Flexible computing offers economic traps as well as advantages

Meta Group –

The recent wave of announcements around flexible-computing models (e.g., adaptive enterprise, on demand, grid computing) promises a better future for IT organizations (ITOs), aligning IT with business-unit computing requirements. With this concept ultimately headed for airline magazines, ITOs must develop a complete understanding of the relevant economics before discussing the issue with business units. Given the general lack of maturity around understanding costs and drivers, ITOs that behave reactively will find themselves paying higher costs after adopting these new initiatives, increasing the potential for outsourcing and further exacerbating (rather than alleviating) frustrations about dealing with the ITO.

Although flexible-computing models promise an easy answer to estimating and managing demand, they set two traps for the unwary CIO. First, their convenience comes at a premium price, requiring a minimum base-capacity installation that the client must pay regardless of whether it ever uses any of the resources. Converting to a flexible-computing model also incurs other large costs (e.g., requirement that customers purchase new hardware and associated software) that customers must negotiate carefully.

Second, flexible-computing business and technical models are an intermediary between traditional IT departments and outsourcing. Consequently, CIOs who lean too heavily on flexible computing (and any associated premium) may find senior management talking to outsourcers that provide similar flexibility at a reduced cost, thereby begging the question, "Why should we have an internal IT department?"

Given the premium that vendors charge for flexible computing, the typical current model is to cover base demand for an IT system with traditional hardware purchases and software licensing, with a flexible component added on top of the base to handle demand peaks. The problem is that many IT departments have a poor internal understanding of demand economics. They do not know what their base demand is, and they are often reluctant to do the difficult work of measuring it. These ITOs will likely fall into the trap of turning all their IT contracts into flexible agreements. Exacerbating this problem, senior management may be willing to go along with these new models because of the potential accounting advantages from turning fixed capital costs into variable-expense items. In the long run, however, this strategy can come back to haunt the IT group. Near-term best practice will likely include mapping capacity requirements against long-range demand on a combined scale with declining price/performance (for both total purchase and Moore's law).

Senior management may also pressure the ITO to adopt a fully flexible model not only for applications, but also for basic infrastructure (which is generally considered a cost center). The same tools that the ITO has adopted to improve communications with senior management (e.g., total cost of ownership) often encourage this view by focusing on IT costs rather than benefits. Such cost-modeling efforts need to be expanded to cover a more comprehensive concept of total technology economics, which compares costs to the value that the system in question provides to the business. Without this approach, whenever an IT system is created or expanded to meet the needs of a business unit, the extra costs are obvious in the IT budget while the benefits are realized in the budget of the business unit. All senior management sees on the IT side is the cost increase.

This expanded model of cost versus benefit is particularly important for analyzing the opportunities and dangers of flexible-computing models. For instance, if a flexible model can enable the organization to exploit variable business opportunities and thereby earn extra profits that go far beyond the premium that the vendor charges for the flexibility, it becomes worthwhile. And when senior management questions the increased IT costs, CIOs can show that those costs are an investment aligned with business benefit. A hypothetical case is presented by online retailers that face a huge increase in demand during the weeks before Christmas every year. If their ordering facilities are overloaded, business can be permanently lost. Worse, those locked-out customers may go to a rival to fill their Christmas orders and develop a loyalty to that rival, resulting in a loss of not only sales, but also customers. Flexible computing that automatically increases its capacity to match the increased demand is easily justified in such cases, but only if the analysis includes the extra IT cost and the additional profit that the user realizes through such flexibility.

USER ACTION: Two kinds of organizations will initially adopt flexible-computing paradigms: those that are smart and understand the economics, and those that do not understand the economics but still pay a premium. CIOs need to ensure they are in the first category and can map extra value to the premium cost of flexible computing. IT organizations that do not closely watch the economics of flexible computing are likely to become candidates for outsourcing. META Group analysts William Snyder, Michael Buchheim, and Glenn O'Donnell contributed to this article.

Visit META Group's IT Operations Excellence Resource Center. http://www.metagroup.com/resourcecenter/OE

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