Zero-based Budgeting with ITaaS

Scott Bils By Scott Bils Americas Digital Transformation Practice Lead, Dell Technologies Consulting Services May 13, 2015

Transforming to an IT-as-a-Service (ITaaS) model requires IT to operate like a true 3rd party service provider instead of a cost center. This means defining, selling, and supporting market-competitive services to business and IT stakeholders.

While the ITaaS model has broad implications for IT operations, the impact on IT finance is frequently underappreciated. One simple hypothetical question typically brings this fact to life for our clients:

Assuming you’ve fully transformed to an ITaaS model,
what should your IT budget be in five years?

Most clients talk about the cost efficiencies and productivity enhancements that an ITaaS model will bring to their current IT budget. Self-serve automation, streamlined and standardized processes. and elastic infrastructure models should together drive reductions of ten, twenty, or perhaps thirty percent from today’s IT budget.

While this may all be true, they are usually surprised by what the real answer is: Zero. Nada. Nothing.

In a true ITaaS model the traditional notion of an IT budget becomes a thing of the past, and should, in effect, be zero. To understand why this is the case, let’s explore how ITaaS changes the business model for IT.

In traditional enterprise IT, budgets are determined through an annual or semi-annual planning process. Estimates of likely new project demand and business-as-usual (BAU) growth are translated into capacity forecasts. These forecasts then drive required investments—in software, hardware, people and services—that are funded by the CFO. In some cases these costs are recovered via a chargeback model that may or may not be based on actual resource consumption. Regardless of the approach, the purse strings are centrally controlled by the CFO.

ITaaS turns this model on its head. Instead of funding coming from the CFO or the corporate center, just as with a service provider investments are directly funded by customers of the services. IT operating and capital expenses are now paid for instead by customer-generated “revenue,” or what internal users actually pay for the services they consume. Taking a cue from the sales world, IT only gets to “eat what it kills.”

This is more than just a matter of semantics. ITaaS introduces a new level of market discipline around funding and investment decisions. For example, the decision to redesign and replatform an existing application to enable an “as-a-service” delivery model needs to be viewed through the eye of the customer.

  • What will the new internal, per-user subscription fee be for the new Application-as-a-Service?
  • What does this mean in terms of the TCO for the LOB or business unit buyer?
  • How does this pricing compare to viable 3rd party SaaS alternatives?

A true ITaaS operating model forces IT organizations to think about how to compete for budget dollars, instead of taking the IT budget largely as a “given.”

An ITaaS funding model forces CIOs to ask hard questions about which services truly warrant investment and where the IT organization can provide differentiated value to its business customers. While the transition may be painful in the short term, it also empowers CIOs to best position their organizations for long-term success.

Scott Bils

About Scott Bils

Americas Digital Transformation Practice Lead, Dell Technologies Consulting Services

Scott is a Senior Director in the Dell Technologies Consulting Services organization. In his role leading the Americas Digital Transformation Practice he is responsible for services in the areas of Cloud Native Applications, DevOps / Infrastructure as Code, Big Data Analytics and IOT. Scott blogs and speaks frequently on the topics of application, cloud and digital transformation.

Prior to Dell Technologies Scott co-founded a leading boutique consultancy focused on helping large enterprises and service providers navigate the issues associated with cloud and ITaaS transformation. Scott was also the Founding CEO at Conformity, a venture-backed provider of the first enterprise-class management and governance platform for cloud applications. Prior to Conformity Scott held senior executive roles at Scalable Software and Troux Technologies, and also worked at McKinsey and Co. and Accenture.

Scott holds a Masters Degree in Business Administration from the University of Chicago and a Bachelor of Arts Degree in Finance from the University of Illinois at Urbana-Champaign.

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4 thoughts on “Zero-based Budgeting with ITaaS

  1. Zero? what do you think IT does?
    So who will fund security architecture? Future technology research?
    Service level monitoring?
    IT architecture?
    IT standards?
    forward schedule of change, coordinating changes ?

    I could go on….

    No matter how much you decentralise or outsource, you still need a central IT function just like finance, HR, or brand marketing. Someone has to look after the enterprise interests independent of all build or run.

    • In no way am I arguing that these activities will go away in an ITaaS model. A central IT organization will certainly continue to exist as well as the activities you describe – it’s the *funding* model that will look totally different in an ITaaS world.

    • He’s not saying all of that other stuff goes away. But the IT Organization acts like a true business, and performs those functions and tasks either off of ‘profit’ from selling its service to the business, or if the organization doesn’t want there to be ‘profit’, it bundles thoses costs into the cost of the services consumed. IT shouldn’t exist just to exist – all actions should be traceable back to requirements driven from your internal customers.

      This also allows the business to have cost transparency and can see which IT services IT just isn’t good at delivering cost effectively. For many organizations IT is a massive black hole that overhead dollars go into, and stuff happens, but they have no idea if the right stuff is happening cost effectively.

  2. “all actions should be traceable back to requirements driven from your internal customers.”
    that’s where I disagree. The functions that IT performs which can be traced back to requirements from internal customers are the functions which can be outsourced or charged back.
    however there are functions which IT performance on behalf of the governors of the organisation in order to provide governance enablement to supervise the compliance and risk of the information and those functions are precisely the functions which cannot and should not be outsourced and those functions are functions which can only be costed back to the business has a whole. I suppose you could charge those functions as a service provided to the governors of the organisation but more likely theu are a cost of the organisation.