Getting our head into the cloud

Feng Lui:

When you have cloud computing power at your fingertips, the cost of trying new ideas, response market change is going to be a lot faster, right? The innovation barriers are significant lower.

Narrator:

Welcome to Accounting for the Future, a BDO Canada podcast for financial leaders to navigate, change and achieve business growth. We'll uncover the challenges financial leaders may not have dealt with yesterday, but we'll definitely have to manage for the future.

Anne-Marie Henson:

Hi, and welcome to BDO Canada's Accounting for the Future. I'm Anne-Marie Henson, and I'm joined by my co-host Armand Capisciolto. Today we'll be talking to Feng Liu, BDO Lixar's Head of Cloud Engineering.

Before we start, I thought I would explain a little bit about what BDO Lixar does. So, Lixar is BDO's technology division, and they help clients with a variety of different needs, such as digital transformation support, big data analysis, and AI tools to help profitability, as well as business applications and cybersecurity.

Armand Capisciolto:

So, Anne-Marie, I'm really looking forward to this discussion. First of all, it's always a treat to talk to a non-accountant. But more importantly, cloud computing arrangements cause some really interesting accounting issues. And I'm a believer in, for any accounting issue, you need to understand the transaction. You need to understand the what's actually happening in the business to get the accounting right. So, I'm hoping Feng can explain cloud transformation to us, and to our listeners, so that we can understand what we have to do from an accounting standpoint. So, Feng, welcome to Accounting for the Future.

Feng Lui:

Thank you, Armand. Thank you Anne-Marie. Super excited to be here. This is probably my first time talking about cloud transformation in front of group financial folks audience, rather than the CFO and the CIOEs. Thank you.

Anne-Marie Henson:

Great, thanks. So, we're really happy to have you, and we thought we'd maybe start with a simple but perhaps complex question. So, we hear a lot of buzzwords being thrown around about moving to the cloud and digital transformation, and so when we hear something like cloud transformation, for most of us, the more financial folk and not IT folk, we don't really know what that truly means. So, can you start by giving us just a brief description of what cloud transformation is?

Feng Lui:

Sure, pleasure. Let me bring that into two different concept, right? First one is, let me explain what is cloud, right? And especially, what is cloud computing?

Cloud computing have five essential characteristics. The first one is self demand, on-demand self-service, right? A consumer should be able to provision computing capabilities such as server, network, storage, as needed automatically without requiring any kind of human interaction with service providers. So, that's number one.

And number two is a broad network access, which means they should able to provision those computing powers using standard mechanisms, such as the internet, on their phones, mobile tablets and laptops.

The third one is resource pulling. What other resource pulling does, it means a multi-tendency, which is a same server rack on computing power could be consumed by different clients at a different time. Which means that a group of customers sharing the same infrastructure at different times to improve efficiency of the utilization.

The next one I'm talking about is the rapid elasticity, which means the capability can be provisioned quickly by increase amount of compute power, or decrease compute power, based on the needs. This is particularly very useful for many scenarios. First, consumption predictable, then unpredictable. Both has a traumatic different kind of use cases. For accounting perspective, for example, in April tax season, you could need a lot of process power. But after that, you may need less, right?

So, the last one is major services. In cloud world, you should only pay what you consume. Not like you buy, in the traditional way, you buy racks and put in data center. You sign a three-year contract. This is more like, you need it, you provision it, you pay it. Once you don't need it, you decommission it, you don't pay for it.

So, that's cloud computing. Next one I'm going to talk about the really is to expand the concept of transformation, right? By its definition is changing something significantly to be better. So, if we combine cloud transformation, that really means organizations migrate their business and correspond the operation to cloud-supported infrastructure and the platforms.

So, I'm not using the word application migration here, because that's actually not a transformation. You simply just shift one location to another. It has to have some fundamental changes to become a really a transformation. Does it help?

Armand Capisciolto:

Yeah, that's... Feng, it's really interesting. I liked how you broke it down into the five components. And what I heard there as you were describing the five components that I find makes this really interesting is, there's a lot of flexibility there. Right? You talked about using something that US accountants like to talk about, tax season and busy season, and having that flexibility of when you need capacity and when you don't. So, very, very interesting. Very, very helpful.

When we think about the transformation side of it, and you mentioned making things better, I think one of the things that we all tend to focus on, whether we're talking about something for business or even talking about new technology we use at our homes, we always talk about the technology. But to have transformation, it's beyond technology. Processes need to change, other things. So, when you think of all of those other changes beyond the technology that has to change, what are some of the key challenges that companies have to overcome to make that transformation successful?

Feng Lui:

Very good question. So, as you said, it is not about the technology. Actually the first thing is the mindset shifting. Actually how you run a business on cloud and leverage that capability at the fingertips, be able to scale up and down, in and out. That's a change in the way how you're planning, how you are managing your business.

You really need a significant architecture redesign session, because the cloud architecture is about cost aware, about design for failure. That's very different from traditional IT architecture. So, that's the number-one challenge, mindset shifting.

The second one, actually, is a skill-side, and experience the resources. Building cloud competencies is not a test, can be done overnight. So, you require years of building. Because if you're looking today, with such a economic advice, you'll have a hard time to hire qualified cloud engineers, cloud architects. Good, skilled people is really hard to find in the cloud field.

Then you have the security concern. So, when the data leaving your data centers, leave something you control to somewhere you don't have a full control, to a public cloud, wider servers, storage areas, how you encrypt them? How you manage the encryption keys?

There's a number of corresponding challenge bring that up, concern by organization, especially when I talk about the financial public sector. There's many things they need to consider when they make that shift.

The next one is how to be compliant with relevant regulation requirements. If you have product B data, if you have PCI data, how you manage that in the cloud environment? Traditionally, if I'm running product B data on my data center, I get a CISC certification. I get government Canada coming to inspect my site. Now, I can't do that with a public cloud, right? So, that's definitely be a challenge.

I'm going to shift a little bit to technology side, actually, because that also represent a significant portion of the challenges. For the existing solutions applications, there's also have a technical complexity. For example, the limitation of the legacy applications. Do they have a supported hardware, operation system, in the cloud? Even running mainframe, my reframe, COBOL in cloud? What if I have a desktop application around Windows XP, right? There's many challenge like that I deal with in the past.

And there's application integration issues. So, my application going to move to cloud, may have some dependency to internal application host internally, because now become one cloud, one on premises. How I secure that connection, resolve that dependency? This is complicated.

When an organization migrated their business and applications in front of the cloud, sometimes they cannot be a [inaudible 00:10:38], which means they need to have an investment put in, to modernize before the migrate. And investment also sometimes become road blocker. Because if a business not generally enough revenue, they actually cannot not make move. So, they stuck. So, I also see this as a significant challenge.

The last point I want bring up is, cloud transformation is not about get it done, then that's it, right? You finished. More than that. Actually it's not. It requires ongoing optimization. Your architecture, your business operation model, your security, your cost. So, cloud is a moving thing, because if I look at why start cloud computing in 2011 compared to 12 years from now, so many things changed. The architecture, what I put in there 12 years ago, is not going to be good for today's cloud services.

That's kind of summary of the challenge I kept facing while working with my customers and doing their cloud transformation.

Armand Capisciolto:

Very interesting. Lots to think about.

Anne-Marie Henson:

Yeah, for sure. I'm hearing challenges around resources and the time and the investment it takes, challenges around legacy technology and how easy it's going to be or difficult it can be to transfer that data, and then business continuity. So, making sure that you're continuing to run your day-to-day business and you don't get bogged down with that. And then challenges around cost as well. So, a lot of things that companies need to consider.

And I like what you said about it just being an ongoing process. I think some of us with a bit less experience in this will think that cloud computing is just a little bit of upfront investment, and then you press a button, and then all of a sudden you're on the cloud, and it's wonderful, and you have access to all these new reports and systems and functionality that you didn't have before. And it obviously isn't that simple, I guess.

So, we're talking a little bit about the challenges, but there are a number of companies, clients of mine, clients that you work with, Feng, on a daily basis, who've decided to go ahead with this investment and ultimately think that this is worthwhile for their company's future. So, how about let's talk a little bit about not just the challenges, but the upside of cloud transformation.

Feng Lui:

Sure. There's no doubt there's tons of benefit to the cloud transformation. I'm going talk the benefit in two different categories.

The first one is, a significant hire is usually, I work with my consulting clients and customers, this is the world we focused on. Right? It's improve the strategy. So, there's many aspect from there.

The first one is stronger and centralized security. If I like a data center built by Amazon, Google and Microsoft, from physical security perspective, is so much better compared to when you deal with a traditional hosting vendors. It's more to medium size. There's just not comparison there.

The second security perspective is a cybersecurity. There's so many different tool set at your fingertips with remote cloud to secure your applications, your data, against cyber attack, right? So, that's the thing. That's not only better than any organization, even the large organizations like banks.

The next one we're talking about, increased scalability, availability and the service level. That's leading to better user experience. Less downtime, less impact on business transaction to support unplanned the business growth. We were talking about one of the things that you can do rapidly is provision and scale out your capacity, and scale in when you don't need it.

Cloud also provide better reliability and the disaster recover capability. Cloud architecture, as mentioned, was designed for failure, which means 10 component failures I expected, accounted for. Resilience was a part of design from the day one. So, there's more option for organization to use to make sure they're meeting their recovering point objectives and their recover time objectives when they're using cloud environment.

Next one is much my favorite. Accelerating the innovation, improve agility. Think about it. When you have cloud computing power at your fingertips, the cost of trying new ideas, response market change is going to be a lot faster. The innovation barriers are significant lower right now, and you can quickly try something. It doesn't work, you haven't buy bunch of machines and put in there. You just rent a few servers and try the idea. Didn't work out? Shutting them down. The cost is really low, right?

Actually, a matter of fact, the beginning of the cloud journey, there's a number of gaming company test their games on cloud. And if the game take off, then they invest further to build better games, and using more capacity. Otherwise they just killed game. So, they don't have to buy a bunch of racks to hold the game to begin with.

Again, we talk about security, right? There's not a wind talking about a tech debt management. Think about it. If you are using Windows XP window 2008, or some really legacy application, Fell Knight, right? There are other support. And you start thinking about the data migration, upgrade. You deal with vendors. There's so many things you need to working about.

My professor actually mentioned a data center. There's so many tech data I have to deal with. It's a major security concern, and also very time consuming. But why I moved to cloud, for example, if I'm using SAAS model for cost, which means if I'm using Salesforce, or some SAAS-based accounting software, I don't have to worry about to upgrade those software anymore. That's all vendor's responsibility.

And the last, not least, the next one is actually talking about the sustainability. Cloud computing actually a lot greener technology than traditional IT solutions, right? By moving to cloud, business can reduce their carbon footprint by sometimes people say 90%. But even if it's not 90%, that's going to be significant.

There's a number of white paper material, Google, Microsoft and Amazon published in terms of how they manage their energy consumption in their data center. Designed the data center in a way consume much less energy compared to traditional data center. Just to name a few. So, this is the first category, talking about improved strategy.

Of course, when we talking about cloud, we're talking about improved bottom line, which is cost. And cost is definitely another benefit for when organizations transform their business to cloud. Think about it. If you use computing resources as needed, so you're not always spending. There's no significant upfront investment, so your cost is more predictable, more manageable. And when you optimize your architecture, and optimize your business operation and your cost, you actually consume further.

So, that's the second category of the benefit. Improve your bottom line. So, company can use their funds to add to other things. Building new product, new features, again, more market shares. That would be the summary of the benefits.

Anne-Marie Henson:

Fantastic. Well, it's good to know, and it sounds like the benefits outweigh a lot of the costs and challenges, so something companies really should consider going forward.

And I love the ESG or sustainability angle to this. I'd never thought of that before. But having visited a traditional data center myself a while back, and walking into what felt like a furnace, with all the energy and the electricity that was being used to basically keep this data center running, I definitely see how that can be an added benefit outside of just the day-to-day operations. So, thanks for providing that.

And I think one thing that's important for listeners to be aware of is, there are some interesting grants and subsidies that are available to companies that want to undertake a digital transformation strategy. So, if you are planning to take that route, there are some interesting grants that are available to you to offset some of those costs.

Armand, I have something... a question for you. So, you did mention that there could be what you called interesting accounting issues, and I know you find a lot of accounting issues interesting. So, I'd like to hear your take on what is interesting about the costs that are incurred as part of a cloud transformation strategy.

Armand Capisciolto:

Yeah, I know what I find interesting, what others find interesting, might be a little bit different. So, maybe there's some accounting complexity, let's say, for those that don't like to think about accounting all the time.

And it's interesting, earlier Feng talked about cloud computing, and one of the things was the lack of human interaction to access the services. And it makes me think about music when he says that. And why I think about music is, I used to spend a lot of time, and I'm going to age myself, in university hanging out in HMV, and flipping the CD racks. And I don't know how I did it when I was in university, but I somehow bought a lot of CDs. Sadly, I still have all of those CDs, and a few cassettes as well. Can't listen to any of them because I don't have a CD player or a cassette player.

But I think it's interesting to think about music because when I think about those CDs, if I had something to play them on, I control those CDs. They're my CDs. I can listen to them whenever I want to listen to them. But I don't consume music that way anymore. I don't have the human interaction of going to HMV and talking to a store clerk and seeing other people around there. I stream all my music, whether I'm using Apple Music, or Spotify, or whatever.

And because I'm doing that, I no longer control that music. If the artist has a dispute with the streaming service, or the streaming service decides not to carry that artist anymore, I can no longer listen to that artist's music. So, I don't control the music. Because I don't control the music, I don't have an asset.

And having an asset is really important because when we talk about software costs, and the implementation costs of software, that is covered by the standards for intangible assets.

But I have to have an asset to attach the implementation costs to. And if I don't have an asset I control, I don't have an asset I can attach the implementation cost to. And this is where accounting standards differ.

So, under IFRS, if I don't have an asset I can attach it to, I'm going to have to expense all those things, and Feng, based on some of the stuff you were talking about, I think a cloud transformation could be costly. So, that's a large period expense. If I'm dealing with a US gap, they actually tell me, "Nope, we're going to make you capitalize these. Even though they don't meet the definition of an asset, we've made an exception, and we're going to let you capitalize it." And then in our private enterprise standards here in Canada, we give people an accounting policy choice.

But the key message here is, I need to understand the technology. I need to understand if I control an asset. Because if I don't control an asset, without an exception to the principles, these costs would otherwise have to be expense.

And that's why, when I've dealt with cloud computing arrangements, and people would reach out to me and say, "We have a cloud arrangement. What do we have to do with it?" My first response is, "I don't know. We need to talk to someone like Feng to make sure we understand what the arrangement is."

Feng Lui:

There's quite a few different kind of cloud arrangements. But before talking about the cloud arrangement, oh we can call them [inaudible 00:24:13] and metals. So, I'm talk about the a little bit asset, right? Digital asset is actually very different from physical asset. Certainly, when you move to cloud, you don't own a rack. You don't own a data center from that perspective.

But, it doesn't mean you don't own the data, and to a certain degree, application depends on different cloud arrangement. So, let me expand the arrangement first.

So, the first one I'll talk about is the infrastructure as a service. This is probably the close to the on-premise model, which means that they're least disruptive. There may be a choice of cloud transformation, but it definitely addresses a number of concerns when we talk about significant investment. When you modernize the application to when you move to cloud.

You don't have to do that. You can just leave to shift to a cloud. As long as there's a supporting version of OS, and hardware on cloud data center, you can actually do the lifter shifting. And you can benefit for better security, scalability, and disaster recover, things like that.

And I also see organization using that overflow of their on-premise data center. So, like the gaming company [inaudible 00:25:32] I mentioned. They use cloud as extension of the data center.

Sometimes it also could be used as a geographic location expansion. You move to somewhere, Asia. There's no data center, your own data center. You can use the cloud. So, that's the infrastructure service. In this case, again, you don't own anything physical, but because you are moving your application and your data for on-premise to the cloud, you still own those applications. Lessons, data still owned by you. When you transition them out, you still have the right to get all that data and application back.

So, that's the first arrangement. The second one I'm talking about is a platform as a service. This is a one step further, which means that it actually requires transformation. If you are now building new application, now building new products, you transition, move existing one to cloud, you actually need to re-architect a little bit, re-platform your architecture, and to run the application in a more cloud native way. Which means the cloud provider not just provided your compute server storage, they also provide you things like OS, database management system, middleware manage system, business intelligence services, development tools environments, deployment tools, monitoring tools. This is cover entire application development lifecycle, right, from building, testing, deployment, managing and updating.

Again, because the application is built by you, you still own the application, as I said, and all the data during the application is still owned by you. So, that's the second scenario, platform as service.

The last one I'm going to talk about is a software service. This is actually a little bit different from premise, too, because this is a scenario like Salesforce, All Phase, 365, Power BI. The cloud provider deploys, config, maintain and update the software.

You don't own software, you buy the right to use when you pay the subscription, hardware, manual them, still you own the data. You can transition your data out when you terminate your subscription, so that your asset in a digital world, in cloud environment, is actually complete virtualized. Either is application plus data, or data only. Depends on different cloud arrangement.

Certainly, we're seeing more and more cloud computing is involving, so there's more service, more arrangements over time. And there's few example, like a functional service.

We're talking about the energy consumption. Functional service means it is also called serverless architecture. There's actually no server. If you need the call function, the compute power provision on demand, based on the traffic law. So, there's much greener technology, from energy consumption perspective, but also means that really have no server there.

But you still have data. There's a database as a service, and today almost everything as a service now. So, there's more things coming out.

And I think on the financial side, just try to understand the concept of application and data, or combination. That's your asset, right? There's no longer have any kind of physical real estate, rack servers, under your asset. Hopefully this clarify a little bit.

Anne-Marie Henson:

It's really helpful. And I think what we're seeing, and what I'm taking away from this, is there are different types of arrangements that you're talking about, and each of those arrangements, I have a feeling, would be accounted differently. They'd be accounted for some majority in assets, some maybe a split half-half between recording an asset and dispensing, and others that would be fully expensed.

And I think the takeaway is, we don't want the accounting conclusion to impact a company's decision as to whether or not to go ahead with cloud transformation. But the more and the better informed you are upfront about what the accounting implications are, the easier it is to understand, to explain, and then it avoids surprises at the end of the implementation process.

And I always try to link this with a concrete example, and I actually do have a sort of bit of a success story about a company that underwent a big transformation.

A lot of those costs had been incurred in-house. They developed sort of their own system that suited their needs, but some of it was outsourced. A portion of it were costs that were going to be ongoing. And it was basically a group of members that were sort of part of the same organization, so the transition was being managed centrally by one team, but the costs were being shared amongst all the different members who were participating in this transition process. And a lot of these members, there were different sizes, different levels of profitability and stuff, and they were concerned about how this was going to look in their own separate financial statements. So, what this team did is that they reached out to us before undertaking that project, and we were able to provide them with an analysis based on an understanding of the technology and exactly what we were doing.

And we had a lot of upfront calls with them. And again, being accountants, it may have seemed like very basic questions for the technology team that we were working with, but very important for us to be able to understand and then translate to what that meant from a financial reporting perspective. And ultimately, we were able to provide analysis of, "Okay, here are your costs. Here's what we think meets the definition for capitalization so you can record it as an asset. Here's what needs to be expensed." And it gave the members a lot of comfort.

Overall, your cost is your cost. You have to pay X dollars. That doesn't change in this analysis. But it was great for them to have a better understanding of how this was going to end up looking in their financial statements. So, always, like we speak to a lot, Armand, in this podcast, it's not about changing your business decisions, but about understanding the impact, just to be better informed for yourself and for your users.

Armand Capisciolto:

I love that story, Anne-Marie. Again, I think the one thing no one likes is surprises. Especially when you're talking about financial reporting, I think you want certainty on what the answer is. Surprises are always problematic.

And what you've done in that story is avoid a surprise at the end of the install when you're, kind of a year later, you're doing your accounting records, and all of a sudden you're "Oh my goodness, we had to expense all that?" And that's a surprise, and no one likes that, so that's a fabulous story.

I'm all about, and we're all about, in the discussion of this, about avoiding surprises. And such a great note to end it with. Feng, thank you so much for your insights on this topic. Myself, Anne-Marie, our audience, appreciate your time and expertise.

I'd also like to thank you, our listeners, for tuning in today. This has been BDO's Accounting for the Future. Please let us know if you found the topic interesting and useful, and remember to subscribe if you liked it. We'll see you next time.