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IT Must Understand Its’ Overall—and Marginal—Cost

In a world focused on margin achievement, buyers are laser-focused on marginal cost, asking “How much does making the next unit cost me?” With public cloud computing, understanding unit cost is much more transparent than traditional IT cost assessment models. Moreover, the OpEx model is much friendlier to margin assessment than a CapEx-based approach.

Consequently, for IT shops that seek to induce CMOs to place their applications into internal private clouds, offering fine-grained chargeback based on resource use is fundamental. Showback with deferred cost assessment is useless for CMOs or LOBs trying to assess a product’s profitability. A different way of saying this is that CMOs will expect to be able to buy IT resource on a retail basis rather than being expected to fund a wholesale offering.

This means IT organizations that want to be in the infrastructure game will have to provide fine-grained chargeback and stand ready to bill users on a pay-per-use basis. In addition, those users will expect to have the same flexibility with regard to use of the internal cloud as they have with external clouds. If the need for resource diminishes, users will expect to be able to release the resources back to the IT organization, and to incur no further charges.

OPEX AND CAPEX

Depending on the company and the size of the organization the purse strings of the IT budget may be shifting from the CIO to the CMO. In days gone by a strict IT budget was put into place at the start of the year and for the most part organizations did their best to adhere to that budget.

The business value of cloud computing, storage, DR and VDI is moving the mantra of Total-Cost-of-Ownership (TCO) to a more sales/marketing bent of Return-on-Investment (ROI).

Pulled from CIO.com 1.28.13 – Bernard Golden
ROI, Not TCO, Drives OpEx Spending

TCO is the mantra of IT organizations. IT is a cost center, and it’s a given that the focus will be on keeping costs down. The less you spend, the more that’s available for the overall company’s profit.
Consequently, IT organizations negotiate to keep costs to a minimum and are loathe to consider more expensive alternatives. After all, from an IT perspective, spending more on one product means having less to spend on another. This is particularly true in a capital-rationing environment.

If IT is allocated only a certain amount of capital to spread across all capital needs, then it’s going to try and trim spending in every area to stretch the capital as far as possible. Generally, the most effective way to sell to a CIO is to offer a way of doing something cheaper than it’s being done now, because that will reduce TCO.

CMOs, by contrast, focus on ROI. CMO spend is bound to be focused on measurable business outcomes, and the applications they use (or have built on their behalf) are directed toward achieving those outcomes.
For a CMO, the question is, “If I spend an IT dollar, how much do I make?” Even more important, “If I spend a dollar, what is my margin on that dollar. Is it the same as the previous dollar I spent, less or more?”

The business case for a CMO is simple: If I can make as much or more margin by spending an additional dollar, I’m going to spend it. Moreover, if achieving that increased margin requires using a product or service that is not the lowest cost, I’ll use the more expensive product, even if that part of my cost structure is higher than it might theoretically be.

This is not even to mention the topic of agility. For a CMO or LOB executive focused on making his or her numbers, getting to a solution and starting to earn margin more quickly is more important than getting the lowest possible cost for something. This is undoubtedly going to cause heartburn for IT executives planning private clouds because they can (putatively) be run less expensively than public cloud options. CMOs are focused on the here-and-now, not the someday-less-expensive.

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