What’s the only expense in business where if you invest in it you can lower all other expenses? The answer is obvious so you only get one guess (if you even have to guess). The biggest opportunity for companies right now is to reduce their total expenses through targeted IT investments that convert them to a variable cost operating model.
In the last few months I’ve spent time sitting in my favorite coffee house doing some thought experiments (okay maybe just day dreaming) and I’ve come to the conclusion that companies have to use IT to move toward a variable cost operating model if they are going to thrive in our present unpredictable economy. Then this month I attended an event hosted by the Chicago Chapter of the Society for Information Management and the keynote speaker, Dr. Howard Rubin, presented his extensive scientific research. He told us the data clearly shows companies have to adopt a variable cost operating model through skillful use of IT in order to enable business agility and thrive in the next few years. Wow. Here’s a case where right brain thinking (polite term for day dreaming) and left brain thinking (rigorous scientific research) come to the same conclusion. Maybe there’s something really important here.
Dr. Rubin started his talk by remarking that IT is still an emerging field; there’s only about 50 years of history so far. And maybe the real impact of IT is only now starting to reveal itself. He said, “I’m like Darwin in the Galapagos Islands. I collect data, look at patterns that emerge and try to figure out what they mean.” Then he began showing us patterns he found in his data and suggesting what they might mean.
The Patterns Reveal an Interesting Story
One slide showed overall revenues and overall operating expenses for companies in the last several years. It showed that company revenues and company operating expenses (or ‘op ex’) converged in 2008 wiping out profit margins. So companies began looking at ways to reduce op ex and since IT is a large part of op ex in most companies, people naturally focus on reducing IT expenses. He said, “Technology spending has collided with current economic conditions as IT organizations have failed to enact agile IT economics and make their value proposition transparent. The pressure is on to cut IT.”
But he went on to say there’s a big difference between cutting costs and optimizing costs and a lot of companies have those two confused right now. Companies often lump all IT expenditures into a business overhead category when actually a lot of their IT expenditures are for growing revenue and reducing operating expenses, therefore a lot of IT expense is not really overhead.
Current IT financial models in most companies have only a 30 – 35 percent variable cost. The rest of the IT budget is fixed cost composed of capital expense (or ‘cap ex’ ) related to the cost of purchasing IT infrastructure and the fixed cost of people to run that infrastructure. Traditional cost cutting strategies involve cutting staff, renegotiating vendor contracts and delaying new projects, but the cumulative effect of these actions isn’t really that much. Instead, companies would be far better off if they lowered the fixed cost of their IT infrastructure. The data shows there’s a big opportunity to reduce IT costs by reducing unneeded capacity in company IT infrastructure through use of what Dr. Rubin calls the “IT Commons”. That could provide companies with a 60 percent or more variability in their IT op ex.
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