by Peter Bendor-Samuel

Building your business case for consumption-based IT pricing

Nov 30, 2016
CIOIT GovernanceSaaS

Tips for making the case for turning fixed IT costs to elastic costs.

cutting costs
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As CIO, you’re under pressure to ensure greater business agility. You need to make sure the business can quickly scale its consumption of technologies. You need to avoid big implementation road maps and switch instead to an easy-on, easy-off method for implementing new technologies. You recognize your IT department has more data center space than needed and more servers than the company can use at any point in time. You also have more software licenses and middleware than necessary. And despite having a state of over-capacity in most resources, sometimes you don’t have enough of the right resources for new initiatives. The remedy is to switch to a consumption-based model.

The software industry’s powerful use of Software-as-a-Service (SaaS) apps introduced businesses to the consumption-based model, where businesses pay only for the resources they use instead of paying for over-capacity in case it might be needed at some point in time.

We often find enterprises paying in the range of 40 percent for over-capacity. There is no reason to pre-commit to paying for higher volumes or capacity, whether the usage pricing is based on FTEs (full-time equivalent employees), seats, data or activities.

The “as-a-service” model, or consumption-based model, attempts to make as much of its service chain or supply chain as elastic as possible. It adjusts each part of the supply chain to the usage demand. Unlike the traditional functional IT structure where businesses pay for hours (or FTEs or data volume, etc.) whether they use them or not, business users only pay for what they use. Moving IT infrastructure to the cloud is a great example of consumption-based services.

Today, there are even software tools such as ParkMyCloud that enable businesses to turn their use of cloud services off when they are not being used, thus increasing elasticity and lowering costs dramatically.

Here are four tips for building a more effective business case for using consumption-based IT services — either delivered by third parties or implemented internally.

1. Focus on agility

Make cost savings a secondary point, not the primary point. The primary point should be more strategic drivers for changing to a consumption-based IT services. Examples of these aspects include flexibility, faster time to market or faster time to value, ease of scaling the volume of work and resources up or down, getting new revenue streams up and running faster. In the Digital Age, gaining a competitive advantage depends on how quickly the business can get the necessary technology functionalities.

2. The cost-savings factor

Achieving considerable cost savings is, of course, an important driver; but even this should be presented more strategically — such as achieving revenue and cost synchronicity.

In this model, your organizations’ budgets must be fluid. The business case for a consumption-based model should not be a capital expenditure (Capex) or ROI discussion; rather, the focus on costs should be about measurement of operating expense against usage.

Again, from a more strategic perspective, your business case should point out a future-proofing aspect: that your organization would be able to incorporate new technologies and capabilities without having the technical debt or stranded costs that saddle the business in the traditional IT pricing model. Your business case also should include calculation of the IT contribution to a product or service line.

3. Point solution aspect

Because of the popularity of SaaS solutions, your business case needs to point out the difference between the consumption-based model and SaaS. Companies today most often adopt SaaS apps as point solutions. Switching to a consumption-based model for IT resources presents the opportunity to operate on this pricing basis enterprise wide instead of a point-solution level.

4. Make the case for the benefits of change on an ongoing basis.

Many organizations spend a lot of time building a business case for change but then don’t revisit it later. This is a mistake. Be sure you continually review the operating expenditure (Opex) numbers to see if they are in line with expectations stated in your business case. In keeping with my advice in #2 above about future-proofing IT, your post-adoption review of the Opex numbers should assess current IT spend at that time. Include in your business case that this periodic assessment will enable your organization to identify technology components or service providers’ services that can be delivered more cost-effectively. Again, achieving elasticity is the goal of switching to a consumption-based model.

Changing to a consumption-based pricing model for IT takes a supply-chain approach, allowing each component or service to evolve elastically to capture more benefits per component or service. The switch to this pricing model is extremely powerful and definitely will improve how your IT group delivers services to the business.