The IT Investment Question

August 15th, 2016
Vadim Vladimirskiy
Vadim VladimirskiyFounder & CEO, Nerdio

Businesses of all shapes and sizes are slashing budgets, and IT is in the crosshairs. Worldwide IT spending is forecast to total $3.49 trillion in 2016, down 0.5% year over year, according to projections from research firm Gartner.

Organizations aren’t just trimming technology budgets, though. They’re also rethinking how they invest in IT— specifically, whether a capital expenditure-based model (CapEx) or an operating expenditure-based model (OpEx) is in their company’s best interests. CFOs historically have favored a CapEx-centric approach to IT, preferring upfront hardware and software costs that are amortized or depreciated over time. But a growing number of firms are siding with CIOs and adopting an OpEx-centric philosophy. They say it gives them greater flexibility to address rapid growth or changes in technological requirements.

“Most traditional IT now has a ‘digital service twin’—license software has cloud software, servers have Infrastructure as a Service, and cellular voice has VoLTE,” said Gartner research vice president John-David Lovelock. “Things that once had to be purchased as an asset now can be delivered as a service. Most digital service twin offerings change the spending pattern from a large upfront payment to a smaller recurring monthly amount. This means the same level of activity has a very different annual spend.”

While all businesses must continue investing in IT to remain competitive and relevant in today’s world, there’s no one-size-fits-all solution outlining precisely how resources should be allocated. Identifying the most prudent plan of attack hinges on understanding the financial implications and benefits.

Purchasing IT infrastructure

As a rule of thumb, businesses should limit long-range IT investments to assets with value and utility that align with the organization’s ambitions well beyond the current calendar year.

Capital expenditures are most sensible when you’re making long-term investments—for example, big-ticket items such as machinery or servers expected to last several years. These purchases typically are financed in one lump-sum payment, and can be written off against taxes over time.

Outright IT ownership has other benefits as well. It grants your company the freedom and flexibility to make  alterations and tweaks. In addition, maintenance is your own responsibility, so you immediately can address any problems or issues. Buying upfront also frees companies from negotiating vendor agreements and contracts.

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But there are some fundamental questions to consider: ‘Is the technology a core business investment, or does it serve some non-core function?’ ‘How much value does it add?’ ‘How can you optimize it?’ ‘Can you distribute costs across multiple businesses and locations?’

Perhaps the most important question is, ‘Can you continue leveraging the technology for many years as its associated costs diminish?’

Outsourcing IT infrastructure

The ever-accelerating pace of technological innovation means it is more difficult than ever to predict IT infrastructure demands accurately. For example, not that long ago on-premise datacenters were hallmarks of forward-thinking companies. They also were major capital expenditures that required significant upfront investments in servers, storage hardware and software licenses (not to mention ongoing administration and maintenance costs). And don’t forget about the huge chunk of physical space they occupied. Now, though, most cutting-edge businesses are outsourcing those same responsibilities to the cloud.

A flexible, pay-as-you-go outsourced IT infrastructure makes accommodating today’s fast-changing business environment dramatically easier, and enables your company to bring new products and services to market faster than ever before. Outsourcing also reduces capital costs by eliminating the need to acquire servers, software licenses, and other traditional IT expenditures.

Many CIOs know the bottom-line benefits of paying per month to access a hosted server instead of purchasing and maintaining their own equipment. But beyond sidestepping upfront equipment costs, outsourcing also makes additional costs more predictable. Finance departments only need to worry about pre-determined monthly service costs, not unexpected repair bills, staffer overtime charges, and the many other inevitable wrinkles that come with in-house technology.

How to decide if IT outsourcing is right for you

All businesses with growth targets that require the acquisition of new technology should give IT infrastructure outsourcing serious consideration. So should companies that are poised for dramatic geographic expansion or some other similar transition.

IT outsourcing is best suited for companies that anticipate growth or other transformational changes. As your business expands and your customers evolve, your IT needs inevitably will change.  Outsourced services can be scaled up or down depending on your needs at any given moment. You also head off the problem that many companies face  once they’ve purchased systems or software – getting stuck with outdated or useless technology.

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Infrastructure outsourcing also benefits organizations desiring to shift internal IT staff from non-core activities to tasks with higher business value. With outsourced providers shouldering the burdens of day-to-day IT responsibilities, corporate IT professionals are liberated to focus on key strategic initiatives that shape the business’ future.

Businesses also can  leverage IT outsourcing to boost customer satisfaction. An adaptable IT infrastructure increases agility, making organizations more responsive to clients’ needs and demands.

Take the right steps

Still not sure whether IT infrastructure outsourcing is right for your business? Before making a decision take these four key steps:

1. Assess your primary business needs and biggest limitations
2. Identify and prioritize the goals of the sourcing engagement
3. Formulate appropriate measures for internal and external operations
4. Conduct a cost-benefit analysis of the internal and external IT options

Every business has its own rationale and expectations for outsourcing IT infrastructure and functions. Some are hoping to streamline operations, others are looking to accelerate product development, and still others are seeking to transform their whole approach to doing business. All are taking steps to address their firm’s most urgent needs and pave the way for the next phase of its evolution. IT infrastructure outsourcing means they don’t have to face those challenges alone.