From CapEx to OpEx: Is Cloud Creating Decentralized IT?

Transitioning to IT as a broker of services and aligning to a new OpEx cost model

Cloud adoption, initially influenced by IT, has evolved as business units, departments, and individual groups seek to gain the agility and flexibility of cloud services. From HR and finance to sales and other areas of the enterprise, software-as-a-service (SaaS)-based consumption has dramatically increased as organizations recognize that cloud accelerates the development and delivery of new services and competitive differentiation. According to a recent McKinsey report, analysis of benchmark surveys indicated that 75% of cloud’s predicted value comes from boosting innovation, with cloud promising an average rise in earnings before interest, taxes, depreciation, and amortization (EBITDA) of more than 20% across industries.¹ Unfortunately, without IT oversight, the adoption of SaaS-based services can lead to new business risk as data protection, security, and governance are often overlooked.

The recent pandemic has accelerated adoption of SaaS and consumption-based services. In fact, 20% of respondents to an Evaluator Group survey reported shifting from CapEx to OpEx as a result of the COVID-19 impact.² A longer-term shift in IT budgetary resources to OpEx spending is also clearly underway.

While digital transformation efforts, the global pandemic, and the shift to subscription- and consumption-based models have dramatically changed how IT services are delivered, it has also created an opportunity to transform the role of IT organizations. By moving from a provider of technology to a broker of services, IT can ensure that the needs of its internal customers—and the business—are met in a way that reduces user friction and complies with security and governance requirements.

The Shift to SaaS Impacts IT, Existing Budgeting, and Cost Models

SaaS-based services don’t require the large capital expenditure once associated with hardware and software acquisition; instead, they introduce a monthly subscription fee based on the number of users, features, or functions. Although this introduces tremendous flexibility and can accelerate the adoption of new services—and create competitive advantage—it can also be massively disruptive to organizations that once relied upon centralized IT and a shared cost model that charged back for large capital expenditures (CapEx) such as infrastructure. SaaS not only impacts how services are provided, but also how IT organizations are structured to support this shift across the business.

The good news is that the move to SaaS and an OpEx model can actually free an IT organization to focus on what matters most to the business and align resources against those initiatives. After all, without the need to staff and maintain expertise across all technologies—for instance, object storage and backup—you can consume services without the need to understand and invest in the underlying infrastructure.

The good news is that the move to SaaS and an OpEx model can actually free an IT organization to focus on what matters most to the business and align resources against those initiatives.

Evolving IT from a Provider of Services to a Broker of Services

Transitioning to IT as a broker of services, rather than a provider of services, and developing the capabilities necessary to do so, will evolve as an organization proceeds along its cloud journey. The first step to evolving IT into a services broker is to introduce the ability to provide self-service access to services. This is critical to ensure a frictionless user experience and keep users from going directly to SaaS providers, therefore introducing new business risk and minimizing the benefits of a SaaS model.

Automating the management and delivery of services and creating a catalog of services that includes a mixture of on-premises services and cloud-provided services are essential for a sustainable “broker” model and enterprise-wide adoption. This requires an automation and operations platform to provide a service catalog to users. At the end of the day, in order for this new IT model to be sustainable and adopted across the enterprise, it needs to be simple for users and add value to the enterprise’s customized workflow. If it’s easier to consume services from a service provider than from IT, users will prefer to work through a service provider.

You can build a platform yourself or outsource this function. Building a platform for the internal organization relies upon the creation of a centralized group that can address cloud governance and brokerage, and understand the services that will be consumed so that they can build around them. The service catalog will vary, with some services being offered via the data center, others via infrastructure as a service (IaaS) or SaaS. IT roles need to align with this new model, taking into account the technical perspective (architecture and engineering) and integration (interface with people consuming IT services), as well as the business (analysts) to eliminate friction associated with service delivery.

Shifting IT from CapEx to OpEx and Aligning IT with Finance

Moving IT to a broker of services model naturally aligns with the direction of today’s enterprise, but it also creates a need for finance to understand this new IT services acquisition model. The shift from CapEx to OpEx can create cost management pressure within an organization. SaaS services are contracted for one or more years and create a steady state of monthly costs. Because SaaS services are designed to be easier to adopt, consume, and scale, they grow—and so does the cost of services over time. CapEx budgeting is well-known among finance organizations, and they’re comfortable with the traditional acquisition and amortization model for hardware and software assets. Often, from a finance perspective, that’s preferred over the monthly subscription expense model, therefore making collaboration between both organizations key to a successful transition.

20% of respondents to an Evaluator Group survey reported shifting from CapEx to OpEx as a result of the COVID-19 impact.²

When IT transforms into a broker of services, there are implications to the IT organization, cost models, and budgeting. That’s why IT needs to work closely with finance to successfully adopt this new model; both organizations need to agree that an OpEx approach to service acquisition and consumption aligns with the strategic direction of the company. When IT becomes a broker of services, organizational structure, security and governance, operations, and finance need to forge a collaborative, strategic relationship.

Explore how EchoStor’s team of IT experts can help you evolve and take advantage of the benefits of cloud and SaaS models to drive innovation.

¹ Forrest W, Gu M, Kaplan J, et al., Cloud’s trillion-dollar prize is up for grabs, McKinsey Quarterly, February 26, 2021.

² Webster J, Enterprise IT Priorities Have Shifted – Permanently, Forbes, November 9, 2020.