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By Sean Epstein `04, Head of SAP Private Equity, EMEA and
Srinivas Rapthadu, Resident Fellow SAP Private Equity
More and more Private Equity funds and their portfolio companies are having to evaluate the merits and approach to moving their technology to the Cloud. While the Cloud offers numerous benefits with regards to cost, agility, and innovation, it is important to maintain a broad view on how current infrastructure supports business needs, and how a change affects bottom-line cost savings and top-line growth. Cloud services offer optimal resource utilization and greater budget flexibility, with the ability to manage costs at a Line of Business (LOB) level, or on a subsidiary level.
Sample Customer Migration to Cloud Service Model
Consider a consumer electronics retail company in the mid-market segment with omnichannel presence. The company has standardized business processes: inventory management, supplier management, CRM, and eCommerce. The company also holds a number of unique and advantageous processes that differentiate it from competitors. Currently, all the processes are supported by homegrown on-premise applications, along with a large IT team and high TCO.
With the high adaption of digital technologies, retail companies like this one are expected to provide a seamless consumer experience with personalized offerings in real time, across all platforms. In order to meet such demanding business needs, companies in the space must focus on implementing competitive technologies, especially those that allow them to eliminate non-core admin tasks, such as manual maintenance and the upgrading of hardware and software.
The company can sort their applications into three categories: one, commodified business processes (non-core standardized), such as proll; two, specialized custom applications that enable a distinct and robust consumer experience; and three, proprietary applications and data. All three categories provide companies with competitive advantages, whether through the company’s pricing engine or in personalized customer promotions.
If the company decides it would be advantageous to move their basic business processes to the Cloud, they could leverage a SaaS model that enables their employees to use software applications without maintaining or upgrading them. SaaS applications are hosted by the Cloud providers in their data centers, thereby eliminating the need for hardware customers would have maintained otherwise for in house applications.
The company does have more specialized applications, all of which need to be developed and integrated by their in-house technology teams: data scientists, business analysts, and integration specialists. However, the underlying hardware and foundation software (operating systems, database, middleware) do not provide any competitive advantage and do not need to be maintained in-house. Thus, the company chooses to leverage a PaaS model for these applications, thereby enabling the company’s specialists to remain focused on their high-impact custom applications.
Lastly, the company decides it wants full control of the development and maintenance of the pricing engine application–database, operating system, software–and its corresponding data. In this scenario, the ideal path would be for the company to leverage IaaS for pricing engine application. IaaS allows the company to migrate their hardware needs (servers, storing, networking) and hardware-related maintenance to an outside party, so that the company can remain focused on the application development, where they need the most control.
In this decision framework, there are a set of questions to assess how a company’s current IT setup is handling resource utilization and business agility. The decision framework can be used for assessment at the organization level, subsidiary level, or LOB level in order to decide how soon a Cloud migration should occur.
Optimal Resource Utilization (Infrastructure and Labor) Reduces Costs
- Does your current infrastructure landscape consist of legacy systems with high maintenance costs (regular operations and upgrade costs)?
- Does your current business, or specific LOBs, have fragmented demand with seasonal high-utilization, but low-utilization during the rest of the time?
- Do you maintain additional hardware to meet the seasonal high demand?
- Do you have frequent production outages that lead to increased costs?
- Do you have challenges finding the right talent to develop or manage IT?
Business Agility Provides a Competitive Advantage and Potential Revenue Growth
- Does it take a long time (months or years) to add new business requirements or functionality?
- Does it take a long time for you to procure the additional infrastructure to meet unanticipated demand?
- Do you have increased effort and costs to close periods?
- Do you have excess effort in finance – especially for timely reporting and analysis?
- Do you have subsidiaries with different infrastructure landscapes that also have high maintenance costs?
- Do you have challenges integrating reorganizations, mergers, and acquisitions?
As Cloud-based infrastructure becomes table stakes across industries and LOBs, legacy IT landscapes will become increasingly obsolete as competitors leverage the operating efficiencies, innovation, and cost benefits of Cloud. For businesses, assessing a Cloud migration is no longer an “if” but “when”, an essential step towards derisking the IT aspects of a business case.