My first column talked about why CFOs want to shift more IT costs from large capital expenditures (capex) to ongoing operational expenses (opex). Practically speaking, this means swapping IT asset ownership with monthly rental payments. Costs, as a result, become more affordable, predictable, and aligned with the sales rhythm of your business. That’s soothing to CFOs, given their charter to manage financing needs and business risk.
Today, many IT leaders are starting on 2011 budgets and finding new ways to demonstrate strategic value. So in this column I’ll explain some best practices for strategically shifting IT investments into the opex budget.
Fundamentally, there are four opex migration paths and talking them over with your CFO shows that you have a perspective on financial implications along with technical ones.
Cloud computing – Most people understand that tapping into a public cloud enables you to rent enterprise computing resources such as networking equipment, servers and certified labor. To a CFO, cloud computing is associated with highly valued concepts like scalability, pooled resource economics, speed to market, and capital outlay avoidance. Essentially, that means trading larger, one-time fixed costs with smaller incremental ones. Since cloud resources are owned by third parties and rented monthly, those expenses slot into your opex budget just like an electricity bill. You don’t own the capital assets, and you can turn off the service whenever you want so there is far less risk of failure.
Software-as-a-service (SaaS) – The sheer volume of new SaaS offerings is exploding as software vendors decouple applications from on-premises hosting equipment and serve them up over the Web. CFOs like SaaS because it eliminates front-loaded software and implementation fees hitting the current year budget as well as unpredictable upgrade fees down the road. More importantly, SaaS gets applications running faster so their benefits can be more quickly factored into your financial results.
With SaaS applications, you don’t own the software and instead pay for it as a monthly service. This means costs are spread out over time and treated as an ongoing operating expense. It also means expenses get reported in periods that better align with how your business sees its software paybacks.
Outsourcing – Instead of managing facilities, IT infrastructure or disaster recovery needs internally, an option CFOs like today is outsourcing. The beauty of outsourcing from a finance perspective is that it transfers financing, business risk and expense volatility to the service provider. CFOs are naturally attracted to the economics of a pooled resource model: that centralized costs spread over a wider user base will yield lower per unit costs to your company. Add to the underlying economics that outsourcing allows them to shift not only equipment costs to someone else, but more of your labor and overhead as well, and they like the idea even more. Most CFO’s will smile if offered the chance to consolidate a basket of such miscellaneous expenses into one monthly bill.
Leasing – It is surprising, and unfortunate, how often this age-old option is overlooked. Given the pace of IT advancement, most CFOs are reluctant to approve large IT investments that have a life beyond three years because of the risk of winding up with obsolete assets on their books. Lease financing avoids this risk and migrates asset costs into predictable monthly operating expenses. More CFOs like leasing today because it eliminates the headaches of ownership, and, in the process, makes it someone else’s problem to finance an initial capital outlay and dispose of gear later on.
I recommend laying all these options on the table when you do your budget review this fall or next year. But I also recommend discussing these ideas with your CFO now to get a productive dialog going in advance. After all, how IT is financed, who owns underlying assets and how costs get reported on the P&L are key ingredients in the recipe for IT success.
Greg Baker is the chief financial officer for Logicalis, an international provider of integrated information and communications technology solutions and services, where he oversees finance, accounting, treasury and strategic planning. Prior to joining Logicalis, Mr. Baker held key finance positions with Thomson Reuters, a Tier-1 automotive supplier, private equity firm Talon LLC, and PricewaterhouseCoopers.