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THE SHIFT FROM CAPEX TO OPEX

By Jeremy Chaplin, Cloud Optimisation Consultant at KCOM

Organisations are flocking to the cloud, taking advantage of the speed at which new servers and infrastructures can be set up and scale with customer demands. However, as they leave their data centres and physical servers behind, businesses may be sacrificing financial control and accountability.

Jeremy Chaplin

When IT spending was focused on buying, repairing or upgrading physical machines and servers, it counted as capital expenditure (capex). The advent of the cloud and on-demand IT services, from computing power to storage, is changing this. Organisations are increasingly moving their data and applications away from the data centre and into the cloud. They favour the flexibility it gives them to scale dynamically with demand and offloads the risks associated with investing in their own infrastructure. 

As businesses now pay for the computing services they need when they need them, IT spending is turning into operational expenditure (opex). Yet this transition from a well-governed capex model to a fluid opex model of cloud spending can be challenging for an organisation. Cloud environments are often fragmented, and it is difficult for finance teams to maintain oversight at all times. If they are not careful, businesses can lose control and run up costs they cannot sustain. New thinking and tools are needed to manage the transition safely. 

A brave new world

Capex and opex are intrinsically different as spending models. The former is defined by upfront investment, well-defined processes and rigid approvals before any money is spent. Purchasing a new host of physical servers, for example, is a large one-off investment so it demands sign-off from finance and, often, other decision-makers in the business.

Opex, by contrast, is a different beast entirely. It typically consists of ongoing costs required for the day to day functioning of the business and there is often a less rigorous approach taken to its governance. Opex usually deals in smaller sums – hundreds or thousands of pounds rather than tens of thousands or millions – meaning IT teams are usually permitted to spend it as needed with limited or no authorisation or supervision. To illustrate, this could be the decision of an IT manager to purchase another cloud instance to manually scale an application to meet customer demand.

Increasingly, these applications and services are capable of autoscaling which brings its own challenges in terms of cost control and visibility.  In development environments it is often the developer rather than the IT manager who decides what infrastructure to provision. These decisions are usually based on performance or other technical concerns, often with little or no concern for the cost.    

If such a fluid environment is not managed properly, mistakes can be made and the impact on the business may be severe. For example, that same IT manager or developer may forget to discontinue the instance when it is no longer required, meaning the business continues paying for services it doesn’t need. Under a poorly-managed opex model, a single employee has the potential to stand up infrastructure that costs the company hundreds or thousands of pounds a month without any oversight or controls. The longer this persists, the more chance there is for mistakes to be made and further costs to build.

If organisations don’t evolve their finance function to match their changing cloud environment, they may soon find themselves caught in a financial black hole, created by cloud costs that appear to grow without cause. If they don’t recognise the need for a different kind of approvals process, finance teams risk constantly playing catch-up, finding themselves investigating and reacting to the decisions of IT and tech teams, rather than collaborating to help make them.

The elasticity of the cloud allows businesses to scale like never before, but this flexibility has its challenges. While businesses are moving to the cloud out of a desire to improve business benefit, many are finding that rigorous financial processes and accountability can be left by the wayside in the process. The cloud can make business faster, easier and more efficient, but without the right controls unmanaged opex costs can create new problems for them.

The path to ‘FinOps’

The challenges of moving from a capex to opex model underline the importance of strong governance in the cloud. Fortunately, the latest platforms, cloud expertise and tooling can be used to replace or even augment the financial control being lost. Making use of the latest technology can even facilitate a new, revolutionary approach to operations. 

One of the innate challenges of the cloud – and the reason opex can spiral so quickly –

is its complexity. Most businesses that make use of the cloud run multiple public and private environments and use different providers for different tasks and workloads. The typical business infrastructure is fragmented, making it very difficult for finance functions to identify what was spent and where. If you can’t identify the source of cloud overspend, it becomes difficult to stop.

However, with a cloud management platform it becomes possible to automate the detection process and prevent mistakes before they happen. Budget controls and policies can be put in place for each environment, preventing certain thresholds from being crossed. By putting upper limits in place, you ensure cloud costs do not get out of hand.

Management platforms can also create insight factories, providing employees with actionable information. Alerts can be sent to IT and tech teams to flag mistakes and warn them if costs have grown significantly or if infrastructure has been provisioned without proper tagging. This enables them to make better decisions and respond to mistakes before they can do any damage.

These cloud management tools support a financial operations (finops) approach, combining financial accountability with improved operations and delivery. In practice, this means that the IT or tech teams that set up the infrastructure can understand the impact of their decisions, allowing them to modify or change course for the good of the business. The resulting savings will be recurring and can be reinvested in the business.

As a business grows and changes so will its IT infrastructure, with new environments being added and removed regularly. It’s important to implement an ongoing optimisation process to assess and refine the cloud estate as needed. This will facilitate cost control and visibility and allow them to identify efficiencies and cost savings down the line. While a business can manage this process by itself, it is recommended to seek out an expert partner to take off the pressure and accelerate delivery.

In moving to the cloud, companies must avoid constraining its advantages. Yet oversight is needed, and businesses have to know what they are spending and why. With the latest cloud management tools and expertise, it’s possible to preserve the cloud’s agility, flexibility and scalability within a process that’s transparent and informative. With some structure, the transition to opex can fulfil your needs and support digital transformation without breaking the bank.

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Business

BACK TO SCHOOL – CEOS NEED TO LEARN A NEW LANGUAGE, FAST!

By Simon Axon, Financial Services Industry Consulting practice lead in EMEA, Teradata

 

Chief Executive Officers of banks know all about change. Leading responses to new challenges, new opportunities, new regulation and new markets is all in a day’s work. But the existential challenge posed by Big Tech requires a totally new set of skills. It is an entirely different beast that inhabits a totally new environment and speaks its own language. CEOs now need to learn the language of data to survive in the emerging digital world.

Learning a new language later in life is hard. CEOs need to fully commit to accomplish it. Becoming data literate means mastering the basics of vocabulary and grammar. Gartner defines data literacy as the ability to read, write and communicate data in context, including an understanding of data sources and constructs, analytical methods and techniques applied — and the ability to describe the use case, application and resulting value.” Extending the language analogy: the building blocks are an understanding of logical data models – the basic vocabulary; meta data providing rules and information about data is the grammar.  Learning needs to go beyond parroting a few key phrases and acronyms. To really communicate in this new language CEOs must not only be data literate – but data cognitive. Language shapes thinking, and to succeed, today’s CEOs need to think data like digital natives.

Simon Axon

As anyone who has learned a language will recognise – practise makes perfect. This means rolling up your sleeves and getting into the data ‘lab’. Run some queries, experiment with data to test theories and learn how data can, and should, inform all aspects of business management. It is daunting, and different functions are fiercely protective of their data. But that’s one of the big cultural shifts the CEO needs to lead. Data is more valuable when it is used across the business. Developing safe and secure ways to combine, refine and analyse data at an enterprise level is fundamental to competing with Big Tech. The Chief Data Officer can help. Spend time with them and use them as a teaching-resource to get more familiar with what can and cannot be done with your data.

As you practise you will build confidence and move from school-level conversations to business-class data fluency. Spending more time looking at and working with data and you will begin to recognise ‘quality’ data, identify attributes and flag anomalies. This will build confidence and essential trust in data. Last year KPMG found just 35% of CEOs trusted the data in their organisations. This shocking stat undoubtedly stems from a data skills deficit among CEOs themselves. If they don’t know what to ask for, and can’t recognise what they get, they won’t trust it. To stretch our linguistic analogy, if you are not confident in the language then you’ll be anxious ordering food in a restaurant!

Ultimately, no one expects the CEO to personally implement data-analytics programmes across the business. But unless they have the confidence and the skills to accurately communicate what’s needed, to sit at the head of the table and ask the right questions about the menu, then the organisation is unlikely to put the right emphasis on the data strategy.

In How Google Works, former Google Chairman Eric Schmidt outlines how every meeting revolved around data – it is simply how Big Tech works. Banks need to adopt the same approach. Exploiting data in all scenarios must become second-nature. By modelling the use of data across the business – dissolving silos rather than sticking to narrow data sets that reinforce them, the CEO can define a powerful data culture. Operationalizing data strategy will, just like using language skills, stop data literacy from becoming rusty.

Entering any new market requires investment in understanding the language, culture and business environment. In the Big Tech world, data is the lingua franca informing every decision. Bank CEOs need to learn from them and invest in building their knowledge to become data fluent. There are no short cuts. Throwing money, bodies and tech at the problem will not get you there.

 

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Business

REVITALISING THE TOKEN MARKET

By Gavin Smith, CEO at Panxora

 

With interest rates near zero and fears that whipsawing stock markets are set for further plunges, many investors are turning to alternative markets in the search for returns. Money flowing into cryptocurrency hedge funds and trusts like Grayscale is at all-time highs and the large cap coins seem to be entering a bull phase, but that capital is not trickling down into new token projects. Why are blockchain token projects struggling to attract funding?

 

Seed investor scepticism

Setting aside the reputational issues with mainstream investors, even those educated in blockchain tech are not signing on the dotted line. This is certainly due in part to the hangover from the early token market.

During the heady days of 2016/17, investors could buy tokens during the token sale, and if the project was legitimate – even if the business case wasn’t particularly strong – prices would soar based on market enthusiasm. Early investors purchased at a discount and cashed out almost immediately for a handsome profit – and then repeated the process again. The token sale allowed founders to amass a war chest large enough to finance the entire token project – without having to give up a large chunk of company equity. Everyone got what they needed out of the deal.

Running a token sale is far more expensive today than it was during the boom. Getting the attention of the token buying public in a market where advertorial has replaced editorial is expensive. This coupled with a regulatory framework that requires the advice of accountants, solicitors and information gathering of KYC details for investors all comes with an escalating price tag.

To accommodate the change in cost structure, tokens now need to acquire funding in two rounds. Frequently there is a first round where capital is raised from a few, large investors. This cash is then used to finance setup and marketing the main token sale. The token sale, in turn, provides the capital needed to run the entire business project.

 

Bridging the gap between token projects’ needs and early stage investors

To successfully get a token through the capital raising process, founders must acknowledge the risk assumed by those very early investors and reward them appropriately. And given that tokens may stagnate or fall in price post token sale means that a deep discount in token price is not necessarily attractive enough to get investors to commit.

Many tokens have turned to offering equity in the business in the effort to raise that first tranche of capital. If you look at the number of successfully concluded token sales, the downward trend has continued since Q2 2018, so offering equity is not sufficiently stimulating the market.

 

Two sides of the coin

So, what is the answer? It’s a complex question but one thing is certain. Any solution must be rooted in a deep understanding of what both parties need to successfully conclude the deal.

On the one hand, token founders’ needs are clear: they need enough capital to get the token ready for and through a successful liquidity event that will provide sufficient funds to build the project. The challenge lies in striking the right balance between accruing that capital and making sure not to offer so much project equity that give up either the control or the incentive founders need to drive the project forward.

On the other hand, while the needs of the seed capital investors are more complex, there are two areas of key concern: transparency and profit incentives.

 

Transparency can mean many things, but almost always includes providing more informative cost and profit projections, as well as answers to a whole range of questions, not least the following:

  • What happens to investor capital if the token sale event fails? Token founders must be transparent from the outset. The token market is highly speculative and early investors run the risk of losing their money should the project fail. Therefore, investors require a well-established fund governance process in place throughout the fundraising so they can make informed decisions on whether the project is worthwhile. 
  • How are the assets for the entire project managed? Investors need to know that their money is in good hands and that proper treasury management techniques are being used to manage cryptocurrency volatility risk. Ideally, an independent custodian will be used to hold the funds and limit founders’ ability to draw down the capital – releasing funds to an agreed-upon schedule of milestones.
  • How are the rights of investors protected, for instance in the case of a trade sale? Investors need to know what happens if the company they are investing in is sold. What impact could this have on the value of their stake? Would a separate governance framework need to be established? These are critical questions and investors aren’t likely to settle for any ambiguity in the answers.

Profit incentives are important when it comes to encouraging early participation in a project. Investors need convincing that the proposition will keep risks to a minimum and focus on providing a strong probability of a return. This means that founders need to be able to defend the case for the increase in the value of their token.

But this isn’t the only incentive that matters. Investors can also be incentivised by preferential offerings such as early access to projects and services that might help their own business.

Let’s not forget that investors don’t support just any project. What really matters is that there is something special and unique about the business being underwritten by the token. Preferably something that could be shared upfront and directly benefit the investor – proof that the investment is really worth it.

And that’s what it all comes down to. Ultimately, while token projects are having a hard time finding funds at the moment, if they can prove their worth and provide full transparency and clear profit incentives to ease investors’ concerns, the money is out there. And deals can be done.

 

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