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Cloud Adoption Essentials: Cloud Cost Fundamentals - YouTube
Channel: A Cloud Guru
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What is cost? Well,
depending on who you ask,
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cost can be the most important or the
least important consideration for a
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business case, and all manner in between.
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Sometimes matters of cost can be
intimidating because of the terminology,
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or maybe you just feel uncomfortable
talking about money. Well,
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there's really no getting around
it when creating a business case.
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In this module,
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we're going to be talking about some of
the economic aspects typically involved
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in developing a cloud business case.
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We'll cover the important
distinction between cost and value.
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You're going to learn about total cost
of ownership and how we can calculate it,
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or at least approximate it.
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We'll also learn about how the cloud
can influence our business expenses.
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When most people talk about costs,
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they're usually referring to how much
money it takes to acquire something. Now,
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as we know, cost isn't limited to money,
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it can be described in
terms of time or resources.
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Usually cost is a number of figure
that most people try to minimize,
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but cost itself is really one dimensional.
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If I were to charge you 100 Euro
for this box, is that a good deal?
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Well, you don't know because you
don't know what's in the box.
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So cost alone isn't very useful.
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We also have to consider the benefits
that we get in exchange for that cost.
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In economic terms, we call this utility,
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and it's this ratio between cost and
utility that describes the value of
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something now,
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because utility is often very
subjective and changes from situation to
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situation. The value
is situational as well.
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And this is why building a cloud business
case, indeed, any business cases,
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not a one size fits all prospect.
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When evaluating cloud adoption,
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most business cases will compare
our current state to a potential
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cloud-based future state.
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And one way people try to do this is
by building a total cost of ownership,
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or TCO. Now, yes, if I ran the world,
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I'd call it a total value of ownership,
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but people call it a TCO
so we'll just go with it.
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Let's look at an example.
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A basic TCO will describe the cost
that I call the low hanging fruit.
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And those are usually
infrastructure and software costs.
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They're easy to get to because we can
just look at our invoices for that.
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But if we stop there, we're not going
to have a very complete picture.
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We also need to include things like
power and cooling and fire protection.
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Because our company might
be in a regulated industry,
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we have to maintain certifications.
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So we might have to pay an auditor to
come in and audit our facilities every so
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often to make sure that we have the
proper security and safety measures in
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place. We also have labor costs.
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These are the people that
keep everything running. Now,
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all these things we can put
into an operational cost bucket,
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as they relate to just keeping the
lights on. Business as usual. Now,
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on the cloud side of things,
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all of those facility and equipment
charges are covered for us in the cost of
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the resource. Many times the software
licenses are included as well.
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In the Cloud Architecture module we
covered some of the common migration
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strategies and, depending
on which one we choose,
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we can formulate an approximate
operational cost for our cloudified
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landscape.
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All the major cloud providers offer
cost calculators to help out with
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this. Okay,
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now we have our operational costs to
describe our current state and our
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potential future state. We're
good, right? No, no, no.
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We have many more things to consider.
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Migrating systems to the cloud
isn't without its costs as well.
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Think about all the things that you're
going to have to do above and beyond just
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business. As usual,
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we might need to purchase some new
tools to help with that migration.
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Maybe we need to bring in a
consultant to help us design our
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new cloud-based architecture properly.
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We'll certainly want to train our staff
on how to use the cloud efficiently.
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We might need to figure in the cost to
buy out contracts or break leases if we
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don't need those services
or facilities anymore.
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If downtime means lost revenue for us,
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we might need to include some allowance
for any required planned downtime
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as we're migrating those
systems to the cloud.
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Now we're starting to get
a better picture of things,
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but we're not done yet.
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We also have a host of intangible
items that we should consider
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that will impact our TCO. We might
be able to avoid costs, for example,
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archiving to the cloud is a way that
we can avoid having to buy an expensive
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onsite storage system. In the cloud,
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we might be able to offer self
service options to our staff,
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which could reduce the number of
touches that it takes to get stuff done,
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which should have some worth to us.
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Maybe our existing business systems
can only run processes overnight,
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while a cloud-based solution could
allow us to do things in real time. Now,
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many companies find that their overall
data security increases once they move to
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the cloud.
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And we'll cover this in more detail
in the Governance and Security module,
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but that should have some value
to the organization as well.
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Then we have agility.
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There are many examples of companies
prototyping and deploying new capabilities
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in a matter of hours or days just
by assembling some ready-made cloud
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services. What's that worth?
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What is it worth if our competitor
has that ability and we don't?
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There's probably some cost
of inaction in that case.
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Think about retaining
and attracting employees.
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Cloud skills are in high-demand now,
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so trying to hire a skilled engineer will
certainly have a cost on the retention
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side. By allowing our employees
to develop those in-demand skills,
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will that reduce employee turnover
or increase employee engagement?
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These things have value too,
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and hopefully we're beyond that
whole "If I train my employees,
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they will leave" nonsense.
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Providing good training resources for
your employees can be one of the biggest
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and best returns for your money
during a cloud adoption. Now,
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these intangibles will probably be
pretty challenging to distill into a cost
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figure, but they are impactful
parts of our TCO equation.
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Superficial TCO exercises
miss these things,
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but they are how your
TCO can provide a better
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complete picture and illustrate
to decision makers that you're
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thinking strategically.
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Terms that you might hear about commonly
are capital expenses and operational
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expenses, or CapEx and OpEx
as the cool kids call them.
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Let me first give you an example of a
capital expense or CapEx model. Now,
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the idea behind a capital asset is that
a company can buy something with the
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expectation that it will keep doing what
it's supposed to do for several years.
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Then when its useful life is over,
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they'll probably buy
something new to replace it.
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Now useful life is an interesting
term and it's usually governed
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by depreciation schedules.
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Depreciation is a way that a company can
account for the declining value of that
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asset over multiple years. However,
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depreciation is a non-cash activity.
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It's more for tax and accounting purposes.
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I still have to drop a big load of cash
upfront or sign some longterm payment
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contract to actually pay
off that whole asset.
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Now traditionally, IT equipment
was treated as a capital asset.
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Back in the day, to make use of the
technology you had to physically own it.
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This concept of using computers in
some far away location just wasn't very
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common or cost-effective. Second,
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the technology was very expensive and
involved large outlays of money that
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would usually require many approvals
across levels of the organization.
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So I,
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as a CIO may only get the opportunity
to ask for new equipment every few
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years, usually defined by
a depreciation schedule.
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I'd need to somehow predict what my other
internal business partners are going
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to need at least until my
next opportunity to buy,
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which is a few years down the road.
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Most of the time that prediction
is just a complete guess.
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My internal business partners might
barely know what the next 12 months holds,
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let alone the next five years.
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And so many things can change like
economic markets, competition, regulation,
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technology, advancements, and so on.
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If I guess too high I'll
have unused resources,
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and I just wasted company
money. If I guess too low,
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I might have to make some emergency
purchases and miss out on economies of
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scale. Now, as perilous as this sounds,
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it was, and still is, how things
are done in many companies.
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But with the advent of faster data
communication lines and companies
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leaning into the
pay-as-you-go business model,
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this provides us with a very
special opportunity moving to an
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operational expense or an OpEx
model for our IT resources.
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operational expenses are variable
costs required to operate our business.
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And rather than buying everything
up-front and hoping I bought the right
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amounts, I can just buy stuff as I need
it and return it when I don't need it.
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I can reevaluate my needs every
hour or minute versus every few
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years.
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And our computing costs can vary
over time in relation to our
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business operations, and this
has some huge implications.
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We can base our IT costs on actual
demand versus reading the tea leaves
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in some rough forecast.
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We don't need to tie up piles of
cash building out a data center.
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We can get access to the latest technology
versus being stuck with some obsolete
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equipment. The cloud has truly
flipped the competitive landscape.
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Small startups can and do
compete head to head with mega
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corporations. This platform, A Cloud Guru,
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is a perfect case study. On that point,
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don't go jumping to the conclusion
that CapEx is bad and OpEx is
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good. CapEX approaches can
be situationally better.
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One example is if a company wanted to
increase their book value with more assets
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on their balance sheet,
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or maybe a company's near term cost
to capital is far less than what they
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expect it to be in the future.
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These are the nuances of
corporate finance and accounting.
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And if you don't have
a finance background,
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I would strongly encourage you to
partner with somebody in your finance
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department when building
this business case.
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Given their perspective,
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they might really help you pull
together a more complete value picture,
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especially for some of those
intangible items that we talked about.
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Plus they may help temper any sort of
inherent bias or blind spot you might
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have around this cost and value topic.
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But above all,
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be sure your business case tells
the story in terms of value
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and not just cost.
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