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Interested in consumption-based IT? Here are 5 questions you must ask

Like any major decision, companies exploring an IT consumption model should think through the business implications. Here are the things to consider before making the leap.

The consumption-based business model—where customers pay for only what they use of a service instead of investing in the infrastructure to provide it themselves—is not new. Telecom companies and utilities have long used it to ensure financial predictability, lower service costs, and steady, ongoing customer relationships. 

What is new is that the model is taking hold in other industries. Driving the change are the typical capacity management issues: slow provisioning, heavy workloads preventing innovation, and report requests around costs, usage, and performance. 

If you’re in this camp, you may be considering adding consumption-based IT to your overall technology strategy. Providers now offer business customers a range of solutions, including large infrastructure deployments and IT usage monitoring, where a monthly payment is based on how much of the service you use, doing away with the need for complicated and sometimes wasteful IT infrastructure investments. 

The benefits of consumption-based IT are the flexibility to pay only for what you consume and an approach to IT that can be better aligned to the fast pace of today’s digital economy. But embracing consumption-based IT can be challenging. Companies exploring this approach should think through the business implications of this choice. 

Here are five important questions to ask yourself.

1. Is my IT organization ready to support new product launches?

In the digital economy, companies need to have the capacity on hand to react to new business opportunities, and the key to getting to market swiftly is having a good handle on your capacity usage. 

IT capacity planning is notoriously difficult to master: If you overprovision, you overspend, but having too little capacity means you’re running the risk of outages. If you’ve tried to become a capacity-planning expert, you know it entails gathering data, making capacity predictions, and gauging potential risks. All this takes time, and not every IT department has personnel with the appropriate level of expertise.

Customers often struggle with capacity planning. It’s not unusual to hear that a customer is needlessly overprovisioned in preparation for a potential future need, sometimes leading to uncomfortable conversations with their CFO. While the cost per unit of IT is going down, customers are using more of it because data use is exploding. And capacity planning is especially challenging for industries in which there’s a high degree of seasonality, such as retail, which faces periods of sudden high demand.

Pay for only what you use: A blueprint for achieving consumption-based IT with on-premises infrastructure. Learn how.

If you’re a retailer, for example, you may want to open a new store or add new lines of OEM sunglasses in time for the summer rush. Additionally, you’ll have the artwork for the sunglasses done in two weeks, and you want those images to be live on the company’s website. To allow that to happen, the processing power has to be available.

In the past, an obstacle has been the procurement cycle, where a company orders equipment to cover its expected increase in capacity. A recent study by 451 Research found this kind of capacity addition can take some time: 59 percent of respondents said a company’s IT department can take three months or more to complete this task.

Clearly, this is too long. A consumption IT model can help you get to market more quickly because it allows IT managers to avoid worrying about capacity. Your IT provider furnishes you with a compute resource buffer that is ready for you to use when needed, without a lengthy procurement process. The provider monitors the consumption of the buffer capacity and will make more available ahead of any expected demand increase.

2. How much IT flexibility do I need? 

As companies grow, their IT needs change. And these needs are not always uniform. One division may grow quickly while another has a slower rate of growth. How much IT flexibility you need depends on these factors.

Traditionally, IT has dealt with these individual changes with fixed IT purchases that involve expensive capital investments and lengthy procurement cycles. But this can be costly and complicated, and drain the resources of your IT department. A flexible consumption-based model for IT could be a good solution for a complicated IT setup. It grows as your needs change, helping you avoid costly overprovisioning

An IT services provider will tailor the flexibility in the model of IT infrastructure provided. For example, it may determine that a customer needs 100 servers. So, in a typical consumption IT agreement, the customer agrees to pay for 70 and the service provider has the risk for the remaining 30. In addition to the 100 servers, a service provider may offer a buffer of 10 percent, meaning 10 servers would be entirely at the IT service provider’s risk. So, if the customer keeps to within 80 and 90 percent usage, it is not spending on unused capacity but can stretch to cover unpredictable demand.

Some companies—manufacturers or retailers—will have different tiers of flexibility in their contracts with IT providers, depending on the needs of the business division. Some may be stable, while others are more prone to sudden surges in demand. A consumption IT approach means you’re no longer running behind the capacity needs of the company.

3. Am I matching IT costs to business activity?

Most IT decision-makers assume that by overestimating their capacity needs, they will avoid the cost of running out of capacity and thereby reduce business risks. A company will typically buy twice as much as it needs. When the company is buying equipment outright, overprovisioning is a needless CapEx investment that sends cash running out of the business—cash that isn’t available for new, potentially profitable projects.

A recent 451 Research report quantifies the extent of the overprovisioning done by IT departments: by 59 percent for compute on average and by 48 percent for storage. While these companies may believe they are playing it safe and avoiding outages, a costly consequence of a lack of capacity, overprovisioning has a significant financial impact, too. 

451 Research points out that if only four virtual machines are deriving business value out of a maximum of eight on a $1,000 server, for example, each virtual machine is effectively costing you $250. If all eight virtual machines are harnessed, the unit cost comes down to just $125. But the ideal scenario is your IT utilization is as close to 100 percent as possible, which is difficult to achieve in practice.

Underprovisioning is also a risk. Half of the businesses surveyed by 451 Research said they experienced downtime as a result of not having enough capacity to meet demand, while 34 percent suffered poor performance and 32 percent could not deliver adequate IT resources to the enterprise. These situations are serious and could result in customers switching to other companies or the business losing out on a potential new opportunity.

A far smarter—and more effective—approach is to use tools that can help you optimize capacity management and therefore optimize costs and reduce business risks. With an IT provider managing your IT infrastructure and monitoring your ongoing consumption needs, this can be done in real time, as opposed to looking at your historical variability in need. And a clear understanding of your metered usage means you know exactly where your dollars are going at all times.

4. How do I minimize risk effectively?

The recent volatility in the stock market related to international trade wars will have shown some companies, most notably those in the financial sector, the importance of minimizing IT risk. 

Smart financial companies would have devoted a significant amount of computing power to modeling for possible risks, such as a sudden surge in trading, which would potentially cost the company a great deal of money if it didn’t have the capacity on hand to perform those calculations. Companies without a moat of flexibility in their IT platform would not have the resources to do this kind of deep modeling, therefore putting a substantial amount of their asset base at risk if an unforeseen trading scenario arises. 

This kind of business risk extends to other sectors of the economy as well, such as retail. If a retailer launches a highly successful product line, not having the extra capacity to manage the upside scenario could constrain a company’s ability to react and reap the financial gain.

To truly manage their capacity efficiently, companies need minute-by-minute modeling and the ability to react. An IT provider can draw on the benefit of working with hundreds of clients to predict your needs and de-risk your IT infrastructure.

5. Am I spending too much time managing purchase orders?

Businesses today spend an excessive amount of time working through paperwork, and this delays the implementation of new projects. Given how long it takes to bring on new capacity, many tend to overprovision capacity in advance.

Handing over the management of your IT to a trusted technology provider that provides stable, reliable, efficient services can help you stop dealing with time-consuming paperwork or wasting resources on capacity. An IT provider helps you place a compute resources buffer in place, ready for use when needed and without extended procurement processes, so you can increase your capacity in minutes rather than months.

When you partner with an IT services provider to create a consumption-based IT contract, the process should involve little more than an exchange of emails once the original agreement is in place. It does away with the inconvenience of purchase orders, which usually go through a lengthy approval process, and allows customers to get their IT up and running faster.

Many companies have embraced hybrid IT, but they now have extensive IT infrastructures that include a mixture of legacy IT, cloud-based IT, and on-premises systems. Running those hybrid operations can be difficult, especially in the digital age. By examining these five areas of your current IT setup, you'll be better prepared to decide if embracing a consumption-based approach can help. 

Data source: 451 Research, November 2016, 500-plus IT decision-makers in the U.S.

This article/content was written by the individual writer identified and does not necessarily reflect the view of Hewlett Packard Enterprise Company.