IT Focus Area: strategy
October 2, 2014
Why it's Time to Rethink Your IT Budget
Editor's Note: Sirius and Forsythe are now one company. Sirius acquired Forsythe in October 2017 and we are pleased to share their exceptional thought leadership with you.
Napoleon Bonaparte is credited with saying, “One must change one's tactics every 10 years if one wishes to maintain one's superiority.”
Clearly he lived in an era before information technology (IT). These days, technology changes so fast it can be difficult for businesses to keep up.
Four, five or even 10-plus years used to represent a normal application lifecycle, and infrastructure could be planned accordingly. The changing landscape of application life-cycle planning, however, brings uncertainty about infrastructure life and the related investment. Business units have changed the way they view, plan for and use applications to support their requirements.
And that’s where organizations get in trouble.
A strategically planned refresh cycle that accounts for the different lifespans of each application or infrastructure is actually the most cost-efficient approach to IT modernization. Today’s business units expect speed and flexibility at a lower cost to meet the changing demands of the marketplace. Cloud providers stay price competitive by aggressively refreshing gear with new standardized hardware riding down the price performance curve and ensuring their cost of technology continues to decline with the market.
Organizations that want to stay competitive and relevant to their internal clients need to employ the same approach. The alternative is a bloated budget that consumes the lion’s share of available capital in a lights-on mode and leaves no funding for transformational investments.
Many organizations estimate they spend 70 to 80 percent of their IT budget just keeping the lights on. But when you reduce IT maintenance and support spend, you can repurpose the funds for transformation or innovation initiatives that will advance the business rather than merely keep it functioning.
It’s time to rethink the way your company invests in IT.
Demonstrate the value of an IT refresh
A dynamic, flexible investment strategy helps your company stay competitive with current technologies while reducing overall IT spend. By combining intelligent investment with a managed infrastructure replacement strategy, you can meet the new requirements for your lines of business while reducing your ongoing costs and freeing up funds for transformational projects.
Many finance departments and business units, unfortunately, don’t see the value in regular technology refreshes—they consider technology “free” once they’ve paid the bill. However, depreciation, maintenance and support costs—not to mention the time staff must devote to keeping older infrastructure running—add up quickly, so legacy technology is far from free.
The key is to look for opportunities to drive costs down by freeing up capital tied up in expensive assets by replacing them with newer, lower cost options. By transitioning book value and related depreciation to a lessor and acquiring and leasing new lower-cost solutions, organizations can immediately drive lights-on budgets down and free up capital for the transformation the business requires. This approach also avoids traditional budget spikes during migration periods related to dual expenses for legacy and refreshed assets.
A $1 million IT investment, for example, depreciates 25 percent each year over four years. At the end of the third year, it has a remaining book value of $250,000 for year four. Replacement technology should be available for approximately $550,000.
These new assets could be leased for $175,000 annually for a new three-year term, reducing your annual lights on budget by 30 percent, not including fourth-year support costs on current equipment. This approach both reduces costs and provides the flexibility the business demands.
A successfully implemented, optimized IT Infrastructure that includes a hybrid data center model can free up budget for other initiatives. By design, it also gives you the flexibility to refresh regularly, which in turn slashes support and maintenance costs. It allows you to simplify your environment, delivers the flexibility to support your ever changing business application requirements and provides the internal cloud alternative necessary for your organization.
Rethink funding with leasing and asset recovery solutions
Leasing might have been inappropriately used in the past, but when structured effectively, it’s a cost-effective way to keep IT fresh.
Many companies falsely assume that leasing is not economical because, instead of purchasing them outright, they might have to pay to continue using the assets. The reality is that owning the assets is the primary reason that the lights-on budget consumes a majority of a company’s IT spend.
However, leasing provides companies the freedom to keep up with changing business unit demands and reduce lights-on budgets.
One company, for example, had a large and complex storage environment that had depreciated by many millions of dollars and required a high maintenance spend. It needed more than $20 million to refresh the environment, but finance wouldn’t approve the funding despite the cost of supporting the old assets.
The IT team determined a refresh would save the company significant money in the long run while also helping it be more agile. It sought the help of a partner who could help it design a financing plan that benefitted the company’s bottom line while allowing it to secure assets that would improve operations.
The partner bought the assets for their book value, and the money was used to pay for migration expenses and establish a consistent monthly lease cost that covered millions of dollars’ worth of new assets and services.
Not only does the company’s IT function more efficiently, it’s easy to add more equipment under the monthly fee rather than pay a lump sum. The company is able to better manage storage growth while eliminating several million dollars it used to spend annually on maintenance and support—money it can now direct toward innovation that advances the business even further.
Another company successfully used an asset recovery solution. The solution helped the IT organization gain access to the right technology at the right time while lowering the company’s annual budget expenditures on an ongoing basis.
How to approach the finance department
So how do you get the finance department on board with a new IT investment strategy?
The key is to involve finance early.
Finance won’t be terribly moved by the fact that new assets would make the IT organization’s life easier. The finance department will find it compelling, however, if IT can make a case for why a refresh will positively impact the organization’s financial situation. Break out the savings in hard dollars (how much less it will cost to maintain new assets) as well as soft dollars (the amount of time employees can redirect from support to innovation).
If you choose to lease, point out that the strategy helps maintain financial predictability—the fee will be the same every month, preventing unexpected budget spikes if business demands on IT suddenly increase. Rather than making finance wade through the plan by itself, walk through the specifics so the team understands why it makes sense. Offer an evaluation of the business benefit so finance can see how the plan aligns with the organization’s strategic priorities.
Finance organizations are struggling to adapt to the new ever shorter and constantly changing application lifecycle. They recognize the old long term investment methodology no longer provides the right balance.
In almost every case, the costs associated with a planned refresh cycle will be lower than keeping the assets for extended useful lives. The strategy will position you to better support the business’ needs for speed, agility, lower cost and flexibility—and that’s your case for changing the way your company invests in IT.