What CIOs should know about the changing the calculus of IT investments

Mary Shacklett explains how pricing changes and trends can affect IT budgets, and what CIOs need to know to stay ahead of the shifting budget landscape.

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Despite cloud computing's stronghold/seemingly inevitable role in the/ on the future of IT, there are still many reasons why enterprises want to keep their data--and their computing--under direct management. Security and governance concerns are one reason. Avoiding painful boardroom discussions and marketplace embarrassments is another.

Technology vendors are aware of this. They know that while cloud computing will continue to grow, on-premises computing for mission-critical applications isn't going away, either.

What does this mean to CIOs?

For most, the persistence of on-premises computing in the wake of expanding cloud computing simply means business as usual. When new IT investments are being justified, there will continue to be a split between on-premises capital investments that must be amortized and committed to for multiple years, and operating expenses that give the CIO flexibility to move ahead immediately with projects.

With the build-up of cloud-based technology during the past five years, many CIOs have altered the mix of their IT budgets to be more slanted toward operating expenses and less toward capital expenses. There are several reasons for this.

As previously mentioned, capital expenses require amortization and commitment over multiple years. Conversely, an operating expense can be a one-year commitment that is discretionary and that can be discontinued if need be.

Capital expenses come with jaw-dropping prices. It is not uncommon for large enterprises to amortize multi-million dollar capital projects. This gives many CEOs, CFOs, and boardrooms pause, when a much lower cost annual operating expense wouldn't.

These budgetary hurdles for capital expenses are prompting some IT vendors to rethink how they are going to price their on-premises solutions.

One past method that vendors used to minimize the sting of high-dollar capital investments was offer lower-cost leasing options to assist with financing. They also offered discounts by taking antiquated equipment from customers in trade against the new purchase. Now, some vendors are considering incorporating strategy from the cloud value proposition by charging for on-premises solutions on a monthly subscription basis that can be plugged into an operating budget. The vendor owns and manages the equipment/software, and the company/subscriber runs its mission-critical applications on the solution, paying a monthly subscription fee that can be incrementally adjusted based upon actual use and demand.

It is still too early to see how this new on-premises pricing flexibility will pencil out over time in IT budgets. An educated guess is that the new on-premises pricing model will be costlier over the long run than a straight-out on-premises capital hardware/software buy, but easier to digest for firms because they now have a more pay as you go pricing model for on-premises solutions, which doesn't lock them into long capital amortization and depreciation cycles.

What should CIOs do now?

CIOs should start by becoming aware of new on-premises pricing trends that could change the calculus of their budgets, likely reducing capital expenses and increasing operating expenses. If the IT budget is subject to a percentage of IT operating spend comparison with other corporate operating budgets, a shift from capital to operating expenses could make the IT budget seem like it is suddenly out of proportion with the total amount that an organization wants to commit to its IT. CIOs need to talk to CFOs, CEOs, and others with budgetary authority and inform them about why the IT budget could shift. If they don't, they could be perceived as asking for more than their share of the overall corporate operating budget.

From the standpoint of physical data center security, CIOs should request more offsite vendor personnel working on equipment to ensure that it is functioning properly and that it is properly maintained. Data center security procedures might need to be adjusted.

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By Mary Shacklett

Mary E. Shacklett is president of Transworld Data, a technology research and market development firm. Prior to founding the company, Mary was Senior Vice President of Marketing and Technology at TCCU, Inc., a financial services firm; Vice President o...