When companies tally up their assets, they’ll typically account for everything from their office furniture to employee laptops to their servers and other IT infrastructure. And while that might make sense from a financial reporting standpoint, the truth is that viewing technology infrastructure as an asset is more of a losing proposition today than ever.
Let me explain.
We quoted Nicolas Carr in a previous post about the total cost of infrastructure ownership, but the argument holds here as well: if owning technology, specifically infrastructure, provides no competitive advantage, than continuing to “invest” in that technology makes no sense.
Today, except for rare cases like high-frequency trading where nano seconds matter, companies gain no competitive advantage from owning infrastructure. It is simply plumbing. Would any sane company invest in building an electric plant to power its operations today? Of course not. And yet most companies today still find themselves in the position of owning, operating, and investing in what amounts to plumbing.
Why do they do it? Sure, it’s true that the depreciating value of owned infrastructure can be written off as a business expense. But given that the useful life of any given piece of IT equipment is fairly short – three to five years is a common figure for a server, for example – by the time its cost has been taken off the books, it’s time to buy upgraded equipment to meet the needs of a growing business.
Then there are the front-loaded costs of infrastructure. With the average mid-sized data center costing about $100 million to build, it’s no wonder that companies have moved in the opposite direction. Companies of all sizes, including the federal government, have been on a data center consolidation binge for years. The reasons are many – cost cutting, inflexible architectures, outdated technologies, aging infrastructure, underutilization of assets. When too many resources have been plowed into owned infrastructure, it can lead to a technological rigor mortis of sorts, making it increasingly difficult to find new money for the next generation of technology the business will need to stay competitive.
Business Spending Is Shifting to the Cloud
The advent of cloud technology gives even very small companies access to the kind of advanced technology capabilities – both in terms of infrastructure, connectivity, and applications – that were once the sole domain of only the biggest players in their industries.
The emergence of infrastructure as a service (IaaS) and platform as a service (PaaS) – which is basically everything you need to run a business, except for applications – is only accelerating the movement to the cloud.
According to the International Data Corporation (IDC) Worldwide Quarterly Cloud IT Infrastructure Tracker, total spending on cloud IT infrastructure (server, storage, and Ethernet switch, excluding double counting between server and storage) grew in 2015 to $32.6 billion. This equals a third of the overall enterprise spending on IT infrastructure and is an increase of 28% over 2014.
The share of total IT infrastructure spend allocated to private cloud (companies that deploy clouds for internal use) was expected to nearly double, to 18%, between 2014 and 2019. And overall spending on cloud infrastructure was likewise expected to grow rapidly during that period, to about 42% of total infrastructure spend.
All of this is happening against the backdrop of ever-increasing demand for bandwidth, video, new enterprise applications, new device-level apps, new devices and device operating systems that need to be supported, new collaboration tools that lead to new ways of working, and integrated ecosystems that include partners, suppliers, and customers.
Then there is the need to rein in costs associated with underutilized assets that are intentionally over-provisioned to meet peak demand for services that may only occur monthly or seasonally. Add to that the costs of orphaned infrastructure that is provisioned but never decommissioned once its useful life is at its end and suddenly businesses are waking to the fact that the old way of doing IT is costing them a fortune in terms of wasted time, resources, and opportunities.
This is why what Carr wrote in 2003 is just as true today: “At a high level, stronger cost management requires more rigor in evaluating expected returns from systems investments, more creativity in exploring simpler and cheaper alternatives, and a greater openness to outsourcing and other partnerships.”
And, finally, (if that isn’t enough) is the fact that most enterprises have very poor visibility into IT spend versus business outcomes. This lack of transparency has led to the perception on the part of many businesspeople that IT spends too much and delivers too little; forcing the perennial budget battles that come about every 12 to 24 months.
But this too is changing. As technology becomes more top-line orientated and strategic (what Forrester calls the “age of the customer”), businesses are demanding insights into the business benefits of their overall technology spend. What they are finding is a great deal of waste. And this is leading to the push for IT to act more like a service provider to the business and less like a cost center.
For a deeper conversation about what this means for your business and how to move more of your business operations into the cloud, reach out.