What if IT had no CapEx? A gedanken experiment.

[tl;dr Imagining IT with no CapEx opens up possibilities that may not otherwise be considered. This is a thought experiment and it may never be practical or desirable to realise, but seeking to minimise direct CapEx expenditure in portfolio planning may help the firm’s overall Agile agenda.]

The ‘no CapEx’ thought experiment is related to the ‘Lean Enterprise’ theme – i.e., how enterprises can be more agile and responsive to business change, and how this could fundamentally change organisation’s approach to IT.

CapEx (or Capital Expenditure) usually relates to large up-front costs that are depreciated over a number of years. Investments such as infrastructure and software licenses are generally treated as CapEx. OpEx, on the other hand, refers to operational expenses, incurred on a recurring basis.

The interesting thing about CapEx is that it is a commitment – i.e., there is no optionality behind it. This means if business needs change, the cost of breaking that commitment could be prohibitively high. So businesses may be forced to keep pushing square pegs through round holes in their technology, reducing the potential value of the investment.

Agility is all about optionality – the deferring of (expensive) commitments to the latest possible moment, so that the commercial benefits of that commitment can be productively exploited for the life of that commitment.

Increasingly, it is becoming less and less clear to organisations, as technology rapidly advances, where to make these commitments that do not unnecessarily limit options in the future.

So, as a thought experiment, how would a CapEx-less IT organisation actually work, and what would it look like?

The first observation is that somebody, somewhere, has to make a CapEx investment for IT. For example, Amazon has made a significant CapEx investment in its datacentres, and it is this investment that allows other businesses to avoid having to make CapEx investments. Is this profitable for Amazon? It’s hard to tell..prices keep going down, and efficiency is improving all the time. In the long run, some profitable players will emerge. For now, organisations choose to use Amazon only because it is cheaper than the capital-investment alternative, over the length of the investment cycle.

Software licensing as a revenue stream is under pressure: businesses may be happier to pay for services to support the software they are using rather than for some license that gives them the right to use a specific version of a software package for commercial purposes. In the days when software was distributed to consumers and deployed onto proprietary infrastructure, this made sense. But more and more generally useful software is being open-sourced, and more and more ‘proprietary’ software is being delivered as a service. So CapEx related to software licenses will (eventually) not be as profitable as it once was (at least for the major enterprise software players).

So, in a CapEx-free IT environment, the IT landscape looks like an interacting set of software services that collectively deliver business value (i.e., give the businesses what they need in a timely manner and at a manageable cost).

The obligation of the enterprise is also clear: either derive value from the service, or stop using the service. In other words, exercise your option to terminate use of the service if the value is not there.

In this environment, do organisations actually need an IT strategy in the conventional/traditional sense? Isn’t it all about sourcing solutions and ensuring the solutions providers interact appropriately to collectively provide value to the enterprise, and that the enterprise interacts with the providers in such a way as to optimise change for maximum value? In the extreme case, yes.

For this model to work, providers need to be agile. They will likely have a number of clients, all requiring different solutions (albeit in the same domain). They need to be responsive, and they need to be able to scale. It is these characteristics that will differentiate among different providers.

All of this has massive implications with respect to data management, security and compliance. A strong culture of data governance coupled with sensible security and compliance policies could (eventually) allow these hurdles to be overcome.

The question for firms then, is where does it make sense to have an internal IT capability? And, apart from some R&D capabilities, is it worth it? Especially as individual businesses could innovate with a number of providers at relatively low risk. Perhaps the model should be to treat each internal capability as potentially a future third party service provider? Give the team the ability to innovate on agility, responsiveness and scaleability. Retain the option in the future to let the ‘internal’ service provider serve other businesses, or to shut it down if it is not providing value.

It is worth bearing in mind that the concept of the traditional ‘end user’ is changing. The end-user is someone who is often quite adept at making technology do what they want, without being considered traditional developers. Providing end-users with innovative ways to connect and orchestrate various (enterprise) services is expected. The difference between ‘local’ and ‘enterprise’ development is then emphasised, with local development being reactive and using enterprise services to ensure compliance etc. while still meeting localised needs.

Such an approach would maximise enterprise agility and also provide skilled technologists and even end users the ability to flex their technical chops in ways that businesses can exploit to their fullest advantage. The cost of this agility is that other organisations can use the same ‘building blocks’ to greater competitive advantage. As has always been the case, it is not so much the technology, as what you do with it, that really matters.

To summarise, while not always possible or even desirable, minimising (direct) CapEx expenses for IT is becoming a feasible way to achieve IT agility.

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What if IT had no CapEx? A gedanken experiment.

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