Cutting IT Costs: The Need for a Flexible Procurement Model

With as much as two-thirds of the average IT budget devoted to fixed costs, trimming expenses is difficult.

It's a no-brainer: in the midst of financial chaos, companies embrace cost cutting. Cost slashing, in many cases -- except where their IT budgets are concerned. The inconvenient truth, according to market watcher Gartner Inc., is that the hands of prospective IT cost-cutters are all too frequently tied. The reason, the analyst firm argues, is that as much as two-thirds of the average IT budget is spent on fixed costs.

This creates both risk and opportunity for IT organizations. The pressure will be on IT to adapt its cost structure and justify its value to the business, Gartner indicates. IT organizations must embrace new asset procurement and deployment models or risk irrelevancy, the consultancy warns.

The future, you might say, is all about flexibility. "Across all operating areas, organizations are taking operating efficiency to a new level. This is being exacerbated by challenging economic times," said Barbara Gomolski, managing vice-president at Gartner, in a prepared release. "[O]rganizations need to be more responsive to changing market conditions. The traditional acquisition model of buying hardware and software, and depreciating it over time, does not allow organizations to quickly shift its IT investments, or cut costs rapidly."

Right now, Gartner indicates, IT spending is a fixed and largely insoluble commodity: nearly two-thirds of every IT budget is fixed -- meaning that IT organizations don't have much (or any) leeway to adjust costs. That must change as savvy IT organizations embrace outsourcing, joint ventures, shared data centers, along with other strategies to help reduce costs and boost efficiencies.

"The message for IT is clear; business needs and expects greater agility from IT," Gomolski said. "The current approaches to project prioritization, resourcing, agility and governance are clearly not satisfying customer needs. A new approach to IT delivery models and sourcing options is required that allows IT organizations to be more responsive to the needs of the business."

One reason Gartner is championing a new approach to IT fulfillment and delivery is because the existing model -- in which organizations procure assets up front and depreciate them over time -- makes businesses less responsive and flexible. Help is on the way: according to Gomolski: a growing number of technology-as-a-service (TaaS) products – now beginning to appear , and which will grow in number over the next half decade -- will help drive the transition to new acquisition schemes.

IT staffing should get an overhaul over the next half-decade, as well: organizations will focus on reducing the ranks of salaried IT pros, shifting to a model in which they tap contract labor.

"The variable-cost model is certainly something that most organizations should be evaluating as part of a wider investigation into the changing cost structures of IT," Gomolski comments. "However, we do not recommend that all firms aggressively move toward a variable-cost model in IT, nor do we suggest that variable cost models will always be less costly than fixed-cost models. What is important is that the cost model of IT is a lever that the business can use to balance the need for growth while managing cost and risk."

The transition to a variable cost structure won't necessarily be an overnight or straightforward endeavor. Organizations must first refit their internal capabilities -- particularly their demand-management budgeting and forecasting practices (in addition to vendor and asset management) -- to take advantage of a variable cost acquisition model.

"At the end of the day, IT leaders need to let the primary business model of the business in which they operate guide their decisions around IT cost structures," Gomolski concludes. "While a general shift from fixed to variable IT costs in IT will result from overall industry trends -- such as the way software providers choose to sell their products -- individual companies can accelerate or decelerate the move.

“Moreover, in these troubled economic times, CIOs need to remember that choosing the least-cost approach to solving today's technology needs may become the most expensive, least-effective in the long run."

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