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Why IT's economics revolution is more than OpEx and CapEx

Bernard Golden | Oct. 3, 2013
Many view cloud economics as a question of operating expenses versus capital expenses -- or, more simply, the cost to rent versus the cost to buy. It's more complicated than that, though, since the cloud forces organizations to more thoroughly examine all costs associated with providing IT services.

Put another way, many IT organizations are offering private cloud pricing at competitive pricing without really knowing whether, say, a virtual machine offered at $.10 per hour really costs $.10 or less; they just offer them, figuring that the overall cost of the private cloud is so tiny compared to the total budget of IT that any cost inefficiencies are immaterial. However, once all users want the same kind of transparency and prices, there's nowhere to hide on understanding real cloud computing costs and being prepared to meet available benchmarks.

IT Economics Mean Defining, Benchmarking Costs

If you're an IT organization facing this new world of transparent, benchmarked and diffused economics, what should you do to remain relevant? Here are four suggestions:

Understand your economics. Five years into the cloud computing era, most IT organizations still have very little understanding of their costs to deliver resources, especially at a fine-grained level. Many still suffer from the fact that portions of their budgets roll up to different groups, including groups outside of IT such as finance and facilities.

More troubling is that many fail to realize that aggregating the costs that make up IT spend is only the first step. After that comes the work of defining costs for fine-grained resources such as the monthly charge for a gigabyte of object storage or the hourly charge for a certain size virtual machine. IT requires the same kind of activity-based costing that the manufacturing sector adopted two decades ago when first confronted with outsourcing.

Benchmark your economics. Once you understand your costs, find peer companies and compare. Both parties can learn from one another and help accelerate progress toward meeting best-in-industry standards. Compare yourself to public cloud providers as well to gauge how you stack up.

Marry your services to business value. A lot of lip service is given to "speaking the language of business" and "getting a seat at the table." Marrying IT services to business value goes well beyond using the right terminology; it has to focus on specific business deliverables or initiatives and providing technology to enable them. The fact that many companies go outside of IT to implement mobile apps shows how much need there is for closer collaboration. To that end, the Technology Business Management Council is devoted to this issue and hosts its inaugural conference in November.

Prepare for real-time utilization analysis and demand management. If you run a capital-intensive, service-based business such as an airline — which offers a good model for what IT needs to look like, by the way — then it's critical to keep utilization high with innovative demand management measures. Amazon Web Services is the leader in this area, thanks to its clever use of reserved and spot instances to keep its assets highly utilized. Utilization analysis and demand management goes well beyond typical capacity planning, though, which is focused on ensuring that sufficient resources are available but typically assumes up-front capital recovery models.


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