Holy Grail of IT, Operating Expense vs Capital Investment

IT budgets were never a great discussion; the CIO struggled to find the right balance between “Business As Usual”, or keeping the lights on, IT infrastructure, incremental innovation, new projects that business wanted, initiatives that IT wanted, and some that the CIO believed will have a transformational impact on the company. Over a period of time, the operating expense ran out of control to reach almost 90% of the total. Across the industry, this required a conscious effort to bring back the innovation budgets with BAU settling around 70%.

In the recent past (at least the last two years that is vivid in my memory), almost every IT solution, vendor, consultant, and CIO has promoted the idea of shifting capital investment to operating expense. Capital investments almost withered away, as the economic challenges dictated cash flow controls. Large initiatives found it difficult to get initial funding. IT companies turned around models to offer almost everything as a service, thus obviating the need for capital expenses. New business models liked payments to outcomes spread over a period.

The operating expense model helped forward movement; in success based engagements, everyone was a winner. For the CFO or the CIO, in the absence of success, it was easy to pull the plug, and stop loss. Yes, there was, and is, an inherent risk of the project or initiative not working, but we have not heard of any such anecdotes as yet — as if success rates now equaled the past’s failure rates. Is this due to the fact that the financial risk is now shared in a different proportion between the stakeholders? Or is there another angle to it?

The answer is probably affirmative when it comes to the shared financial risk. However, I also believe that the vendors now prefer the OPEX model, as it helps their profitability over the long term with continued revenues and the ability to spread their capital investments over a set of customers. The customer is probably paying more over the useful life of the product.

There is another angle as well. Once any process operates over a shared IT infrastructure, application, or solution, with the data too being stored in the service providers premises (sounds like the Cloud?), the ability to get out of such an arrangement into an independent model will be a huge, if not insurmountable, challenge. Everyone recognizes it, and believes that the changeover is executable, but I would be worried to be in a situation where I could be held to ransom — despite what the lawyers tell me.

I am not propagating the message that we all need to move back to the good/bad old days of big capital expenses. The CIO should be wary of the “too good to be true” deals, and safeguard the enterprise’s interests by reviewing alternatives to disruption of services, or the possibility of a shift should the service levels fall below acceptable limits; and in the worst case scenario, the service provider increasing the fee to abnormal levels. The time and cost of any change in this situation can be very high indeed.