, thereby having a negative impact on your RoA. For example, some industry analysts have said that average system utilization of server farms is around 10-15% and that typical utilization of storage (excluding RAID and System resource overhead) is still only 60%. In short: expensive equipment on your balance sheet is mostly idle without adding value to a company’s ability to generate revenue. The Cloud enables you to fire up servers when you need them, and shut them down when you don’t so you’ll immediately stop paying. You can even fully automate this process to maximize utilization by elastically using only what you need. Similarly, with storage in the Cloud, you pay only for the storage you use, per GB per month, so that you never invest in assets that you don’t actually use or need. In conclusion, Cloud services like those offered by AWS allow you to significantly increase the Return on IT Assets by eliminating idle, capital-inefficient resources.
Finally, and most importantly, the Cloud can help you to avoid the need for investments in hardware, and/or increasing capacity due to higher resource efficiency. The Cloud also helps to reduce the costs of IT resources. For example, AWS has leveraged its economies of scale to reduce its process 26 times since 2006.. In addition, the Cloud offers many ways for automation so that companies are able to reduce costs of personnel due to reduced need for admin and support activities. The above-mentioned IDC report showed that companies were able to reduce IT-related labor costs by 52 percent and average savings per application were US$518,990 per year. The same study showed that the combined costs for server, storage and network support costs are reduced by 68 percent which includes the cost avoidance from not having to increase staff to meet new business requirements.
In conclusion, the Cloud platform offered by AWS can be leveraged by CFO’s as a powerful tool to create value through financial streamlining. The second post in this mini-series will explore how PE firms and the CFO’s of their companies can leverage Amazon Web Services for Operational Streamlining.