Passing the buck – who pays for IT?

The word ‘investment’ is often put next to IT spending and budgets in order to make the costs sound palatable. Organisations want a ‘return on investment’, many try to measure it and some even succeed. But not many. Perhaps IT could be thought of as something to consume, not own?

The problem is that like most industrial progress, IT is still rapidly evolving and expanding its capabilities. This means more spending on IT. According to recent Quocirca research, IT spending is flat for two in five UK companies but growing for the rest. For one in five it is growing fast. Costs are rising because IT has the potential to be used by more people for more purposes. IT departments struggle to cope with this as they often lack staff or the right skills and end up having to spend so much time and effort simply supporting and managing what they already have. Innovation is hamstrung by legacy.

Simply increasing budgets (even where this is possible) is not the solution. From the research, IT capital expenditure constraints are a significant reason why it is difficult to secure IT funds, but changes in business requirements tops the list and growth in user demand is also high up. Financing needs to go hand in hand with flexibility. Clearly a different approach is required.

Looking to the cloud

For many, public cloud services provide an opportunity to shift expenses to the operational expenditure (OpEx) side of the ledger, which many chief financial officers (CFOs) appreciate. Quocirca’s research shows cloud adoption is widespread in around a fifth of companies – both public and private cloud – and around half of UK companies are expecting overall cloud usage to grow. The primary drivers for public cloud in particular, revolve around reducing upfront outlay and adding flexibility in both cost and headcount. Even security, once a significant concern, is now thought to be being addressed.

There are significant challenges with cloud. A pay-as-you-go cost model seems appealing, but there may need to be significant architectural changes and costs up front. Once in place, costs can grow unpredictably. Most cloud services are delivering flexible technical capacity, with investment costs spread as OpEx, but this does not necessarily match the business requirement.

Hybrid cloud, hybrid financing

While public cloud has flexibility for providing certain resources – storage, compute power and application platforms on demand – this does not account for all of IT requirements. The end user needs other IT systems in order to access cloud services. A hybrid architecture, with some elements deployed on premise, often fits well from a technical, management and governance perspective. But it may not offer complete commercial flexibility as it will require capital expenditure (CapEx) and upfront investment.

Increasingly there is an appetite for delivering more IT capabilities as a service. This includes the well-established managed print services (MPS). The research also shows increasing interest in desktop as a service, mobile device management and video and collaboration services.

This means there needs to be a more all-encompassing hybrid model for financing, based on consumption of IT services in a manner that makes sense to the business user, that ultimately is paying for it and can measure the value. This is not something that should be tackled in the ‘shadows’, hidden away from IT. Shadow IT can be embraced and managed by the IT function. This can then act as a service broker by integrating a mix of internal and external capacity and capabilities to deliver the services required by the business.

Consumption based IT

Organisations prefer to spread costs over time and dependent on usage. Over time means that upfront CapEx can be avoided, with predictable recurring costs spread like a subscription. Rather than variability in capacity an initial service level should be agreed upfront. Pre-agreed and priced ‘burst through’ capacity could be made available and then be measured and billed for, only if used. Instead of just applying this approach to individual services from the public cloud, with the right financing this could be applied to all IT systems; moving the model from ‘owning’ IT assets, to ‘consuming’ them.

With this type of financial model, organisations have the technical flexibility akin to public cloud, shifting CapEx into OpEx. IT can be consumed as a service, with the value delivered much more closely aligned to costs. The details from Quocirca’s research (commissioned by Rigby Capital Ltd) and information for organisations considering how consumption based IT might work for their business, is available in the report which is free to download below.

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Note:  This Quocirca Insight, written by Principal Analyst, Rob Bamforth, first appeared in Tech Target, June 2017.