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The economics of IT

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It is the responsibility of the CIO to demonstrate real, monetary value to the business.
This is the word from David Merrill, chief economist at Hitachi Data Systems (HDS), speaking at today’s Hitachi Innovation Forum in Johannesburg about IT economics.

“We’ve got shrinking budgets – from both capex and opex points of view,” says Merrill.
Typically, CFOs will spend capex to reduce opex, but only if there is a good return on the investment. While budgets are flat – or declining – demand for IT services is rising rapidly. Moore’s Law can no longer keep up, he adds, so price erosion will no longer come at 30% levels.

“So Moore’s Law is running out of gas, especially with the growth of big data.”

IT cannot control the need for services, however. But they need to reconcile the lower budgets with increased needs. The only way to do this, says Merrill, is to drive down unit costs.

“The only way you can maintain the increasing needs is to address the costs. IT departments have got to start aggressively driving down unit costs.”

The easy place to start is the unit cost of a virtual machine and of a terabyte, because they are infrastructure, says Merrill. HDS and Merrill are pioneers of IT economics concepts, and believe in addressing total cost of ownership (TCO).

“Economics is about changing roadmaps, architectures and standards – not about buying cheaper things.”

Price does not equal cost – this is the first law of IT economics. The second is that there are 34 different types of cost, from depreciation to labour, to software to maintenance and power, cooling and floor space. They also include buying for future needs, cost of waste, copies, SAN , circuits, back-up, outages, performance – and more.

There are economically superior IT architectures as well, says Merrill.

“Tell me what’s important to you and I can help you build a superior architecture that addresses that.”

The fourth point is econometrics – users can’t improve what they can’t measure.

“Most people don’t know what their costs are today, and are not doing charge-back. I recommend that you get a handle on what your costs are now.”

Merrill says the costs are probably higher than most people think they are.

“First, you need to identify your costs, measure them, and then look at recommendations to reduce costs,” he adds.
“Make sure you know what costs are important to you before you talk to vendors about reducing them. Don’t let vendors tell you what your costs will do. We can help you on the journey but you need to take the leadership role.”

HDS has determined what some of the costs are and can help customers to map their costs, and match technologies or best practices that are proven to reduce specific costs.

“We’ve done the hard work to map money to solutions,” Merrill says. “And we’ve made a tool available to help you to reduce these costs.”

Merrill is very clear that the correlation between money and IT solutions is very deterministic. He urges CIOs to start with a mapping exercise. Partners have access to a wealth of tools – many of which are also available online. However, Merrill stresses that the correlation is a vital step that needs to be taken.

“You need to create a baseline to decide a starting point before you can do a major transformation.”

Once the CIO has a number to work with, they can start calculating the cost per terabyte, and can start actioning it.

The cost analysis can be done with storage or with servers, both physical and virtual. Importantly, CIOs can put these into money terms, and can start looking at ways of bringing those costs down.

“If you can show you are driving down the unit costs of IT you will be a rock star, because you are dealing with a monetary concept, which is something we are missing in IT.”

The same concepts can be used to calculate cloud economics, Merrill says.