IT departments are struggling to keep pace in a world that is moving at breakneck speed, and the IT industry is entering a period in which it will not only be possible to change the cost structure of IT, but it will be an imperative for many chief information officers (CIOs).
"Across all operating areas, organisations are taking operating efficiency to a new level. This is being exacerbated by challenging economic times," says Barbara Gomolski, managing vice-president at Gartner. "At the same time, organisations need to be more responsive to changing market conditions.
"The traditional acquisition model of buying hardware and software, and depreciating it over time, does not allow organisations to quickly shift its IT investments, or cut costs rapidly.
"The message for IT is clear; business needs and expects greater agility from IT," says Gomolski. "The current approaches to project prioritisation, resourcing, agility and governance are clearly not satisfying customer needs. A new approach to IT delivery models and sourcing options is required that allows IT organisations to be more responsive to the needs of the business."
Today, IT spending is heavily weighed by fixed costs. Almost two-thirds of the average IT budget is fixed, at least in the short run. IT outsourcing is the most well-known way to move fixed costs to variable, but it is not the only technique organisations will employ.
Gartner analysts say they expect some organisations to come up with new models, such as joint ventures and shared data centres as a means to reduce the fixed costs associated with IT.
Gomolski says that fixed-cost models burden organisations with assets and large amounts of depreciation, making the business less responsive. She adds that the trend toward user provisioning of IT requires a more flexible acquisition model that gives greater agility in both IT and the business.
Going forward the burgeoning number of technology as a service (TaaS) offerings that will emerge during the next five years will give firms new acquisition models. In the area of staffing, reducing the number of salaried IT professionals and shifting to a model of using more contract labour will move more fixed costs to variable costs while compensation changes such as putting more pay into the performance-driven category can also help reduce fixed costs.
"The variable-cost model is certainly something that most organisations should be evaluating as part of a wider investigation into the changing cost structures of IT," says Gomolski. "However, we do not recommend that all firms aggressively move towards a variable-cost model in IT, nor do we suggest that variable cost models will always be less costly than fixed-cost models. What is important is that the cost model of IT is a lever that the business can use to balance the need for growth while managing cost and risk."
Prominent industry trends such as TaaS and the need for greater business flexibility will increase the importance for more variability and IT leaders need to recognise and balance the strengths, weaknesses, opportunities and threats of variable cost structures. Gartner expects that some of the biggest challenges will come from the businesses internal capabilities, such as demand management budgeting and forecasting and vendor and asset management, all of which will need to evolve to exploit new acquisition models.
"At the end of the day, IT leaders need to let the primary business model of the business in which they operate guide their decisions around IT cost structures," says Gomolski. "While a general shift from fixed to variable IT costs in IT will result from overall industry trends – such as the way software providers choose to sell their products – individual companies can accelerate or decelerate the move.
"Moreover, in these troubled economic times, CIOs need to remember that choosing the least-cost approach to solving today¹s technology needs may become the most expensive, least-effective in the long run."