Adopting cloud computing provides a number of challenges for organizations, but managing cloud spend may be one of the most demanding. A survey of over 750 enterprises revealed that over 30% considered their cloud spend wasteful, and 80% stated that they found managing their cloud spend challenging.

Most organizations move their system to the cloud to reduce costs. A common mistake that many enterprises make when moving to the cloud is trying to follow the fastest path. They simply lift and shift the applications they were using from their in-house data center to a cloud infrastructure.

Most of the time, they find that this has not made these applications cheaper, scalable, faster, or more flexible. In fact, many enterprises are surprised to find that their costs go up instead of down. In many cases, the users within the organization may not even realize that the company invested a large amount of time and resources to move operations to the cloud because everything works predominantly the same.

Cloud cost optimization is a new discipline that organizations need to deploy cloud computing effectively. Here is some guidance to help you create a comprehensive and standardized optimization process to improve cloud cost.

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

Challenges to cloud optimization

When it comes to lowering the cost of cloud spend, many organizations run into significant issues such as:

• Complicated and multifaceted pricing structures
• Extreme cloud bill detail
• Ease of cloud service provisioning
• Continuous modifications to cloud offerings
• Excessive alternative architectures
• Lack of coherence across cloud platforms

Many times, advice on cost management provides a list of tasks like turning off unused instances and deleting unused storage. However, these practices do not give a comprehensive view of cost management. In fact, some of these tasks (like turning off unused instances) can even lead to disruption, frustration, and shadow IT.

Instead, it’s critical to create a strategic approach to cloud cost management. A set expectation is vital to keep spending within a certain budget. Plus, tracking and organizing costs around applications and centers will provide insights that cause cloud consumers to take a proactive approach to their spending.

Organizations need to develop sound financial management processes to prevent cloud overspending and create more efficient cloud service consumption.

Developing these processes will affect multiple departments and roles within the organization, such as the Cloud Center of Excellence (CCoE), I&O, finance, and users of the cloud services. These processes will translate into concrete management requirements and involve adopting new tools.

Four aspects of cloud cost optimization

Managing and optimizing cloud costs requires a multifaceted and comprehensive approach. Here are four steps to overseeing and improving cloud spending.

Create a plan

Random tactics will not guarantee that spending remains within expectations if no one knows what the expectations are. Organizations need to forecast their consumption and create budget expectations to stay within that forecast.

Organizations need to develop this capability and run processes before deploying applications, workloads, and projects in the cloud.

CCoE needs to define requirements to identify the exact outcomes that impact cloud services design and keep from overengineering applications. They need to gain a comprehensive understanding, questions assumptions and clarify what each application is accomplishing.

This step entails collaborating with product owners and stakeholders to gain an understanding of the value each application offers the organization. They also determine the key metrics that require the utilization of specific architectural principles.

Ask questions to help determine workload requirements:

• How sensitive is the data the workload handles?
• What happens if the data remains unavailable for a certain amount of time or is lost altogether? Does this application require service-level objectives?
• What is the desired performance target?
• Does the data require compliance with any industry-specific regulations, such as HIPAA?

This step also required choosing pricing models that best suit your organization. Model prices will vary depending on factors such as data integrity, service availability, embedded license-based software, and performance targets. It’s critical to find which pricing model meets your budget and your organization’s needs.

Increase spend visibility

When you’ve established your budget, landed on your pricing model, and deployed the application, maintaining visibility is critical. Create an organized view of costs outside of the bill itself. The amount of data makes manually managing each line item most likely unsuccessful. Plus, it won’t allow you to get a daily view of spending, which is critical for optimization.

Define which metrics are critical to track for your organization. These metrics are crucial to building dashboards and reports, as well as maintaining automation workflows to optimize spending. Some metrics to track include:

• Cost of services
• Capacity
• Utilization
• Availability
• Performance

Every major cloud provider utilizes tags (or labels) as a fundamental governance construct. These tags are a critical tool for cost tracking. They allow customizable names, multilateral structures and can be implemented across multiple clouds.

While tags will appear in bills after implementation, they do not appear on previous bills, so it’s critical to implement tags as quickly as possible to enable cost tracking.

Building dashboards and reports and updating them daily are critical for staying on top of spend. These reports include:

• Top and least spenders
• Trending daily, monthly, quarterly, and annual patterns
• Actual versus planned spending
• Overall spending
• Estimated spending waste

Decrease spending

Once you’ve set goals and enabled visibility, you can better identify ways to reduce waste. Because you’ve completed the first two steps, reducing waste won’t require changing application code or architecture. Plus, it’s also easier to implement and calculate ROI with tracking already in place. Some ways to reduce spending include:

Discard unused resources. Although it may seem like an obvious measure, it is an uncommon practice for many traditional data centers. Find any resources that your organization has deployed but does not use. In particular, find allocation-based resources that accrue cost regardless of their usage. Some examples include old snapshots, unused storage volumes, idle compute instances and unassigned IP addresses. To ensure that it is truly unused, mark them first and then notify owners to solicit an action from them.

Schedule services. It is common for organizations to have resources idle at specific hours or days. Reduce waste by scheduling cloud services based on these expected patterns. Do this by describing it with a “duty schedule” tag. Any cron-like scheduler can then read that tag value and schedule services correspondingly.

Optimize allocation-based services. These types of services require users to request particular allocation when provisioning. Instead, adjust the size of your allocation to fit the actual workload demand to reduce costs. Container, compute, storage, database, and application services are all good places to start.

Utilize discounts. Pay-as-you-go (PAYG) models don’t work for every organization. If your workload is relatively stable and your utilization in the future is predictable, you might be able to get discounted prices. Some cloud providers offer discounts that you can purchase programmatically. You can also contact your sales rep to negotiate a deal by committing to a minimum spend.

Upgrade instance generation. Cloud providers have refreshed their computer platforms over the years to provide renewed power to certain use cases. These instances are also often less expensive because they are more efficient than previous generations. As a result, you will want to optimize across instance families with these updates. You may be able to opt for a new instance generation and get the same performance with a smaller size.

Optimize resources

Reducing spending is only part of the strategic techniques to lower cloud costs. Organizations also need to optimize their processes to reduce their need for certain resources.

Find preemptible instances. Particular cloud providers offer a much lower price point for compute instances instead of the PAYG model. However, preemptible are riskier in that providers can terminate them at any time based on demand. Identify components and use cases in your application’s architecture that may be suitable in the case of suddenly unavailable infrastructure. Batch workloads, for example, can simply be put on pause if infrastructure becomes unavailable and resume when it’s available again.

Adjust data storage. Not all data is equally important, and some require less access as it ages. For example, social media data becomes less important as time goes on. Optimize costs by storing old or less important data in a less expensive service or tier.

(Explore data storage types & storage temperatures.)

Utilize serverless. Serverless computing requires organizations to give up ownership of their application infrastructure to a third-party cloud provider. However, they get to experience zero-touch autoscaling, dynamic deployment, and enhanced efficiencies in resource utilization.

While serverless computing services can seem cost-effective, there is a certain point where it does become cost-prohibitive and offers a diminishing return. As a result, organizations should aim to leverage serverless technology for the right use cases.

Utilize horizontal autoscaling. Autoscaling, or enabling applications to increase or decrease in response to events, can significantly optimize costs. However, autoscaling is either “vertical,” making one instance bigger, or “horizontal,” adding more instances of a similar type and distributing them across.

Both forms of autoscaling can reduce costs and have their place in optimizing. Horizontal autoscaling needs certain design principles built into the application architecture. Applications must be allowed to run multiple instances in parallel. Plus, it needs to be to start and shutdown seamlessly and not rely on local dependencies. It’s an effective practice that makes the application more resilient and must be used alongside optimizing allocation-based services because they apply to different sets of applications.

While the initial process requires following each step, this process is iterative. Lowering cloud costs is not a one-step process and does not always require following the steps in order. Instead, it requires going back over each aspect of optimization to find areas to reduce spending.

Best practices for cloud cost optimization

Let’s review some tips for how to optimize cloud cost.

Identify stakeholders

Optimization is not limited to your finance team. Successfully optimizing costs requires everyone’s buy-in and should be spread across your organization. Some stakeholders to consider include:

• Managers
• Product owners
• DevOps
• Finance department
• CCoE

Implement accountability

Keeping costs down is a part of everyone’s job. The IT and financial departments have long had separate goals. However, IT needs to be accountable for its budget. Chargeback models that calculate and charge based on unit costs can help increase accountability. It can also make costs a part of every department.

Implementing a fair chargeback model can increase awareness and help lower costs.

Utilize tools

The right tools can help your organizations gain visibility and critical insights to increase optimizations. Some tools to consider include:

• Dashboard visualization
• Heat maps
• Cloud cost intelligence
• Container cost optimization

Summing up cloud costs

As IT and cloud operations teams start to work on optimizing their cloud implementations, many find that the efforts required are more complicated than they anticipated. By applying the principles above, you can start to control spending, establish realistic cloud operations budgets, and ultimately reduce costs and waste.

Related reading

• BMC Multi-Cloud Blog
• How to Accurately Estimate the Cost of Cloud Migrations
• How Multi-Cloud Can Enable Cost Savings
• Cloud Compliance: Best Practices for Success

Remote employees, supply chain headaches, openings, then closures, and the Great Resignation are just some of the stressful issues that most organizations and leaders have had to face this past year. And although many of the unknowns of the pandemic are hopefully coming to an end, that doesn’t mean uncertainty is out the door for 2022.

“Volatility is something that we clearly saw this year but it’s something that is going to be an ongoing theme,” said Monika Sinha, research vice president at Gartner, in a call ahead of the virtual Gartner IT Symposium/Xpo 2021.

“Volatility is something that is now a new normal.”

A majority of businesses were forced to adapt to the changes that the pandemic necessitated, and where some faltered, some also thrived. With new technologies and more digital work environments than ever, adaptation for the modern enterprise will continue to be critical.

“Our research this year showed that technology investments are going way up,” Sinha said. “In fact, technology investments are going to be at the highest they’ve been over the last decade.”

As organizations look towards 2022, the future seems encouraging, especially when it comes to IT spending. Let’s look at some of the top IT spending trends of 2022.

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

Worldwide IT spending

According to Gartner’s latest forecast, worldwide IT spending is projected to total $4.5 trillion in 2022, an increase of 5.5% from 2021, and the largest year-over-year jump in more than 10 years.

“Enterprises will increasingly build new technologies and software, rather than buy and implement them, leading to overall slower spending levels in 2022 compared to 2021,” said John-David Lovelock, distinguished research vice president at Gartner.

“However, digital tech initiatives remain a top strategic business priority for companies as they continue to reinvent the future of work, focusing spending on making their infrastructure bulletproof and accommodating increasingly complex hybrid work for employees going into 2022.”

(Source)

Fastest growing technology spending

As listed in the table above, Gartner’s IT spending forecast also notes the top five fastest growing technology market segments. In 2022, these include:

• Enterprise software
• IT services
• Data center systems
• Devices
• Communication services

Enterprise software

Overall, enterprise software is projected to have the highest growth rate in 2022, at 11.5%, going from an estimated $601 billion in 2021 to $670 billion in 2022. This increase in spending is largely driven by infrastructure software expenses outpacing application software spending.

IT services

IT services are quickly becoming one of the most critical assets for organizations to spend money on. Increasing 8.6% to $1.29 trillion in 2022, IT services are a high priority for many organizations as they are the key to digital transformation.

(Get the complete digital transformation guide.)

Data center systems

In 2022, Gartner predicts that spending on data center systems will hit $207 billion, representing a 5.8% year-over-year increase.

Connected to one of the biggest IT trends of 2022 is the multi-cloud and hybrid cloud environments, midsize businesses all the way to global enterprises will be mixing their on-premises options or data centers with a variety of cloud offerings, making the need for these systems to rise.

Devices

As remote learning, telehealth, and remote work took precedence, global spending on devices reached record levels in 2021 at over $800 billion. Although some of these might not be required in the months to come, Gartner still predicts there will be an increase in enterprise devices that need to be upgraded or invested in for hybrid work settings.

(Learn more about the IoT & the Internet of Behaviors.)

Communication services

Communication services will see the slowest overall growth rate for 2022 compared to 2021, but it still sits at the number one spot for the largest total spending levels next year at $1.48 trillion.

The pandemic challenged companies to get creative and operate outside normal comfort zones, and even the most opposed to remote workers suddenly faced entire teams going entirely digital. As a result, IT communications software and services will prove to continue to be vital in the year to come.

Long-term IT spending strategies

Although this spending increase is good news for the tech industry, CIOs will need to rethink what critical technology their organizations would be wise to invest in, not only creating a path for quick wins, but also being strategic with a long-term plan.

“What changed in 2020 and 2021 was not really the technology itself, but people’s willingness and eagerness to adopt it and use it in different ways,” said Lovelock. “In 2022, CIOs need to reconfigure how work is done by embracing business composability and the technologies that accommodate asynchronous workflows.”

As businesses continue to shift from legacy systems and upkeep towards technology investments that will advance the enterprise, it will also be crucial to increase cybersecurity spending, business intelligence, and cloud platform investments.

“Traditional work models do not provide the agility, scalability, and resilience required by the future enterprise,” said Holly Muscolino, research vice president of Content Strategies and the Future of Work at IDC.

“This was, of course, highlighted by the ongoing health crisis. To drive growth and competitive differentiation, organizations will invest in technologies and services that power automation, human-machine collaboration, new organizational structures and leadership styles, dynamic learning opportunities, a reimagined workplace, and a digital work environment that is not bounded by time or physical place.”

Future of Work

According to research from International Data Corporation (IDC), investments in various technologies that support Future of Work initiatives will exceed $1 trillion worldwide by 2024.

“All aspects of how people and organizations work are evolving, enabled by 3rd Platform technologies and accelerated by the pandemic,” said Karen Massey, research manager, Customer Insights & Analysis.

“Indeed 3rd Platform hardware, such as IoT devices, robots and drones, and IaaS, are more than one-third of the total spend, demonstrating the growing importance of the technologies enabling the reimagined workplace.”

Some use-cases that are projected to see the fastest spending growth rates in the next few years are:

• Interconnected collaborative workspaces
• Adaptive skill development
• Advanced project management

“Emerging technologies like artificial intelligence, the Internet of Things, and augmented/virtual reality are changing how work is getting done across all industries and across the world,” said Eileen Smith, program vice president, Customer Insights and Analysis.

“Seeking automated decision support and virtual collaborative approaches, discrete and process manufacturing, the two largest spenders on Future of Work technology over the forecast period, are investing in key use cases like collaborative robotics, operational performance management, and 3D and digital product design and review for improved cost control and higher process efficiency,”

BDA

IDC also predicts spending on big data and business analytics (BDA) solutions will reach $215.7 billion by the end of 2021, with a compound annual growth rate (CAGR) for global BDA spending over the 2021-2025 forecast to be 12.8%.

“As executives seek solutions to enable better, faster decisions, we’re seeing relatively healthy BDA spending across all industries. Leveraging data for insights into everything from internal business operations to the customer journey is top of mind and of strategic importance,” said Jessica Goepfert, program vice president, Customer Insights and Analysis.

As reported in the new Worldwide Big Data and Analytics Spending Guide, over half of all BDA spending in 2021 has gone to IT services, totaling $85 billion, with the second largest segment of BDA spending going towards software, seeing investments of over $82 billion.

IT spending trends

Large businesses are ready and willing to invest in their technologies this upcoming year, whether that be to update or replace legacy systems, or to continue to grow their IT projects. Overall, IT spending will see an increase compared to the past few years, with executives focusing on technologies that enhance and advance the digital work environment.

And after the past few years, this IT spending boom could never be so welcome.

Related reading

• BMC Business of IT Blog
• The Cloud in 2022: Growth, Trends, Market Share & Outlook
• Today’s Top Trends in Software Development
• IT Budget Trends: How Companies Spend on IT
• IT Budget Management Overview and Tips for Success
• CapEx vs OpEx: Capital Expenditures & Operating Expenses Explained

Managing IT budgets is a juggling act. Keep the best workers that you have on the job at all times and you will have no problems. But the cost of keeping a group of highly specialized agents is significant. To reduce spending on service desks without leaving an organization unable to service requests of end-users is a difficult ask—and a difficult task.

Working out the cost of the average ticket is key to understanding the costs to your business on a range of metrics. This is where the use of data is necessary. You could bring that cost down looking at how your IT service desk works with users while still ensuring that your users (whether customers or employees) can get back to productivity quickly.

When your service desk can focus on the important stuff, the cost of the average incident will go down. Then, it’s a domino effect: A solution or service becomes more cost-effective, and management has an easier job justifying the value of your service desk agents.

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

The importance of a service desk

An IT service desk (or help desk) is for attending to the IT needs of the end-users in an organization. When you give every user the proper support they need, they can get back in working order without a loss of productivity.

Whether the service desk is working in-house or as an outside agency, service desk agents must provide value to any user who needs help. This involves quickly dealing with a range of IT issues, hardware or software, in-office or remote. The specialist knowledge of an IT service desk allows the requests of end-users to be dealt with in good time.

(Does your service desk have a mission & vision statement?)

The service desk generally provides support to employees in a number of ways:

• A phone call to help provide simple solutions through voice support
• Ticket support submitted to the IT service desk
• In-person support
• Remote support either through an organization’s intranet or over the internet

Much of what the service desk does is related to network issues, including:

• Resetting passwords
• Connecting to networks
• Allowing access to new network areas or software
• Other general troubleshooting tasks

While some of these issues need a trained agent, software can handle others.

Is a service desk worth the cost?

Although the costs of an IT service desk are significant, most companies understand that it is a necessary resource. Many organizations are looking to outsource their IT teams to keep costs down. An enterprise may prefer to get outside specialist help when needed to ensure the efficiency of resources and to manage costs.

Having a number of IT specialists on hand allows a company to:

• Cater to the needs of their customer base
• Improve customer satisfaction (CSAT)
• Support internal employees in day-to-day work

Although the constraints on budgets may be a huge challenge for some, the benefits of dedicated staff will help find a resolution to the difficulties that a user would often face. This allows management to analyze the data that shows a large team can better support the needs of every employee.

What is the Average Cost Per Ticket?

Working out the cost per ticket and then identifying ways to reduce that cost is a headache for many IT managers. The time between receiving tickets and resolving them to the satisfaction of the individual is the most important factor to consider—but exactly how much should we expect it to cost?

Take a look at some of the statistics around service desks:

• The average ticket cost per ticket is $15.56, with lows of $2.93 and highs of $46.69.
• The average cost per minute of a ticket is $1.60 (MetricNet)
• 5% of the average service desk’s budget is spent on staffing costs (MetricNet)
• A vast majority of support desks (91%) plan to include self-servicing options in the future (SDI)

(Explore more service desk benchmarks.)

Maximizing service desk value

There are several strategies you can look at to maximize the value of your service desk, without running up the budget.

Hire more service desk agents

Employ more staff, watch the tickets be resolved quicker. As the average internal support service desk receives on average 492 tickets per month and a staggering 69% of internal support tickets are resolved in one touch. This data shows that a trained agent can deal with issues and provide a solution quickly.

Hiring more staff and spreading the number of tickets makes the process simpler. Taking the volume of tickets per IT service desk specialist down allows for a quick response time in any enterprise. This cuts down on the time between receiving a ticket and the issue’s resolution, which leads to greater customer satisfaction.

Automate repetitive tasks

Doing away with repetitive tasks is the easiest way to improve your business’ efficiency. Free up your employees to deal with the difficult stuff and you will get the most out of them. This includes giving customers access to quality resources.

(Deploy service/help desk automation & explore best tools.)

Self-service options

A self-service program allows end-users to log into a portal and find solutions to their problems without needing to call or submit a ticket. Of course, this is no replacement for a dedicated service desk lead by IT professionals. Sometimes, some issues are too difficult to handle without specialist support.

Still, a self-service portal is an excellent way to raise customer satisfaction. An end-user can find solutions to simple problems, such as password resets, without having to escalate the problem.

Reducing the cost of the service desk

For the stressed IT manager, cost reduction can come in many forms. Reducing the cost per ticket can help deal with congested budgets and making sure that every end-user gets the appropriate service they need.

It can be difficult to manage resources, but there are many easy fixes that you can implement. Then, each incident becomes an easily solved problem by a trained agent and productivity can pick up again. But the focus needs to be on how to do this effectively.

Ask yourself, and your team, these questions to help determine a better way to handle service desk touches.

Can self-service and chatbots help?

Adopting self-service software is an easy way to deal with repetitive tasks such as password resets and basic functionality errors. These self-service programs can act as a knowledge base that a puzzled employee could search. (Here’s where a robust knowledge management system thrives.)

Introducing this technology to your business can then free up staff to focus on tasks that cannot be handled without the support of a specialist. Implementing an effective self-service platform can easily lower the number of tickets.

Another excellent way to do this is by implementing a chatbot. This will allow users to find their own solutions through the use of AI, not just relying on a knowledge base to guide them.

Can we reduce ticket handling time?

Although it can be difficult to reduce the amount of time, the value of every service desk employee rises when they can deal with issues quickly. Efficiency leads to great savings. That’s why first contact resolution (FCR) is a critical service/help desk metric.

To reduce ticket handling time, first analyze and then streamline—including the very way that you fix issues or handle requests. Consider these strategies:

• Employing highly trained and capable individuals.
• Ensuring that the organization continues to develop all individual agents throughout their career. (Stagnation is fatal to productivity.)
• Using technology to handle a significant proportion of easily solved tasks.

These factors will bring down the average time that a service desk will have to deal with an issue thanks to experience, expertise, and better skills in dealing with a given end-user. In a way, employing more specialists can actually reduce the overall service desk cost.

How small can a team be?

Reducing the staff often is an attractive option for management—cut salaries, cut costs. But the truth is that a smaller IT team leads to a worse user experience.

The recommended number of service desk specialists is 1 service desk employee to every 70 workers in a company. When the ratio is lower than this, incidents are dealt with more slowly and customer satisfaction drops. The cost for this is inestimable but can be significant, even more than spending to keep teams at an appropriate size.

Moreover, the average downtime of an employee that requires IT support causes a large cost to business processes. If an employee can’t work for a full day because of a computer issue that takes a long time to resolve, that is another cost you won’t recoup.

As the cost per ticket goes up, so does the disruption that is caused to a business.

Can we consolidate the service desk?

Some companies run multiple service desks, not a single one that services the entire employee or customer base. They might do this because of geography, service portfolios, and skillsets of agents and who they’re servicing.

If you’re in this situation, look at the obstacles to consolidating the service desk. Several strategies can work together to consolidate the service desk effort, like:

• Creating a strategic vision
• Enlist volunteers who support this move
• Institute change

Can we be proactive?

For some problems, the best approach is being proactive. Train your non-IT specialists, then give them tools to treat their issues on their own. This can be done through the use of a well-developed knowledge base, but the effort cannot stop there.

By delivering quality training to your non-IT specialists, you can reduce the cost per ticket by removing some tickets altogether. The costs of training your employees over the course of a year have direct implications on the cost of maintaining an IT team which only deals with password resets.

Reducing service desk cost isn’t easy

Reducing costs is never easy. Getting a specialist group of professionals to reduce the cost per ticket is not easy either. But effective management can lead to the jobs an IT specialist employee has to deal with (resetting a password or replacing hardware) being reduced in volume.

Setting up your working environment with intelligent, cutting-edge support solutions can make operations smoother, reduce spending, and improve the value your staff bring. This means introducing an effective system that can automate the simple stuff and free up staff to fix the bigger issues.

BMC supports the service desk

BMC Helix ITSM is industry-leading service management that uses intelligent automation to transform best-practice ITSM principles into the modern agile service solutions businesses need.

In fact, BMC Helix ITSM can help you realize 354% ROI and improve service desk efficiency up to 45%.

(Learn more about BMC Helix ITSM.)

Related reading

• BMC Service Management Blog
• Service Request Management in ITIL^® 4, part of our ITIL 4 Guide
• 5 Metrics & KPIs All Service Desks Need
• Pitfalls of Choosing the Wrong IT Service Desk Metrics
• Agile ITSM: How Agile & Service Management Can Work Together
• CapEx vs OpEx: Capital Expenditures & Operating Expenses Explained

When it comes to procuring new equipment, capabilities, and software, IT professionals generally have two options:

• Obtaining new capabilities and equipment as a capital expenditure (CapEx).
• Obtaining them as an operating expense (OpEx).

As many companies shift from traditional hardware and software ownership to as-a-service models, IT and finance departments must reconcile how best to classify cloud costs.

According to Gartner, after a decline in IT spending in 2020, spending has picked up significantly in 2021. Experts project that worldwide IT spending will increase 6.2% to total $3.9 trillion.

In other words, IT spending is big business. The way companies think about it may deserve new consideration. In this article, we will:

• Define CapEx and OpEx in relation to IT spending
• Compare when to use each
• See how CapEx & OpEx plays out in a real IT purchase
• Explore recent changes that seem to favor OpEx
• Share additional resources

(Note: This articles discusses CapEx and OpEx purchasing in the United States. The points and ideas discussed may be different in other countries.)

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

What are capital expenditures (CapEx)?

Capital expenditures (CapEx) refers to the money a company spends towards fixed assets, such as the purchase, maintenance, and improvement of buildings, vehicles, equipment, or land. You might also hear this called PP&E, short for property, plant, and equipment.

One-time purchases of these major physical goods or services are intended to benefit the organization for more than one year. In the IT world, examples of these major items include:

• IBM Power systems
• Intel-based Windows servers
• Other high-dollar items
• A variety of supporting items such as Universal Power Systems (UPS), line printers, air conditioners, scanners, and generators
• Additional procurement costs

(Explore IT infrastructure & components that might fall into this category.)

CapEx spending has pros and cons from the accounting side. If the asset’s useful life extends beyond a year, which is typical, the cost is expensed using depreciation, anywhere from 5-10 years beyond the purchase date.

Real estate, in particular, can be depreciated for over 20 years—something that has fueled commercial real estate for decades. Finance teams and bookkeepers applaud these CapEx tax depreciations.

On the other hand, the more money you spend on CapEx means less free cash flow for the rest of the business, which can hinder shorter-term operations.

Unlock the potential of IT Service Management with BMC Helix ITSM. ›

What are operating expenses (OpEx)?

Operating expenses (OpEx) are the funds that support your day-to-day business. OpEx items are generally used up within the year they are purchased. Examples include:

• Consumables such as printer cartridges, paper, electricity, and other supplies
• Contract items such as yearly service or maintenance agreements, website hosting, and web domain registrations

OpEx purchases cover pay-as-you-go items that show up on an organization’s profit and loss statement, and they are deducted from income as they occur.

When material goods or services are purchased as an OpEx item, the workflow is this:

1. Costs are assigned to the operating expense budget.
2. The expense is tracked in your profit and loss statement
3. The equipment’s monthly expenses are tracked and deducted from the bottom line as they are incurred (instead of being depreciated over several years).

Management is often tasked with decreasing OpEx spending without blunting the firm’s ability to compete or produce.

Unlike the depreciation of CapEx, OpEx are fully tax-deductible in the year they are made.

Expense vs expenditure

A technical note on terms in this article. You might notice that we use “capital expenditure” and “operating expense”, instead of calling both expenditures or both expenses.

From an accounting perspective, expenditures are the payments you make on long-term spending. Expenses generally refer to more short-term spending. However, unless you’re talking to the company bookkeepers, most folks won’t notice the difference.

Determining CapEx vs OpEx

Though the definitions seem clear cut, there are plenty of grey areas. Many IT material goods—like servers, generators, or UPS systems—can be purchased either as a capital item or as an operating expense item.

For example:

• CapEx. You can pay cash and own the item outright.
• OpEx. You can lease the item or sign a hosting contract with a managed services provider (MSP) that provides access to the equipment as a service for a monthly cost.

Having the choice between CapEx and OpEx for acquiring new IT capabilities isn’t a novel development. These options have been with us in various shapes and forms for a long time. So, what’s different today?

The cloud. With new cloud hosting capabilities, using OpEx procurement to obtain major IT equipment and services is easier than it’s ever been.

Comparing CapEx vs OpEx for IT

Outside of the tax and payment treatments, there are several advantages and disadvantages to procuring major IT capabilities as either CapEx or OpEx items.

Let’s look at an example of upgrading or purchasing a new IBM Power system, and how the process differs when procuring it as either a capital expenditure or as an operating expense.

Here are different components to consider when deciding:

Approval process

CapEx and OpEx items go into different budgets, with different approval processes:

• Capital items generally must be approved through several layers of management (including executive management), which will hold up purchasing until approval is received, which could slow you down significantly.
• Adding the IBM Power system as an OpEx item is generally an easier process, as long as the item is covered through and budgeted for in the operating expense budget.

Upfront costs

For a capital purchase, all money must be paid up-front.

Purchasing IBM Power capability on lease or from a hosting company as an OpEx item allows you to pay as you go, on a monthly or quarterly basis. This can free up budget dollars for more bottom-line revenue producing projects.

Supporting infrastructure capabilities

Purchasing an IBM Power machine as a CapEx item may also require you to buy several other supporting capabilities, including:

• Redundant power supplies
• UPS systems
• Generators
• Air conditioning
• Insurance
• Maintenance
• Data center access, in order to run it all

Procuring the same capability as an OpEx item under a hosting contract will usually include all the infrastructure items that go along with your hardware. This allows you to pay for the infrastructure along with the hardware, in one regular payment.

Shifting IT operations to an outside vendor

When purchasing an IBM Power system, you as the purchaser are responsible for all IT Operations management (ITOps) capabilities, including backups, operating system upgrades, and repairs.

• In a CapEx environment, you need to provide these capabilities. All IT Ops capabilities remain with you—the buyer.
• In a hosted OpEx environment, you can include these items in your contract, so that the provider will handle them as part of your monthly service.

Forecasting

Purchasing a capital item requires a certain amount of forecasting. IBM Power systems may be purchased on a four-year lifecycle, with the intent of replacing or upgrading the machine every four years.

That means when you purchase the machine you would need to buy it with all the capabilities you believe you’ll need for a number of years into the future. You’ll need to either:

• Overbuy the machine with capabilities you may not use until the 4th year.
• Purchase additional capabilities as you need them.

If you have a cyclical business where you have significantly busier months than others (think Christmas rush for retail), then you must size your machine to have the capability to always run at peak performance, even during the slow times of your year.

With OpEx hosting, you may be able to:

• Contract for additional CPU and memory on an as needed basis.
• Run with lower capabilities the rest of the year, possibly reducing your costs.

Hardware control

In a CapEx situation, you own the hardware and have total control over its use, location, and disposition.

If you are procuring an IBM Power system as an operating expense item in the cloud, you are dependent on the hardware, operating system software, and maintenance the cloud service is providing.

You may have problems if your cloud provider:

• Has an outage
• Doesn’t have sufficient capability to meet your needs
• Is unable to meet your service level agreements (SLAs)
• Goes out of business

In OpEx situations—especially with cloud providers—you introduce a third-party into the provisioning of your IT capabilities, which can affect your performance and deliverables.

(Understand whether vendor lock-in applies to your vendor relationships.)

Corporate policy

Many organizations specify that all major IT goods or services be purchased, and they cannot be leased or “rented” through an MSP. Other organizations may specify the opposite.

The point here isn’t whether one is better than the other. Instead, it’s that you may not even have a choice on CapEx vs OpX. A particular procurement method may be mandatory depending on your organization’s rules.

Changes in IT spending that favor OpEx

Traditionally, CapEx has two significant benefits, aside from the financial positives:

• A company will own the product outright, so you can alter and tweak it as you need⁠—once owned, you don’t continue paying for it.
• Owning assets such as hardware and software may be seen as prestigious.

Despite these benefits, three complaints of CapEx continually rise to the top:

• High-cost items require well-forecast budget estimates and long processes for approval, which can slow down purchase of the equipment.
• Age is a significant factor. Once you own the hardware or software, you’re likely stuck with it for a long time, in order to extend its ROI.
• Estimating future capacity needs for static hardware or software can be tricky and complicated.

As IT is imperative for any business operating today, two major changes have affected both hardware and software.

Today, hardware is frequently significantly cheaper to purchase than it once was, which we expect with time.

Further, though you might need highly specialized (expensive) machines in certain areas/departments, many employees can perform their daily functions on basic, low-cost computers like Dell laptops or Chromebooks, since so much work has shifted to the cloud.

So, what does this mean for OpEx? In the cloud era, companies who used to avoid significant operational expenses might be embracing them, particularly for these benefits:

• More cost-effective & flexible
• Less red tape
• Scalability

More cost-effective & flexible

The internet makes software a lot nimbler⁠—and more cost-effective.

Instead of purchasing expensive licenses to own and alter software in a CapEx model, companies can shift towards as-a-service options, including SaaS, IaaS, PaaS, AIaaS, and even IT as a service.

These options:

• Run via internet connection, generally eliminating any manual install or upgrade.
• Require small, monthly subscriptions, often per user.
• Offer transparency, letting companies pay only for pieces they use.
• Fall under the OpEx procurement model, with all its inherent benefits.

Less red tape

With low monthly costs, budget approval of OpEx procurement can be a lot speedier, reducing the time needed to achieve business goals.

The monthly payment model of software as a service (SaaS) and related services can help streamline business cash flow over time: there’s no long-term commitment. That’s good for:

• Turning off services when you don’t need them
• Switching to a new product when one product stops fitting your needs.

The minute one SaaS option doesn’t work, a department could—realistically, easily—switch to another one that better suits their needs. This flexibility is key for emerging opportunities.

Scalable

Not every operating expense is scalable, but SaaS sure is! If you need to add many users only for a month, SaaS is still cheaper than outright owning software for that many users.

Importantly, SaaS and similar solutions make it much easier to measure ROI—is the cost justifying the benefits? It’s usually harder to track ROI on a lump-sum purchase of a product that continues to age than it is on a monthly payment under a SaaS arrangement.

With these changes in cost and use of hardware and software options, the traditional benefits of CapEx may not carry their weight. Using an OpEx solution like SaaS allows organizations to unlock money that was formerly frozen in CapEx purchases on other business needs.

Will OpEx outpace CapEx?

Still, the complaints of CapEx do not mean that OpEx is the ultimate solution for every company or every purchase.

Some companies worry that they don’t know what to expect and instead wind up budgeting their IT needs on a month-to-month basis. If use is low one month, but skyrockets the next, long-term forecasting is complicated.

Justifying a switch from CapEx to OpEx can also be difficult, as CIOs, CTOs, and the finance department appreciate the tax benefits of CapEx. Many C-level execs and financial departments prefer stable payments over fluctuating monthly payments.

Fortunately, more SaaS providers are addressing these OpEx concerns. When the cloud first became feasible, a giant hindrance was the lack of transparency into costs. Forgetting to turn off an AWS instance, for example, could cost you dearly.

Fortunately, SaaS and other cloud providers are adjusting to these concerns. Increasingly, cloud environments can predict or limit⁠—often automatically⁠—these costs.

As cloud technology continues to develop, it will get smarter in its usage predictions, ensuring that monthly costs don’t go through the roof.

CapEx, OpEx: which is right for you?

The good news is that selecting CapEx or OpEx is not an either/or situation.

Companies need to choose which areas to bucket under CapEx and which to bucket in OpEx, understanding the trade-offs. Perhaps some enterprise systems must be owned outright and in-house, while other applications can come and go as the need and staff change.

• Proper forecasting can help a company invest as necessary in CapEx, while accurately estimating OpEx.
• Experts also recommend considering the non-monetary cost of the transaction. This can include the friction users feel when switching from one type of technology to another, common in a CapEx/OpEx tradeoff.

Keeping in mind the pains of forecast and change, remember that the benefit of considering CapEx/OpEx for IT spending is about shifting money spending to better benefit overall business needs.

Regardless of what expense model you choose, having the visibility and control of your infrastructure—whether in a CapEx model on premises or an OpEx model in public or private clouds—gives you the ability to make decisions that will impact your overall business success.

Related reading

• BMC Business of IT Blog
• What Is An IT Vendor Management Office (VMO)?
• Innovation and R&D in the Enterprise
• What Is XaaS? Everything as a Service Explained
• Get Started with ITAM: IT Asset Management Explained
• SaaS Today: Growth Trends & Statistics

2019 and 2020 are all about digital transformation. As in years past, global IT spending is expected to continue to grow in 2019, increasing 3.2 percent to over $3.8 trillion as enterprise software, cloud, and digital transformation projects boost growth.

By fully integrating IT into products, services, and value propositions, instead of just a backend system, companies will quickly gain the true value of IT and its potential.

“It’s not looking at what’s in the ‘IT budget’, but at all of those things across the business that can be influenced by IT, which is just about everything,” said James Anderson, research director at Gartner. “If you’re not on the innovation end of trying to fund digitalization of your business, it’s likely some other company is coming up with some type of an optimization technology to eat your revenue.”

In fact, the latest predictions from IDC advise enterprises that if they’re not digitally transforming their companies at an aggressive pace, that by 2022, just over two-thirds of their total addressable markets will be gone.

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

Researcher reports on IT budgets

Gartner CIO Agenda

The 2019 Gartner CIO Agenda survey, which gathered data from more than 3,000 CIO respondents in 89 countries and all major industries, was presented by Gartner analysts during the Gartner Symposium/ITxpo in October.

“Although global IT spending is forecast to grow 6.2 percent this year, the declining U.S. dollar has caused currency tailwinds, which are the main reason for this strong growth,” said John-David Lovelock, research vice president at Gartner. “This is the highest annual growth rate that Gartner has forecast since 2007 and would be a sign of a new cycle of IT growth. However, spending on IT around the world is growing at expected levels and is in line with expected global economic growth. Through 2018 and 2019, the U.S. dollar is expected to trend stronger while enduring tremendous volatility due to the uncertain political environment, the North American Free Trade Agreement renegotiation and the potential for trade wars.”

Gartner’s survey suggests that CxOs are likely to be spending more on enterprise application software, mobile devices, infrastructure software and business IT services in 2019 and beyond, and less on (on-premises) data center systems and associated services.

“CIOs should use their financial resources to make 2019 a transformative year for their businesses,” said Andy Rowsell-Jones, vice president and distinguished analyst at Gartner. “Stay active in the transformation discussions and invest time, money and human resources to remove any barriers to change. Enterprises that fall behind in digital business now will have to deal with a serious competitive disadvantage in the future.”

Harvey Nash/KPMG CIO Survey

Consistent with what Gartner found, Harvey Nash/KPMG CIO Survey, one of the world’s largest global IT leadership surveys, reported that CIOs are now enjoying “bigger budgets and headcount growth” compared to last year. As well as continuing investment in digital and cloud, “we also see data privacy, governance and security draw the attention of boards,” the report said, adding that CIOs need to “think smart about how they control and influence technology within the business”.

Close to half of the respondents saw budget increases in the past year alone, with nearly half also reporting they expect to see budget increases in 2019, as well. These metrics are some of the highest that have been seen since 2005, and marks a more normal return since the economic downturn.

Computer Economics IT Spending & Staffing Benchmarks Report

Market research firm Computer Economics published its 2019 results from the annual IT Spending & Staffing Benchmarks report, also reporting modest growth in operational budgets and general increases in IT spending.

Some of the biggest differences noticed compared to last year’s survey is an increase in IT spending as a percentage of revenue—from 2.3% to 2.7%—which the firm suggests proves “IT organizations are encouraged by their experience with cloud computing thus far and are willing to supplement those efficiency gains with additional spending, especially for business transformation and the continued move to the cloud.”

IT operational spending per user is up significantly this year, a 14.3% increase, and almost half of the organizations surveyed reported an increase in IT capital budgets. With the main focus for new spending being on business applications, IT personnel, and networks, it is apparent that there is a widespread move to cloud-based infrastructure, storage, and applications.

Survey says: trends in IT budgets

According to the surveys summarized below, IT budgets are growing in several key areas: digital initiatives, shadow IT, and cybersecurity. Let’s take a look at each.

Digital initiatives

Digital initiatives are a top priority for CIOs in 2019, with 33% of businesses now in the scaling or refining stages of digital maturity — up from only 17% last year.

There is no doubt that organizations are planning to aggressively invest in digital transformation efforts in 2019. While digital transformation is about business impact, digital maturity is the amount of benefits the company derives from its digital transformation efforts as a whole. For the most part, the more comprehensive and cross-functional a company’s efforts are in their digital transformation strategies, the more digitally mature they typically are.

According to a recent survey by Deloitte, higher-maturity organizations are nearly three times more likely than lower-maturity organizations to report net profit margins and annual revenue growth that are significantly above the averages in their industry, further iterating why this expense upfront can prove massive gains down the line.

“What we see here is a milestone in the transition to the third era of IT, the digital era,” said Mr. Rowsell-Jones from Gartner. “Initially, CIOs were making a leap from IT-as-a-craft to IT-as-an-industrial-concern. Today, 20 years after we launched the first CIO Agenda survey, digital initiatives, along with growth, are the top priorities for CIOs in 2019. Digital has become mainstream.”

One of the biggest drivers for scale is the ability to increase general consumer engagement through digital channels. In order to support customer engagement during this process, businesses are focusing on three main areas:

• Volume. Providing reliable services that meet demand while remaining cost efficient
• Scope. Supporting a variety of offerings and products
• Agility. Anticipating and adjusting to consumer demands in terms of both channel and speed

“All aim at encouraging consumers to interact with the organization,” Mr. Rowsell-Jones explained. “In general, the greater the variety of interactions that are available via digital channels, the more engaged a consumer becomes and the lower the costs to serve them are.”

Shadow IT

Another component that is gathering speed this year is technology spending controlled by lines of business (LOB) as opposed to the IT department. According to analyst firm IDC, this type of spending, typically referred to as ‘shadow IT’ is projected to overtake IT department spending across the globe in 2019.

Shadow IT refers to employee use of IT technologies, solutions, services, projects, or infrastructure without formal approval and support of the internal IT department. This can include free and bought systems and encompasses SaaS, PaaS, IaaS, off-the-shelf software, and hardware like computers, tablets, smartphones, and other devices.

“Technology is becoming easily available and accessible to everyone, therefore companies are witnessing the surge of business-funded IT investments. By 2021, LOBs will fund half of the IT spending, meaning that business managers will increasingly make decisions independently and without the approval of IT departments,” said Andrea Minonne, research analyst, IDC Customer Insights and Analysis.

By 2021, only two of the 16 industries profiled in IDC’s report, construction and telecommunications, will still see their technology spending led by the IT department. As this shift continues, and business managers rely less on IT departments for overall technology spending, it’s going to become increasingly important for CIOs to keep track of what is being deployed and how to best go about protecting the organization from security threats resulting from shadow IT.

Cybersecurity

As inmost years, but particularly in 2018, the IT industry endured significant cybersecurity challenges including high-profile data breaches, costly systems hacks, and exposed vulnerabilities. While privacy and security issues will continue to remain major concerns in 2019, the industry is finding new ways to cope with these issues.

“Threats continue to multiply and expand; breaches seem to be getting worse, in terms of scale, depth and sophistication,” said Steve Wilson, vice president and principal analyst at Constellation Research. “Data is the lifeblood of the new digital economy, and the sophistication of criminals seeking to exploit that is growing all the time.”

According to a July report from Neustar, IT security professionals are twice as concerned about data breaches and cyberattacks as they were last year. With 17 percent of respondents to a survey by 451 Research Digital Pulse citing information security as the largest budgetary increase area, it is apparent that these concerns are also impacting the budgeting process.

As Gartner vice president and distinguished analyst Paul Proctor told ZDNet, “I’m not a fan of what is the most common practice out there, which is to ask how much are others spending on cybersecurity,” Proctor said. “That is not useful, because there are organizations that are spending a ton on cybersecurity and they have very bad risk postures, and there’s others that aren’t spending very much but they have very good risk postures. The bottom line is: It’s about their level of readiness.”

2019 is the year for leaders to truly look at their level of readiness to determine if they are as mature as they would like to be. If the answer is no, then it is time to ask whether more money needs to be spent to get there.

Proctor continued, “Yes, AI is going to be a big deal in security right now, but people are spray-painting the concept of machine learning and AI on every single thing they do.”

It is important for IT to mind their spending on newer areas, like AI, choosing only what can add real value to the organization now instead of potential, future value. Past risks and threats must also be audited to see how your company should actually be spending money to protect itself versus what’s in the news.

Forecasting IT budgets

Although the global economy is on an upswing, political unrest and instability in various geographies are leaving many businesses at risk. Tariff barriers and trade conflicts only had to the worry for the IT industry, proving to be a few issues that could derail the overall improvement.

Potential political complications aside, IT budgets and headcounts are generally increasing around the globe as organizations focus more on digital transformation. As CxOs continue to recognize the true value of technology and leverage it to optimize a current business process or model, IT’s role in the organization will only continue to increase, along with its budget.

A commonly held belief in business is that investment in R+D leads to creation and innovation. By that standard, a company who invests heavily in R+D should see innovative processes that result in increased sales, perhaps market success. Company lacking innovation? They probably need to double-down on their R+D efforts.

If only it were that simple. Businesses are complex. While we all search for some elusive calculation of investments in one certain area will guarantee success in another area, the data shows the truth: investing in R+D doesn’t promise innovation.

Strategy&, a unit of PwC, studies market success and innovation, culminating in an annual review of the Top 1,000 innovative companies. The last decade’s worth of data shows no statistically significant relationship between R+D expenditure and sustained financial performances that we normally associate with innovation. Strategy& has found that higher spending on R+D does not relate to increased sales or profit, market capitalization, or shareholder returns. In fact, the top 10 most innovative companies are rarely the top 10 R+D spenders.

Still, companies rely on some combination of R+D and innovation – the market demands it. Understanding how R+D and innovation work, conceptually and practically, and how to fund both, can help improve your bottom line.

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

Are R+D and innovation the same thing?

In short, no, R+D is not the same as innovation. The good news is that most people agree on the separation between R+D and innovation, but we haven’t reached consensus on the differences.

Some theories: that R+D is an early-stage component of innovation, an umbrella-term for commercializing findings and discoveries. Or, that R+D is a long-term play but innovation can be put into action, across a variety of business needs, in the near term. These various definitions indicate that both R+D and innovation are changing in today’s interconnected, outcomes-based marketplace.

This question is timely, especially for digital firms who are under immense pressure to constantly provide the next great solution. Yet this need for innovation plays out across all industries. The mega-pharma firm Pfizer has been known for their R+D for decades. In recent years, however, they’ve developed short-term innovation efforts that are wholly separate from R+D. What gives?

One school of thought is that the universal truth of a good product (the idea that a good product will sell, no matter what) is no longer a given. Today, organizations must go beyond mere products or technologies to be successful – whether it’s improved customer service, seeming to “do the right thing” on a moral issue, or a whole host of tangible and intangible metrics. A good product alone no longer promises a good business.

An academic approach holds that, in most companies, the purpose of R+D is threefold:

1. Developing fundamental knowledge. This often means exploring certain technologies that have potential for massive industry impact, but neither their intrinsic value or practical application is known. Funding for this purpose is a fraction of the whole, but it is strategic, with little expectation for near-term growth or development.
2. Supporting business areas like business management, manufacturing, and customer satisfaction. Functions are more tangible and necessary, like looking for strengths and weaknesses or upcoming trends that allow the company to create new business opportunities. This work isn’t necessarily ongoing, but perhaps focused on a certain timeline or business area.
3. Creating and implementing new technologies. The output from this R+D arm can could be anything. Companies tend to see this R+D area as an investment instead of as a necessary operating cost, especially for short-term projects that are easier to measure and value.

In this multi-purpose vision of R+D, innovation can still come from anywhere, but when companies recognize and act on all three purposes, R+D may be more directly tied to an innovative outcome.

Funding R+D

With competing purposes for R+D, it’s no wonder that some companies often treat it as a non-essential expenditure. In the U.S., even the IRS sees it as such.

But recent research on digital firms in particular shows that R+D is essential. R+D is a necessary and important piece of operating expenses because, without it, most digital firms would be stopped in their digital tracks altogether.

Compare a fluid digital company, like Google, with a staid American company, like General Mills: it would be heresy to think Google shouldn’t improve current products and introduce new ones, but General Mills makes cereal and other products in much the same way it did decades ago. Google sees innovation beyond a search engine, with forays into individual software, artificial intelligence, mobile apps, enterprise services, hardware, and much more. General Mills’ innovations often seem to reduce a cereal’s fat or add in some fiber – perhaps a smaller win on the innovation continuum.

Today, economic success is measured less by a single product and more by the confluence of ideas, strategies, software and algorithms, the ever-elusive innovation. All these efforts require R+D. A recent study, published by the Harvard Business Review, surveyed five years of data from a variety of digital firms, including Yelp, Netflix, Facebook, and Alphabet as well as much smaller outfits. The results indicate that while established digital companies like these spent around 15-20 percent of their revenue, smaller digital firms often invest upwards of 50 percent. (Twitter spent 76 percent in 2013.)

Now, compare that to traditional companies who spent significantly less than that in 2017: GM spent two percent and Walmart spent zero on R+D.

Sure, traditional companies may work in other ways, but the way to fund R+D is changing, too. In the 20th century, obtaining financial capital necessary to fund innovative science research was difficult – you needed a lot of money with little tangible or guaranteed outcome. Today, though, financial capital isn’t the problem – digital companies bring in billions and many know how to obtain it from outside sources. But scarce is the scientific and engineering talent that drives R+D: fewer people have the hard science and engineering skills, so they cost more to retain.

Funding innovation

If R+D is driven by the need to create better or more innovative solutions, then innovation is driven by value. R+D might create interesting or important findings, but without a process that results in additional value, R+D can feel superfluous, even if we agree it’s essential.

True innovation, then, isn’t simply a “better” product, but one that offers new value to the customer. One strategy focuses on shifting some R+D spending: take 15 percent of your current R+D spending and invest it in a business-focused R+D process that aims to improve value propositions – whether through value-adds for the customers or in business models that can grow and scale. This business investment could include wholly new technologies and products as well as tweaks to your current business model that results from your “business R+D”.

Another way to fund innovation is to apply a start-up mentality: stop “cost cutting”, a move that signals hard times. Instead, redirect massive marketing budgets and money spent on tiny “innovations” that don’t move the needle much and funnel this money into R+D. This signals to shareholders that you’re retooling for growth and innovation, not shrinking away from a need to change.

Creating a positive correlation between R+D and innovation

Though R+D doesn’t guarantee innovation, applying a sustainable business model to getting innovation from your R+D can be fruitful. For instance, Intel combines massive R+D spending with a specific business model that takes advantage of R+D’s findings. This model, known as “tick tock”, focuses on two areas of Intel’s business: microarchitecture processes and manufacturing technology.

In a “tick” cycle, Intel focuses on advancing their manufacturing processes that indirectly benefit customers. In a “tock” cycle, the company built on these manufacturing changes in order to innovate their processes microarchitecture, resulting in increased speed or power (perhaps both) in the end product.

Another practice is to plan for two types of risks inherent in any business: technical risk, which relates to whether a business is able to create new, working technologies, whereas market risk considers whether customers will buy and use the product, even when the technology works.

Perhaps, then, innovation that results in a positive market impact requires both technical risk and market risk. Traditional R+D, on the other hand, focuses solely on technical risk, leaving market risk to other company departments.

Perhaps, instead of considering innovation as the natural result of sustained R+D, we revamp what innovation means: invention (via R+D) + customer value + a business model = innovation.

Companies getting started with cloud technology usually opt for a single-cloud approach, almost unintentionally, simply because it makes sense: they want to start by putting some of their data in the cloud, and they might only need one or two specific functionalities.

As the company grows comfortable and more fully embraces the cloud and its benefits, moving towards a multi-cloud approach is common. At first glance, a multi-cloud approach can seem more complicated, but look closer – multi-cloud can actually offer a range of benefits, not least a significant cost savings.

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

Distinguishing clouds

Not all clouds are the same. Getting started with cloud technology can feel overwhelming because there are a whole host of questions you’re supposed to know the answer to: public or private cloud? Hybrid or not? Single- or multi-cloud? Who’s managing the cloud?

For clarity, a single-cloud environment is generally understood as a company opting for just one cloud provider to serve all cloud-related applications. If you’re working with a third-party cloud vendor, it’s likely a public cloud (that’s not to say your information is publicly available, just that other companies are also utilizing the third-party cloud). A private cloud is one that you house and manage directly, often to protect sensitive data.

As a company wants more services from their cloud, they can continue to stick with a single vendor, especially if it’s a big provider, like AWS, Google, Microsoft, or IBM. These large providers have a range of tools, SaaS, and IaaS options, so companies can branch into more services without having to shop for the perfect fit.

But, there’s a caveat to this “one stop shop” approach. Vendors that have a variety of services tend to be more expensive, something the industry dubs “vendor lock-in”. Vendor lock-in can be problematic because, if you’re dedicated to a single cloud provider, you may be forced into choosing a less-than-optimal solution because that’s all they’ve got.

One way to leverage cost savings and avoid vendor lock-in? Going multi-cloud.

Multi-cloud for multi-purposes

When your single-cloud “solution” feels less and less like it’s solving your custom problems, you may be ready to migrate to a multi-cloud environment. Multi-cloud environments are any combination of clouds, from a variety of vendors. You may opt for a Google or Microsoft Azure product for volume or sheer computing power, but smaller, independent cloud solutions may address more specific needs. Indeed, you may still keep some data in private, on-prem servers, a set-up known as hybrid-cloud. (Some tech experts say that the multi-cloud is probably most accurately described as multi-hybrid-cloud.)

There are several benefits to the multi-cloud route, like avoiding vendor lock-in, optimizing your performance for as many services as you need, increasing reliability, and decreasing your risk of security attacks. When you’ve separated workloads across a variety of clouds, you can have more work happening independently, quickly, and, if planned well, more efficiently.

The most compelling reason may just be cost savings, and efficiency is key to cost savings. When you break free of vendor lock-in, you can start prioritizing how to spend money, not just how much to spend.

The way you spend your money is unique to your company’s needs. You can go all-in pricewise for a really important, high-end solution for your core business need and then seek more affordable options for less vital projects or processes. Another approach is scaling up or down depending on your needs, which lets you spend money when you’ve got it but save big when it’s necessary. Or, build automation into processes that turn off resources when they’re not needed, offering reliable cost savings.

Monthly or quarterly reviews on cloud spending can help you stay on top of whether you’re spending too much or estimating too little. The overarching principle is that when you have the right workload in the right cloud at the right time, you’ll get the most bang for your buck.

While shifting to the multi-cloud can be overwhelming because the sheer volume of choices, a DevOps concern is one of integration. How do you get the relevant cloud technologies to speak to each other when they’re all different?

Certainly this is a concern to be proactive about. Luckily, software companies are beginning to provide solutions to the issue of multi-cloud integration. New data control interfaces that sit on top of the cloud interfaces provide a single endpoint for storing, managing, searching, and retrieving data. Thanks to their agnostic approach, they can smoothly navigate across private and public as well as big-name and more specific clouds.

Choosing between single- or multi-cloud

As with most things in technology, each company has different needs, expectations, and budgets, and the right combination is one that’s often reached through trial and error. Though multi-cloud can seem intimidating, the cost savings are often worth the initial exploration. At the very least, consider the opposite – sticking with the single-cloud.

The U.S. Department of Defense is a perfect example of the single- versus multi-cloud debate. They are in the midst of shopping their Joint Enterprise Defense Infrastructure (JEDI) to potential contractors. The 10-year contract that, when awarded, can be worth up to $10 billion for the winning firm. JEDI aims to bring DoD processes to the cloud, but with one big catch: they are insisting on one cloud computing provider – a single-cloud approach.

Critics are weary that this vital work (DoD includes the Army, Navy, Air Force, and several intelligence branches, among other sensitive missions) will pigeonhole the Department into a single vendor’s approach. Whether DoD chooses AWS, as rumored, or another big cloud provider, will their work get to take advantage of innovation or will it wall off the DoD from advances in security and data analytics?

The government may have its own reasons for choosing a single-cloud approach. Most private enterprises, however, seem to crave the flexibility to shop around for the best cloud solution – unique to them – in a way that only multi-cloud can solve.

Of course, for utmost cost savings, you’ll need to get away from external clouds altogether. As long as you’re paying for someone else’s infrastructure, you’re paying more than the absolute lowest price. You could always go the Dropbox route and move the vast majority of your data to in-house clouds, saving huge on OpEx. (But, then again, that option has a lot of drawbacks, too.)

Is there a scarier word in management than “budget”? Whether you’re in charge of a small team or you oversee dozens of departments, putting together a budget can provoke feelings of fear and frustration. Asking for money is always scary – especially when you know you will be judged for how successfully you managed it. The year-long projections and request for money can feel alternately like a mystery you’re forced to solve or a game you don’t want to play.

Add the slippery, ever-shifting world of IT, and you’re stuck with trying to build a budget for a team that generates business revenue yet most companies still treat as a cost center.

But it doesn’t have to be like that. Whether you’re building your first budget or you’re a seasoned veteran, here are some IT budget management tips that work in your multi-cloud world.

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

Do’s and don’ts: Budgeting best practices

Budgets are one of the many tools that managers use to achieve goals. Instead of thinking of budgets as a favor or a debt, consider your budgets as a way to align your IT initiatives with monetary investments. After all, the company knows you need money to accomplish your goals. And, like in your personal life, budgets aren’t inherently bad – they simply make you refocus on the things you want to accomplish.

Before diving into budget line items, let’s look at some general budget approaches:

• Ditch the guessing game. Budgets are a strategic tool, not a free-for-all. That means you should have a philosophy or approach in mind – increasing spending to support certain goals, perhaps curtailing spending in other areas. But some managers take a “guessing game” approach by simply requesting an additional 10% of this year’s budget, without real strategy or proof of concept behind it. By doing that, you’re sending the signal that your work is 10% more important this year than last. Maybe it is, maybe it isn’t. This guessing game also undermines your authority to define your team’s focus.
• Manage your budget like it’s your own money. Taking ownership and responsibility of what you want your team to accomplish can open you up to a way of thinking that goes beyond a random ask for money. Look at areas that you’ve fallen short in the past and consider new approaches. Read up on new trends and see if any are applicable to your team’s work. Putting skin in the game – which you already have as a manager – shows that you know what’s on the line.
• Quit that “use it or lose it” mentality. The idea that if you don’t use all your allocated money this year, the higher-ups won’t give you more next year may have some basis in reality, but it’s not a smart financial move. No matter who’s telling you to do this, it’s often a bad habit: it encourages willy-nilly spending and it undermines all your future spending justifications.
• Be transparent with your team. (At least, as much as you can.) We know some companies can be secretive about their budgets; still, it is beneficial when your direct-reports know exactly what they can spend on training or on software – you’re not wasting their time or yours. They’ll appreciate it and you’ll benefit from a more trusting relationship.

First-time budget tips for IT managers

Newly-minted managers often feel an overwhelming sense of dread when it comes to budgeting. After all, you may have been promoted for any combination of your IT know-how and your people management skills, but if you’ve never put together a budget, it’s likely not a skill you’ve spent much time considering.

Keep in mind that everyone before you learned budgeting on-the-job. Some up-front investment of your own time alongside these practical tips will help you organize the chaos and uncertainty:

• Treat the existing budget as a baseline. Review the current budget carefully, ask questions (to yourself or to the person who developed it), maybe poke holes in it. The goal is not to agree with the budget’s methodology, but to understand how it was put together.
• Learn from your team. Whether a formal meeting or a casual conversation, talk your team about their needs: what did they spend money on this past year? Will they need new hardware or software or trainings for next year? Ask them to prioritize – what’s the thing they need most? What’s the trendy thing they like but may not need just yet?
• Chat with corporate. C-level executives likely already established a general budget for next year, before you have to make your monetary requests. Find out if they give a rule-of-thumb – they may say that you need to be within a certain percentage of last year’s budget.
• Ask for help. Since you’re not the first person in the company to build a budget, ask for some expert help. Go to your finance team and see if they have budget analysts – a role that many companies employ. They can help with standard budget questions, more complicated topics like amortization and depreciation, and even give you tips on getting your budget approved. You could also talk with a couple manager who you look up to for their insight.
• Take a budgeting class. Check out a nearby community college or business school for a budgeting class for non-financial professionals. You may even be able to get work to cover the expenses.
• Prioritize your budget asks. Let’s say you only get approved for 90 percent of what you asked for – what items can you cut? Or, perhaps corporate earnings are short mid-year, so you’re asked to scale back. Knowing which items are higher and lower priority from the get-go will make this process much easier.

Tips and tricks for IT budgets

As you get more comfortable with maintaining a budget, you’ll get more sophisticated with the ways your budget can work for you. You can also harness your budget as a tool towards larger corporate harmony.

• Share the wealth with other teams. Maybe last year you had a much heavier budget than normal – you scaled up with new hires, you invested in some new hardware, and you changed your team’s functionality and philosophy. So, be a team player and consider a more “normal” budget for this year. Ask your manager where your budget fits into your manager’s overall workload, perhaps this year it’s time to scale down so another team can grow.
• Share manpower. You want to hire a data scientist, but you don’t have enough money for a full salary. Instead, find other teams who could use a part-time data scientist. By sharing the workload for a person across teams, you can also split the cost for that employee.
• Consolidate databases and apps. At least as much as realistic and feasible, consolidating your databases can help you reduce costs. Whether living in the cloud or onsite in servers, by reducing how many places your data lives, you can scale back your infrastructure costs.
• Ask about financing options. You may need to make a purchase or hire a new employee, but you don’t have the budget for it. Look for an intern, ask your software or hardware vendor for finance options, or see if a vendor can do a proof of concept project, so you can test-drive a new system. When your budget opens up, you’ll already know you like the app and you’ll be ready to justify its cost.

Long-term IT budget best practices

A budget should never be just a year-long forecast. It’s a way to measure what’s working against what you thought might work. It’s a test in imagination versus reality. Incorporate these best practices into your IT management style:

• Review your budget monthly. See where you overspent and underspent – and see what the results were. Being proactive with your budget means next year’s budget will be a lot easier – and smaller – of a task. You’ll also start to see trends or setups for failure: for example, let’s say you want to shift to mobile apps, but your overspending elsewhere means you can’t hire that mobile developer you planned on.
• Consider fixed costs versus variable costs. Upfront CapEx spending is pricey and non-flexible: buying hardware or signing a contract for a years-long service locks you into those prices. But, considering as-a-service options can give you flexibility and scalability.
• Communicate. A budget is one way to communicate your team’s goals, to your managers, to the company at large, and, of course, to your team. But communicating itself can be just as useful: If you’re getting off track, ask for help. If you can’t figure out where the money is going, talk with your team. If you’re successful, share your best practices.

As you get better managing your budget, you’ll optimize your cost and your value. This can be the difference between being treated as a standard cost center and being recognized as the revenue producer that IT truly is.

The amount of IT spending in the enterprise segment has grown significantly in recent years. Gartner estimates that the annual worldwide IT spending will reach an all time high of $3.7 trillion in 2018, at a 6.2 percent increase from last year as we analyzed in a recent BMC blog post on IT spending trends. The sharp increase is not attributed to the rising cost of IT or losses associated with technology investments. In fact, the IT industry continues to align with the Moore’s Law of technology growth and development. The Law suggests that the processing capabilities – or number of transistors on a silicon chip – double every 18 months. And as a result, improvements in technology are matched with price reductions. Yet, many organizations fail to optimize their IT spending. Instead of leveraging technology as an affordable and viable business enabler, IT is sometimes seen as a cost center. Here are five tips to help your organization reduce IT spending and transform IT into profit centers.

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

1. Optimize HR Investments

Despite the growing dependence on technology, the workforce is the greatest asset for any organization. Making the right decisions regarding hiring and employee retention is therefore critical to drive costs down, increase productivity and operate as a profitable organization. For established companies, hiring fresh graduates and nurturing their talent among expert professionals at the workplace is a proven way of reducing total long-term cost of HR. Hiring and firing experts is a costly process considering the administrative burdens, compliance issues, direct and indirect cost of searching, identifying and onboarding new employees as well as the business opportunity costs associated with making the wrong decisions. Additionally, it pays to compensate employees well, since the cost of employee turnover can cost $150,000 per employee according to a recent research report. Understanding the true needs of the organization and suitability of potential candidates is therefore critical to eliminate these costs.

Organizations can also resort to outsourcing non-critical IT operations to low-cost skilled labor abroad. Engaging IT consultants on-demand is a common practice to fulfil unpredictable IT skills gap. However, it can also emerge as one of the most intractable management challenges. Successful entrepreneurs like Elon Musk address this problem by asking managers to justify consultant engagements or terminate consultant contracts that draw projects for unnecessarily prolonged periods of time.

2. Strategize Cloud Investments

For small and midsize business organizations, trading high IT infrastructure CapEx with affordable ongoing OpEx is a viable approach to conserve IT budget. Instead of having to spend on IT infrastructure deployments merely to keep data centers alive, SMB firms can invest in subscription-based cloud infrastructure solutions and save the costs of installing, running, managing, securing and upgrading the technology on an ongoing basis. For large enterprises, investing in dedicated data centers may offer a lower total cost of ownership (TCO) especially since they have the necessary IT expertise available in-house and cloud may not be the most viable option as Dropbox recently figured out. A strategic approach to cloud investment is therefore critical in deciding between on-site IT data centers and cloud-based infrastructure solutions. The right answer varies based on the tech, business and legal requirements of the organization as well as the future outlook in terms of IT needs, costs, performance and security demands as well as business growth.

In terms of software solutions, cloud computing lets organizations of all sizes and industry verticals achieve faster time to value, automate cost and time-intensive manual processes and improve operational efficiencies. Using commercial off the shelf Software as a Service (SaaS) helps reduce infrastructure and HR costs as organizations don’t have to develop and maintain the technology solutions in-house.

3. Go Open Source

Relying on proprietary cloud solutions may trap organizations into vendor lock-in, preventing them from investing in cost-effective alternatives in the future. Going open source reduces these limitations since the technology functionality is provided by multiple contributors instead of individual vendors. Open source providers typically don’t seek direct financial rewards and are therefore not inclined to force end-users into a lock-in situation. The technology is developed and maintained by multiple software developers, which enables faster detection and resolution of security flaws and performance issues. Organizations using open source are also free to modify the technology to address unique IT needs. As a result, organizations have the flexibility to leverage the technology to their advantage and avoid the legal ramifications that prevent them from optimizing IT investments.

4. Transform IT through DevOps

DevOps is all about speed and continuous improvements. DevOps adds value through continuous testing, continuous integration, continuous delivery, deployment and release. Continuous IT processes enable organizations to calibrate their IT in favor of business growth on an ongoing basis. For instance, continuous testing helps identify software defects fast and early, before the impact spreads across the project and forces rework, project extensions and IT budget overhead. Continuous deployment, delivery and release allow organizations to push improvements to the market on an ongoing basis, allowing them to make the most out of their IT investments with every development sprint.

DevOps enables collaboration, integration and automation in otherwise siloed IT environments. DevOps instigates a cultural change that lets Devs, Ops and QA teams work collectively toward common objectives. Teams operating with cross-functional responsibilities, effective communication and fruitful collaboration are better positioned to transform IT cost centers into profit centers. By anticipating and reacting to failures faster and working to deliver feature improvements to end-users on a continuous basis, organizations waste less IT budget on overcoming IT project hurdles and devote more resources to create true business value.

5. Prepare to Fight the Cost Centers

Cost-cutting measures are not all about choosing the most affordable technologies and resources but should also focus on reducing the cost impact of unforeseen circumstances. For instance, investing in security solutions and redundant cloud infrastructure help protect sensitive business information and keep systems alive in event of data center downtime. Improving organizational culture, governance policies and employee satisfaction efforts help eradicate the malpractices of Shadow IT, boost employee morale and reduce the chances of employees going rogue against the organization.

Fighting these cost centers may incur additional investments but the long term financial returns and low risk of financial losses help organizations reduce the overall IT spending necessary to operate as a profitable business.

As budgets for IT seem to be on the rise and the importance of a solid technology team only increases, more and more organizations are realizing the necessity of being honest about costs, both to stakeholders and staff as well as to consumers.

For a majority of companies, expenses are the most common factor that influences IT budget decisions and without a transparent plan in place these costs can quickly skyrocket, especially as technologies require updates or replacements down the line.

For organizations that adopt IT cost transparency, not only can IT departments make educated and powerful decisions as a result of knowing where money is spent, but they are also on the same page as the business department related to the cost of running IT, ensuring the best strategies for future innovation.

(This article is part of our IT Cost Management Guide. Use the right-hand menu to navigate.)

What is IT Cost Transparency?

In short, IT cost transparency is tracking the total cost it requires to deliver and maintain the IT services that are provided to the business. By making all costs and expenses highly transparent through management software and systems, organizations are better able to ensure business growth is not impaired by the pressure of IT budgets.

Elements of IT Cost Transparency

There are multiple factors that must be considered when moving towards IT cost transparency and it is necessary for organizations to be properly informed of the main elements involved.

IT Asset Baseline

One of the first steps towards IT cost transparency is to find the IT asset baseline. This is accomplished by performing a complete analysis of the number of IT assets that are chargeable and determining how they are used. These assets might include things such as servers, networks, storage, software, mobile devices, and employee workstations. This baseline number must be accurate and completely reflect the amount of money towards these assets.

Business System Correlation

The next element of IT cost transparency is business system correlation. What this means is that the numbers from the analysis and asset baseline must be understandable in order for action to occur. By expressing facts in ways that decision makers can understand, IT costs and systems can be properly identified along with the value they provide the business.

Business Intelligence

Although making the asset baseline transparent and easy to understand is important, those steps alone are not enough to achieve IT cost transparency. The relationship between the deployment of software and its configuration must also be made transparent, including the connections of clustering, virtualization, and licensing. Another component of business intelligence is usage. While most organizations have multiple servers and hold expensive licenses, it is necessary to be able to identify who uses each of these components and what their value is to the systems. Being able to decommission unnecessary hardware and software is a huge piece of cost transparency.

Benefits of IT Cost Transparency

While the idea of decreasing costs is a huge draw to undergoing IT cost transparency, there are many other benefits to adopting a solid system, as well.

A Complete View

One of the biggest benefits of IT cost transparency is that it provides a complete view of where money is actually being spent throughout the department. This information gives IT leaders and stakeholders the ability to make accurate decisions regarding current needs as well as future innovations.

Leverage

For IT leaders, being able to have more leverage is a huge benefit of IT cost transparency as it allows them to more confidently communicate the reasons behind costs and their overall value to the company. By putting things into terms for even non-IT leaders to be able to understand and analyze, the business can start to put plans into place on what makes sense and what does not.

Evidence

When assumptions about spending are replaced with numbers and data, it is much easier for companies to make decisions based on facts rather than emotions. IT cost transparency clarifies total expenses associated with IT, and factors in other elements like labor and assets. By providing this information, most open and honest conversations can occur between stakeholders.

Change in Behavior

As costs are regularly reviewed and analyzed, executives have the ability to see how their employees affect consumption and how teams are performing. When staff knows that data is going to be seen and shared, it can lead to increased engagement and reduced unnecessary costs. Once numbers are reviewed on a routine basis, cost transparency can influence employees to notice services and software that isn’t beneficial.

Conclusion

IT cost transparency shouldn’t be viewed as just another major project that IT departments must undergo in order to check it off the list. Rather, it should be seen as a solid investment that will end up saving tons of time and money as the years go on. By reporting assets, understanding business system correlation, and seeing how business intelligence interplays with other systems, organizations can become one step closer to IT cost transparency and ultimately complete cost optimization.