IT and Finance Getting Married?
“Where and how to spend the money?” is a combative question that decision makers regularly face in companies. According to a Gartner study, more and more CFO’s are making IT investment decisions in many organizations. In fact, results show that out of 500 enterprises surveyed, 42% of all CIOs report to CFOs and 75% of CFO’s play a dominant role in IT spending decisions. Thus, to figure out the IT spending of a company, it is important to understand how CFOs think when they make financial and business decisions.
CFO’s spending decision takes into consideration many variable factors, which depend on the ongoing market and environmental conditions. Traditionally, when it came to IT investments, CFO’s were more inclined to adopt CAPEX (Capital Expenditure) over OPEX (Operating Expenditure), because it has amortization and depreciation benefits over a prolonged period (usually greater than a year). Now, due to a massive shift to the cloud and the introduction of Infrastructure-as-a-Service such as CapEx-as-a-Service™, OPEX gained a competitive advantage over CAPEX and evolved into the preferred investment tactic by finance departments.
A company’s approved budgets include many hard costs that require big upfront investments. Even though for approved projects the actual spend is “predictable,” it is still not definite, for planned projects are dependent on the accuracy of future requirement projections. Throughout the life of that investment, what was planned might not necessarily align with the actual business need. Hence, with the rapid advancement of technology, major upfront investments can handcuff organizations for years and make infrastructure needs less and less predictable.
In the past, full-time skilled labor and big amounts were required, but now all needs can be met via dedicated companies that specialize in providing Infrastructure-as-a-Service (IaaS) in return for a monthly or yearly subscription fee. Examples of IaaS provider companies are Rackspace, CapEx-as-a-Service™ by M-Theory Group and SoftLayer by IBM. Businesses can now afford to have the latest technology without making huge lump-sum investments. These service providers eliminate worries about keeping up with technology changes, for they give companies the option to scale up when the need arises. Consequently, organizations have more time to focus on their core competencies.
Other CAPEX model flaws are:
- Requirement of massive amounts of money upfront
- Failure-prone guesswork to gauge forthcoming necessities for static hardware/software
- Long and complex budget estimation and approval processes
- Being stuck with the technology once it’s purchased, regardless of technology improvements and company expansion
On the other hand, operating expenses are a periodic consumption model used for day-to-day business operations. Despite the fact that some CFOs are still hesitant to shift their IT spending from CAPEX to OPEX, many other CFOs adopted OPEX to keep up with the fast pace of technology advancement. Additionally, technology as an OPEX allows a company to:
- Accelerate and simplify the budgeting process
- Benefit from simple pay-as-you-go model
- Make various investments across the business, since capital is not tied up in big upfront investments
- Cease to borrow money or divert from other projects to pay for big upfront CAPEX investments
- Optimize cash flows
At the end of the day, the CFO will have to find a common ground with the CIO and CTO regarding budget management strategies, as well as the type of technology the business needs. The CAPEX is shaded in gray, unlike OPEX. Thus, the easiest way to get a CFO on board with an IT budget proposal is to convert CapEx to OpEx, as it helps companies to do more with less.