Things to consider when budgeting for IT capital expenditures
It has been said that the only constant in business is changing. The number of levers one can pull to affect change in various aspects of a business is more diverse and complicated than ever. However, the net effect is always a combination of two things, the increase or decrease of costs and revenue.
Over the last 150 years, we have figured out through trial, error, and experience the most optimal way to handle administration, finance, production, sales, and logistics. However, information technology is so new that the guidelines of the IT cost/benefit equation are still up in the air.
Desktop computers only became widely affordable in the mid-nineties, so IT is still very much in its infancy. It is becoming more and more important to figure out exactly where IT fits into the actual line of business and how to maximize its value. To date, this has been fairly one dimensional as IT often falls under finance. Business owners often want to reduce costs instead of trying to figure out exactly how to use it as a tool of business.
Done right, IT can and should be a strategic driver of value and not just a line item to be optimized for cost. Understanding the various risks and costs drivers is important. Driving business value through IT comes from the ability to reduce the labor required to either reduce costs or enhance service offerings. It’s about finding the right tool for the job that fits within the budget and functional constraints. Regardless of which vertical you find yourself in, the drivers remain the same and it’s the actual impacts that may differ.
We’ll start with the ones that are easiest to illustrate- IT capital expenditures.
Hardware and software are considered capital costs because they are fixed, one-time expenses. These are easy costs to rationalize, but they can become complicated. The issue is that purchases should be driven by operational needs. The right tool for the job at hand is what you should be thinking of when you buy. We often see very high-cost employees struggling through their day with substandard equipment or even more troubling, entire subsystems built to decrease cost over functionality. The money you can save here is minimal. What you are saving in upfront costs, you may be losing in inefficiency and downtime. It’s important to have knowledgeable professionals making the decisions on what to buy. Sometimes even an internal IT staff will need the guidance of a consultant.
Here is a quick example:
A design professional in a construction or engineering firm needs a workstation. The employee is involved in creating construction documents and simulations. You have the option between buying a $3500 engineering workstation or an $1800 high-end desktop. The difference is $1700. Over a three-year period, the employee will spend approximately 6000 hours working on the machine. The employee, having an engineering degree costs about $80,000/year or $40/hour and generates under ideal circumstances revenue of $90/hour.
The actual cost differential is $1700. We have 783 workdays over three years so every day the more expensive machine should save you $2.17 at least. Your income potential is $1.5 per minute and your cost is approximately 75 cents a minute. The simple addition of a Solid state hard drive will save you at least six minutes. Combine this with an extra monitor and the costs of the $3500 machine starts becoming inconsequential. This is valid for servers, software, networking, etc. The only time finance should have an opinion is whether to finance or purchase outright.
The most expensive thing an organization can do is buy the wrong tool for the job. Understanding the drivers of cost and revenue and how that relates to IT spending will allow you to optimize the actual functionality and put your business in the best position to thrive.
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