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Want to Drive Transforming Business Growth? Look to Your IT Department

November 24, 2014

It’s just not fair (but what is?). Mid-size companies and organizations typically devote a greater percentage of their available dollars than large enterprises to receive equivalent value from their investment. This is particularly true for infrastructure and operations (I&O) budgeting due to an absence of economies of scale. Smart investment, aggressive cost management and budget reductions are, in part, equalizers that help the mid-size enterprise (MSE) compete against more formidable contenders, as well as against comparable organizations.

The MSE spends more of its IT budget than larger companies do (70 vs. 60 percent, respectively) to simply to keep the lights on, leaving less money for innovation, growth and business transformation (i.e. the stuff of competitive advantage, market differentiation and close customer alignment). Eighty percent of that budget slice goes to I&O, making that a target for cost reduction and efficiency improvement. It’s one thing to reduce costs. It’s another to figure out which cost reduction initiatives will yield the best results and, therefore, which areas to attack first and hard.

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That road to revelation begins with determining total cost of ownership (TCO) for each I&O domain: data center, networking, client computing and service desk. The ability to see direct and indirect domain costs in their entirety and in relation to each other enables you to zero in on areas that will yield the greatest return for more value-creating endeavors such as application development and IT innovation.

In a recent report entitled, “How Best to Reduce I&O Costs in Midsize Enterprises,” Gartner Inc. offers this advice to I&O leaders in mid-size companies:

“Gartner strongly recommends using TCO to assess cost reduction initiatives for the following reasons:

  • TCO takes into account all costs during a platform’s life cycle.
  • TCO ensures a consistent baseline for evaluating cost reduction projects.
  • By amortizing one-time capital expenditures, you have a single TCO number for a platform. Hence, you can avoid the complexities of dealing with one-time and recurring costs.”

At the highest level, the data center TCO breakdown is 65 percent for compute, 25 percent for storage and 10 percent network. We assume that this is the traditional data center model. The degrees to which IT and data center technology transformations (e.g. cloud computing and data storage, disaster recovery as a service, backup and replication) are reflected in this breakdown are probably minimal. By the same token, Gartner allows that these transformations warrant serious consideration for their I&O cost-saving potential for MSEs.

The report advises, “Recognize that three economic principles are the basis of most I&O cost optimization opportunities. These principles are economies of scale, modernization and staff productivity. As you assess each I&O domain and its subdomains, ask yourself if you can apply one or more of these economic principles.”

In our view, these three principals are hallmarks of outsourced IT services – colocation and cloud computing in particular. The “one serving many” model of Infrastructure as a Service (IaaS) relies on economies of scale for its compelling value proposition. Providing best-in-class products and services speaks to infrastructure modernization and the continual evaluation of and investment in new systems to sustain business growth. Depending on their business model and offerings, third-party service providers may also have a breadth and depth of technical expertise that most MSEs could not hope to afford.

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Many of the cogent observations made in this Gartner report point to outsourcing, not simply as a viable alternative but a must-consider alternative. One such point, under the banner of best practices for I&O cost reduction, concerned data storage:

“Do everything you can to contain storage costs. For most enterprises, storage TCO will not decrease within three years, because storage growth is outpacing the decline in storage TCO on a per-Terabyte basis. Use cloud storage services to the fullest extent feasible.”

The report also obsrves that staff cost is the largest I&O expense, in the data center particularly. Looking to an outsource provider as an extension of your own data center operations would help to reduce in-house staffing or divert those resources to higher-value activities. It also would provide access to hardware, software and networking skill sets that are too expensive or too rarely used in-house to justify acquiring and retaining them on your own.

When it comes to future data center needs, look to colocation and managed service providers. Again, they have the scale, as well as the ability to cost-effectively accommodate your growth and the ever-changing business dynamics impacting your business.

  • TCO enables you to accurately compare costs before and after a cost reduction initiative.

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About Peak 10

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Board Member, Peak 10 + ViaWest