McKinsey: How to make cloud migration pay

Has your investment in cloud migration paid off? McKinsey & Company has created a report which focuses on how industrial companies can make the cloud pay by simplifying the IT landscape and avoiding hidden costs.

“The cloud’s real value goes far beyond IT: it can help industrial companies reinvent how they develop, deliver, sell and service their products,” highlights the consultation survey.

“The cloud, digital channels and data and analytics can improve everything industrial companies do,” commented McKinsey & Company.

“Our experience with clients suggests that cloud-enabled operations can unlock more than $1 trillion in shareholder value for industrial companies—half from revenue growth and half from margin expansion.”

According to the report, Making the cloud pay: How industrial companies can accelerate impact from the cloud, there is now an intensified need for the cloud due to the repercussions of the COVID-19 pandemic.

“COVID-19 has intensified the need for the cloud as an enabler of increasingly critical e-commerce, remote sales and flexible cost structures. During the lockdowns, 10 years of e-commerce growth took place in three months.”

McKinsey & Company comment that using the cloud is not always easy and offer advice on how to embrace this technology. Many cloud migrations fail because organisations did not initially simplify the IT landscape and establish data governance. 

“Rather than increasing budgets for cloud initiatives, industrial companies can ‘bend the curve’ to make the cloud pay over the short term,” says the report.

How to bend the curve

1. Be strategic and sequenced
   Carefully select which applications you migrate to the public cloud and then manage cloud consumption. Cloud operations can be adopted in multiple environments, not just the public cloud.
2. Make early changes to the IT operating model
   This will drive a step-change in pace and productivity, especially in DevSecOps and infrastructure management. Use the software-engineering paradigm to enhance the productivity of IT people.
3. Balance migration against cloud-enabled business redesign
   The redesign may include Industry tools, new analytics and business models. Emphasise business-process improvements, often enabled by analytics, where investment is lower and impact is faster.
4. Embrace cloud flexibility
   Drive ongoing business innovation with the fast introduction of new products, more partnerships and new ecosystem plays.

The report points out the cloud can improve processes for R&D, procurement, supply chain, manufacturing, marketing and sales, aftermarket, and business support. “The increased efficiency it promotes can significantly improve margins and productivity.”

“It provides access to innovations, such as new Artificial Intelligence (AI) and machine-learning engines, from cloud partners. Secondly, the cloud facilitates experimentation with new products and features, since the cost to set up a “sandbox” environment is nearly zero.” 

According to McKinsey & Company, companies average 23% over budget on cloud spending – but 30% of this investment is wasted - and the problem looks set to grow unless they can reset their cloud program. Extra costs, such as add-on services and double-bubble costs, are also an issue for organisations.

“These extra costs and growing complexity in the legacy landscape, have led to an increasingly difficult business case for the cloud. In 2015, only 7% of executives had difficulty making a compelling business case for cloud adoption. In 2019, that number more than tripled, to 23%. 

“Many companies have stalled cloud programs whose benefits cannot offset spending commitments with cloud providers,” commented McKinsey & Company.

Chief information officers (CIOs) see additional challenges too with 58% of the respondents to the McKinsey Cloud Survey indicating that since talent gaps make cloud projects more difficult, they are the top concern.

Managing a cloud transformation requires strong governance. Critical activities include the following:

• Quantifying business benefits 
• Planning and executing an end-to-end transformation by business domain
• Preparing the legacy application and data landscape ahead of the transformation
• Integrating application rationalisation and retirement into the transformation governance
• Training the entire relevant organisation by domain, not just IT
• Ensuring adoption of operational improvements by investing in change management from the start 

“Now is a good time for industrial companies to review and reset their cloud programmes, but they must first understand the current and future IT state and operating model, as well as any digitally enabled business opportunities,” concludes the report. 

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