Zero-based Budgeting with ITaaS
Transforming to an IT-as-a-Service (ITaaS) model requires IT to operate like a true 3rd party service provider instead of a cost center. This means defining, selling, and supporting market-competitive services to business and IT stakeholders.
While the ITaaS model has broad implications for IT operations, the impact on IT finance is frequently underappreciated. One simple hypothetical question typically brings this fact to life for our clients:
Assuming you’ve fully transformed to an ITaaS model,
what should your IT budget be in five years?
Most clients talk about the cost efficiencies and productivity enhancements that an ITaaS model will bring to their current IT budget. Self-serve automation, streamlined and standardized processes. and elastic infrastructure models should together drive reductions of ten, twenty, or perhaps thirty percent from today’s IT budget.
While this may all be true, they are usually surprised by what the real answer is: Zero. Nada. Nothing.
In a true ITaaS model the traditional notion of an IT budget becomes a thing of the past, and should, in effect, be zero. To understand why this is the case, let’s explore how ITaaS changes the business model for IT.
In traditional enterprise IT, budgets are determined through an annual or semi-annual planning process. Estimates of likely new project demand and business-as-usual (BAU) growth are translated into capacity forecasts. These forecasts then drive required investments—in software, hardware, people and services—that are funded by the CFO. In some cases these costs are recovered via a chargeback model that may or may not be based on actual resource consumption. Regardless of the approach, the purse strings are centrally controlled by the CFO.
ITaaS turns this model on its head. Instead of funding coming from the CFO or the corporate center, just as with a service provider investments are directly funded by customers of the services. IT operating and capital expenses are now paid for instead by customer-generated “revenue,” or what internal users actually pay for the services they consume. Taking a cue from the sales world, IT only gets to “eat what it kills.”
This is more than just a matter of semantics. ITaaS introduces a new level of market discipline around funding and investment decisions. For example, the decision to redesign and replatform an existing application to enable an “as-a-service” delivery model needs to be viewed through the eye of the customer.
- What will the new internal, per-user subscription fee be for the new Application-as-a-Service?
- What does this mean in terms of the TCO for the LOB or business unit buyer?
- How does this pricing compare to viable 3rd party SaaS alternatives?
A true ITaaS operating model forces IT organizations to think about how to compete for budget dollars, instead of taking the IT budget largely as a “given.”
An ITaaS funding model forces CIOs to ask hard questions about which services truly warrant investment and where the IT organization can provide differentiated value to its business customers. While the transition may be painful in the short term, it also empowers CIOs to best position their organizations for long-term success.