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By Sean Epstein `04, Head of SAP Private Equity, EMEA;
Srinivas Rapthadu – SAP Senior Strategist;
and Sean Kibbe, SAP Private Equity Fellow
Private Equity funds, specifically their operating partners on the ground, need to get more engaged on how their portfolio companies’ leaders evaluate the merits and approach to moving to the cloud – both their backbone technologies and the those that create competitive advantage.
Any technology investment should clearly align with the fund’s goals for the transaction – such as short term cost savings goals: platform plays with rapid acquisitions and quick integrations all lend themselves to a cloud-first strategy. Companies use a myriad of evaluation approaches which most commonly include items such as existing/future business requirements, current infrastructure/software, agility demands, and the quantification of business risks associated with security, compliance, and data privacy. Assessing these risks and requirements is necessary to determine the true opportunity costs of implementing, or not implementing, a cloud-first strategy.
Opportunity cost, along with CAPEX (Capital Expenditure) and OPEX (Operating Expenditure) calculations, identifies the real benefit of transitioning IT spend from on-premise resources towards cloud services. Opportunity cost analysis provides insights into how invested capital can be utilized for the best alternative.
Traditional on-premise IT spend (i.e.:. you pay to host your data) can be both capital and time intensive. Hardware purchases and software licenses are upfront expenditures that need to be carefully planned based on the projected growth of a business. Predicting the exact IT requirements is complex due to external factors, such as market demand and competition.
Cloud computing, on the other hand, provides the ability to match supply and demand, thus alleviating over-investment or under-investment on IT resources. Cloud services offer subscription-based pricing models that incur IT spend as an OPEX, due to their pay-as-you-go pricing structure. In addition, the capital used for CAPEX purchases cannot be redirected; even in the case of underutilized IT resources, they are then sunk costs. You need to know what percent of software and infrastructure is being consumed to make these decisions.
Business agility is essential for faster revenue growth, sustainable cost reduction, and the adaption of business model changes that result from innovations, expansions, increased complexity to execute. Getting digitization right is a source of competitive advantage and a driver of increased investment returns.
Most organizations have a landscape of old applications that cannot be upgraded and will not be supported for long. This results in companies that cannot integrate new acquisitions, get behind the industries technology best practices, and are distracted from their core business purpose. On the other hand, cloud offerings drastically reduce the time to implement new innovations. Software-as-a-Service (SaaS) offerings, the defacto service model for the cloud, provide a continuous stream of enhancements which add new functionality, utility refinements, and leaps in performance.
Getting it right means closing on a transaction and quickly having accurate and consolidated financial data available in real time. For instance: capitalizing on that opportunity in APJ (Asia Pacific and Japan) because you can immediately handle multi-lingual and multi-currency requirements; initiating vendor rationalization and negotiation; knowing where your human capital investments are and where they need to be; maintaining a consistent interaction with your existing and new customers; etc.
Business Risk Associated with Security, Compliance and Data Privacy
No company can underestimate how important mitigating security, compliance and data privacy risks are. A cloud -based environment is the most effective and efficient way to proactively manage risks associated with these capabilities – see the amount Yahoo, Target, Equifax, etc., have spent on crisis management PR, compensating customers, and lawyering up to protect themselves from further penalties.
Economies of scale allow cloud-based service providers to invest heavily on the state of the art security standards to meet the growing demands of cyber security and intrusion threats – benefiting the customers of these providers. In fact, network security and cybersecurity are considered core competencies of cloud service providers; as one operating partner recently told us, “Security is our risk and concern, but it’s their (the cloud providers’) business.” Business risk can be mitigated by strategically partnering with a trusted service provider that can demonstrate high standards of security and compliance requirements though certifications and regular external audits.
Inevitably most companies will start their journey with a hybrid model for their digital core, we explain more about that in Part II of this series.