The biggest objection we hear from clients considering a move to the cloud, especially for ERP, is financial. Specifically, the hit to operating expense on a recurring basis is too much to take and that they would like to keep their on-premises solution because the licenses and a significant amount of the initial implementation costs are capitalized and depreciated. The reason behind this is their attempt to manage to EBITDA, which brings us to Warren Buffet.
“People who use EBITDA are either trying to con you or they’re conning themselves.”
– Warren Buffet, 2014 in Forbes
So is this an explicit endorsement of moving all your expenses to operating expense instead of capital expense? Not exactly. As the ‘Oracle of Omaha’ has explained in several annual letters to shareholders for Berkshire Hathaway and in other public comments, the fixation by managers with EBITDA ignores the very real costs of doing business. Buildings, vehicles, servers, and even enterprise software licenses, which can all be capitalized, still represent real expenses of conducting business even though they don’t impact the almighty EBITDA. You can’t run a business without these expenses. Which brings us back to Mr. Buffet.
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“[d]oes management think the tooth fairy pays for capital expenditures?”
– Warren Buffet, Berkshire Hathaway Annual Letter, 2000
This quote encapsulates the essence of why Buffet thinks capitalized costs are real costs. Someone has to pay for it, namely the owner of the business. For a privately held company with an owner who has a short-term point of view and is concerned with “putting lipstick on a pig” to sell the business based on cash flow, increasing operating expense and shrinking EBITDA is not a winning strategy. However, for an owner or management with a long-term view, there is a different answer.
“Our favorite holding period is forever.”
– Warren Buffet
If your management perspective is more in line with Mr. Buffet’s favorite holding period, ‘forever,” moving to the cloud to take advantage of guaranteed uptime, cutting-edge functionality, seamless upgrade process, and, yes, predictable long-term operating costs, then a cloud solution is a better answer.
Ironically, moving to the cloud with a solution like Oracle ERP Cloud, clears up the future forecast for your IT costs and reduces the need to plan hardware and software upgrades. While some managers may think there is financial pain due to the operating expense hit to EBITDA for Oracle ERP Cloud subscription fees compared to licensing an on-prem solution, doing so will give you a fully supported application with regular upgrades and the newest functionality.
To paraphrase Warren Buffet, there is no tooth fairy to pay for the capital expenditures of a server or application upgrade in 5 to 7 years, so if you have a long-term view of doing what is right for your business, quit conning yourself into thinking an on-premises solution is the right answer because it doesn’t hit EBITDA.