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IT Budgets: Good-bye Fixed Costs, Hello Variability

In the wake of the recession, IT is replacing fixed costs with on-demand strategies and processes that can handle cost variability so it can be positioned to take advantage of business opportunities as they minimize risks in a today’s high-volatility economy. How? By exploiting new service delivery models that help an enterprise respond faster.

Tony Chauhan and Honorio J. Padrón III, the authors of The Hackett Group’s study, <em>On-Demand Sourcing: Driving Costs Down and Value Up in a Period of Increased Business Volatility</em>, note that “effective strategies link business performance with IT-driven initiatives, responsiveness, and the costs of service delivery, transforming the IT function into a valued business partner. This contrasts sharply with traditional, one-dimensional strategies focused mostly on just cutting IT costs.”

Say goodbye to capital-intensive costs that typically interfere with changes in capacity. Business demand is too variable these days, says Hackett’s analysts, pointing out that “the fragile economic recovery underway makes efforts to predict business demand riskier than ever.” Competition is tougher, too, especially from emerging nations, “which are projected to have higher growth rates than Western countries in the recession’s aftermath.”

What should IT do? According to Chuhan and Padrón,

We believe that the highly unsettled conditions that characterize the economic climate today will never fully abate. Therefore scalable, pay-for-use systems are favored over inflexible, fixed-cost, capital-intensive technology. Companies would be wise to redesign their traditional IT environment and embrace on-demand strategies that support variability in cost and capacity in their services as well as their technology.

Do these strategies pay off? It certainly seems so. The authors cite an IT agility study from last year in which 33 percent of all respondents said on-demand infrastructure sourcing (read: cloud computing) is highly effective compared to 67 percent saying so among top-performing businesses. Figures were also dramatically different for the effectiveness of on-demand application sourcing (software as a service): 25 percent for all respondents versus 50 percent of top performers. Likewise, 17 percent thought offshoring was highly effective while 67 percent of top performers thought so.

More recent results from Gomez, the Web performance division of Compuware, confirm the trend toward the cloud. Its survey revealed that “over 19 percent of Web site transactions include at least one element hosted from the Amazon EC2 Cloud service.”

In addition, Hackett Group’s analyst say IT can play a more important part of an enterprise if it can increase operating flexibility, becoming “a highly valued business partner rather than an inescapable ‘overhead.’”

--James E. Powell
Editorial Director, ESJ

Posted by Jim Powell on 07/13/2010 at 11:53 AM