IT Budgets Made to Stretch

 
 
By David Mitchell  |  Posted 2010-12-21
 
 
 

How can we get more return from our IT investment?

It’s a question business leaders the world over wrestle with on a daily basis. And it’s a worthy one, too: Ovum research shows that companies spend vastly different amounts of money, from as little as $500 per employee per year to more than $35,000 per employee per year.

Whatever the absolute level of spending, though, one thing remains depressingly constant—70 to 80 percent of that money goes to simply keeping everything running. It’s not a pretty picture, especially in a time of constrained capital, as economies around the world continue to grapple with the aftermath of the recession.

Increasingly—and understandably—decisions regarding IT investment no longer rest only on the shoulders of the CIO: These decisions are now also within the CFO’s domain. This new paradigm hasn’t just changed the way companies look at IT; it’s also transforming the way they invest in it.

Capital planning once dominated the IT budgeting landscape. Today, CFOs seek to free up capital for business expansion and innovation, rather than committing it to an IT infrastructure that’s focused on just sustaining the business. As part of the process, CFOs need clarity on where their capital dollars are spent.

Some IT-related expenses (such as hardware, software and training) are relatively easy to determine. But others (such as maintenance, application development, downtime, power and cooling, and end-of-life disposal fees) are less obvious. They also can be insidious, as costs tend to rise dramatically on IT equipment that’s past its prime.

Prioritizing Demands for Capital

The ability to identify hidden costs and false economies associated with maintaining older IT equipment is incredibly valuable in helping business leaders prioritize competing demands for capital. Companies require an IT investment process that provides a data-driven, holistic view that empowers better decision making by providing the following:

• comprehensive information on the full costs related to IT investments;

• data to evaluate the merits of competing IT investment approaches; and

• guidance on focusing IT investment to support innovation and business growth.

To address the need, some leading-edge IT leasing companies offer financial solution analysis tools to help clients understand how to get a better return on their IT investment dollars. This helps business leaders assess and refine their IT investment approach, while reducing costs and driving innovation.

A corollary to the strategy is evolution to a business services-focused approach to IT, including treating computing as a utility. Using virtualization, cloud computing and software as a service, companies can address the proliferation of aging technology and also reduce IT sprawl.

While migrating away from a capital-dominated IT investment approach in favor of a services-centric budget model may seem overwhelming, it can be managed at a controlled pace and with measured risk. Here are some options that can aid the transition:

• Sale and leaseback agreements are an eminently sensible way for business to free up capital—and there’s an even bigger upside. The sale and leaseback arrangement triggers an infusion of cash, which can be used to pay down debt or invest in other areas of the business.

• Leasing is an effective means of establishing a life-cycle approach to IT management, with predictable costs and an easy pathway to new generations of technology as they’re introduced. It also helps companies expand or renew their IT infrastructure independent of budget cycles.

• Utility contracts allow IT computing capacity to be varied according to business needs at a given point in time, and for the business to pay based on its usage levels.

• Outsourcing is a useful way to move fixed costs to variable costs, with the service provider bearing the capacity arbitrage risk.

Each of these proven techniques can be readily deployed as part of a move toward a new financial architecture designed to support IT innovation and business growth. A financially grounded approach—coupled with a business services-focused approach to IT—will produce the best outcomes in the long term.

London-based David Mitchell is senior vice president for IT research at Ovum, a global technology research firm. His research focuses on the major supply- and demand-side issues changing the IT value chain. David has worked in the IT industry since the early 1990s.