Migrating To The Cloud: Three Things For Private Equity Funds To Consider

Sean Epstein

A rising number of private equity funds—and their portfolio companies—are evaluating the merits of moving their technology to the cloud.

While the cloud offers numerous financial and operational benefits, the underlying technology and decision-making process behind a cloud migration is not simple, nor is it easy to understand. It is essential to consider a mix of analysis. Here are three things to consider.

Opportunity cost

Opportunity cost, along with capital expenditure (CAPEX) and operating expenditure (OPEX) 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 next-best alternative.

Traditional on-premise IT spend is both capital- and time-intensive. Hardware purchases and software licenses are up-front expenditures that need to be carefully planned based on the projected growth of a business. However, predicting the exact IT requirements is complex due to external factors such as market demand and competition. In addition, the capital used for CAPEX purchases cannot be redirected, even in the case of underutilized IT resources. Thus, they are sunk costs.

Cloud computing provides the ability to match supply and demand, alleviating over-investment or under-investment on IT resources. Additionally, cloud services offer subscription-based pricing models that incur IT spend as an OPEX, due to their pay-as-you-go pricing structure. This allows 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.

Business agility

Business agility is essential for faster revenue growth, sustainable cost reduction, and the adaption of business model changes that result from disruptive innovations. Due to the incredible rate of technology innovation, the digitalization of businesses is rapidly becoming a core driver for competitive advantage. For businesses in fast-paced markets, disruptive innovations from new entrants have become the new norm, and the slow-to-compete are often faced with an imminent decline in market share.

Most organizations deal with an infrastructure landscape filled with legacy applications that cannot be easily adjusted or upgraded to handle the latest innovations. This results in companies falling behind the technology adoption curve, gradually losing control over the core business. However, with cloud offerings, the time to implement innovation is reduced drastically.

Many software-as-a-service (SaaS) offerings, the de facto service model for the cloud, provides added value to companies by offering a continuous stream of upgrades. These recurring enhancements add new functionality, utility refinements, and leaps in performance through updates. Thus, SaaS enables companies to focus on their core business activities rather than actively manage their own IT infrastructure.

Cloud services enable rapid advances for innovation and cost optimization efforts. Cost optimization is achieved by eliminating the sunk costs that result from the legacy IT spend that required up-front capital investments. Capital commitment for subscription-based pricing grants the flexibility for companies to choose the right solutions at the LoB levelalong with best-of-breed vendor solutions. In the event business costs or resources must be slashed, OPEX can be reduced in a relatively short timeframe.

Business risk associated with security, compliance, and data privacy

Security, compliance, and data privacy have become increasingly critical for business environments. The fast-paced evolution of new business models has created a requirement for digital transformation, and to proactively manage risks associated with this transformation, the cloud has become the most effective tool. At a high level, 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 cybersecurity and intrusion threats – benefiting the customers of these providers.

Due to the ease of entering and exiting a subscription-based contract, it is critical for service providers to maintain their customer’s trust to ensure customer “stickiness” and improved customer lifetime value. Cloud service providers invest heavily on security aspects, and in fact, network security and cybersecurity are considered core competencies of cloud service providers. Business risk can be mitigated by strategically partnering with a trusted cloud service provider that can demonstrate high standards of security and compliance requirements through certifications and regular external audits.

Sean Kibbe and Srinivas Rapthadu contributed to this story, which also appears on the SAP Community.

Sean Epstein

About Sean Epstein

Sean Epstein is Head of the SAP Private Equity team in EMEA and runs global merger and acquisition (M&A) transaction programs at SAP. His team develops strategic partnerships with private equity funds, institutional investors, and family offices and helps drive customer success during M&A. Prior to SAP, Sean was an executive advisor and general manager at CEB and has held a variety roles in merchant banking, strategy consulting, and venture capital in San Francisco, New York, and London. He is frequent speaker, guest lecturer, and ad hoc writer covering topics such as technology innovation, M&A, and private equity. He has an MBA from Columbia Business School and a bachelor’s degree from the University of Virginia. He and his wife have three children and reside in Arlington, Virginia.