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Why and How to Overcome the CAPEX to OPEX Barrier

Benoit-cropBy Richard Benoit

Anyone who has ever struggled with the “moving from CAPEX to OPEX” question knows that it is one of the most difficult barriers to overcome within IT.  Although it is a challenge, it can be achieved if you can answer the following 3 questions:

  • What is the barrier?
  • Why do we want to overcome the barrier?
  • How do we overcome the barrier?

In the rest of this post we will try to answer each one of these quandaries.

What is the barrier?

Resistance to moving away from CAPEX essentially falls into 2 categories: Business Resistance and Finance Rules.

Business resistance to loss of control

As we’ve seen with the move to virtualization, one of the biggest obstacles to adoption is resistance from the business because of their sense that they are losing control.  In the days of old, the business was used to having a ring-fenced domain where its developers, production support, and users had complete control over its every detail.  IT was there to just make sure that the network and server were up and running.  The idea of sharing was a completely foreign concept.  They had a CAPEX budget and they wanted complete control over how it was used.  Going to a completely shared environment is just one of the last steps of a process that started many years ago, but is still no less difficult.

Business resistance to show back or charge back

Invariably when we discuss OPEX, the topic of show back and charge back come up.  In an effort to use resources more efficiently, many organizations attempt to instrument first show back (or shame back as its known in some circles) and then charge back.  Like above, the business is not used to having to justify the use of resources it paid for and is, not surprisingly, resistant to the idea of starting.

Finance Rules

Although various elements of the business will resist going to an OPEX model, the biggest challenge to moving to an OPEX model is an organizations finance rules.  Given that this level of effort is not trivial and will certainly involve C-Level people and probably the board, it’s no wonder that organizations are hesitant to address this conundrum.

Why do we want to overcome the barrier?

Change behavior

CAPEX to OPEXProbably one of the biggest reasons to adopt an OPEX model is to change how the Business consumes IT.  In an environment without chargeback or an OPEX model, the business is used to “squatting” on as many resources as possible due to the fact that getting new ones often has to wait until the next fiscal year. Under the traditional way of delivering IT, the business wants as much as they can get all of the time.

An example of this was at a large East Coast bank where before any form of OPEX or chargeback, every business unit had every environment backed up every night.  This included even test and development systems.  Trying to get business units to consume less backup resources was largely unsuccessful.  However, once an OPEX chargeback cost was introduced, this behavior changed almost over night.  Very quickly when business units saw how much it cost them for just backups, they slashed their use of backups to mostly just production databases.  All other things such as development and production environments were expected to be backed up through other means by the developers and production support teams.

Traditionally, IT has tried to restrain the use of resources of the business units, which has been largely unsuccessful.  By charging businesses for what they use, the business now controls its own usage to maximize their OPEX value.

Granularity and choice

As part of changing behavior, giving the business the ability to choose what they consume with their OPEX payments, allows them to save money on things they really don’t need.  It also allows IT to offer multiple types and levels of service depending on what the business needs.  Common examples of this are the silver, gold and platinum levels of service for virtualized workloads, but can also include things such as backups and storage tiers.

Another example of this was at the same large East Coast bank where before choice was in place, performance of production VMs had to be guaranteed at all times no matter what.  This led to IT providing their platinum service that had no over commitment and was as a result fairly expensive.   However, IT also offered a gold service that had some degree of performance guarantee, but was much cheaper.  As a result, over time many business units elected to go with the gold level of service by improving the resiliency of their applications and planning for scale out when needed.  This saved them quite a bit of money that then they could use on other projects.

Enable innovation

If you combine the granularity and choice available with an OPEX model with automated provisioning, the business can innovate like they haven’t been able to in the past.  Between technical restrictions that require new resources to be manually provisioned over the course of several weeks and financial rules that don’t allow much flexibility to change allocations quickly, many projects don’t take flight because they take too long and are too much trouble.

However, when a project can be launched in a matter of hours because automation allows a new environment to be spun up quickly and the OPEX model allows discretion on how funds are applied, many new opportunities are open to the business that weren’t worth it in the past.

Be more efficient

Traditional IT is essentially a form of rationing in how resources are allocated.  Users are encouraged to hold on to resources they don’t need because they know they may not be able to get them when they need them.  This of course assumes that they can give them back, which in many CAPEX models, they can’t.

By going to a shared resource OPEX model, business units can consume what they need and give back what they don’t.

Avoid shadow IT

One of the biggest drivers for IT moving to an OPEX model with the above advantages is that, like it or not, IT is competing with the open market.  Many Business units today are just pulling out a credit card and buying resources directly from hosting and cloud providers because IT isn’t responsive or competitive.  As offerings on the Internet continue to improve, shadow IT is likely to increase as a result.

How do we overcome the barrier?

IT as a Business

To be relevant, IT needs to start operating as a business.  Traditionally IT has provided resources to business units by essentially “throwing it over the wall”.  Unless it breaks there is very little effort spent of the resources.  Successful IT departments now define services that they offer to their customers with defined service definitions that describe not only the technology provide, but any SLAs provided along with other non-function requirements that have been included.  As part of that, IT can highlight the value added that they provide above what hosting or cloud providers offer.  IT has to also start doing customer relationship management to make sure that the right services are being offered, at the right time, and at the right price.

CAPEX and OPEX can co-exist

Many finance departments resist going to an OPEX model because it is presented as either CAPEX or OPEX.  In reality this doesn’t have to be.  In order for IT to realize the benefits outlined in this article, OPEX only has to exist in the relationship between IT and the business.  CAPEX can still exist in the bowels of IT somewhere; it would just need to be converted to OPEX according to rules set up by finance.

A good example of this is how some private clouds operate today.  They assume the CAPEX budget of the business unit in return for OPEX credits that the business can use over a predetermined time period.

Conclusion

By answering the questions above regarding moving to an OPEX model, IT departments can become enablers to the business instead of a hindrance.

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Richard Benoit is an Operations Architect with the Operations Transformation Services practice and is based in Michigan.

Top 5 Tips for Marketing Your Cloud Services

By Alberto Martinez

Alberto Martinez-cropA couple of years ago when I was working in Australia, one of my customers was starting to deliver cloud services to its external customers—mainly infrastructure as a service (IaaS). It was not a very mature market at that time though they knew what they had to do to promote those services: enable a marketing capability with a strong customer focus. As the IT organization was evolving its cloud service offering from a technology point of view, that marketing function was driving the change and ensuring customers recognized the value of their cloud.

One key takeaway from the recent Computerworld Forecast Study 2015 is that companies like yours are now investing (or are planning to invest) large portions of their IT budgets to enable a cloud service offering. In my previous blog entry, I briefly mentioned the key steps to define a process for marketing your cloud services within your organization in order to maximize ROI.

cover top tipsNow let´s take those steps to the next level of detail by considering the lessons learned and the critical success factors from those early adopters of cloud. Take a look at this brief: Top 5 Tips for Marketing Your Cloud Services. I think you’ll find some very useful tips for building a marketing capability for your cloud service offering.

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Alberto Martinez is an operations architect with the VMware Operations Transformation global practice and is based in Spain.

4 Steps to Better Market Your Cloud Services

By Alberto Martinez

Alberto Martinez-cropSuccessful cloud providers invest in marketing their services: promoting them, showing the value to customers, implementing strong pricing campaigns—and they understand how to rapidly adapt to changing market demands. But what prevents your internal IT organization from defining an effective marketing strategy to be more competitive and foster your cloud investments? And more importantly, how should you approach this effort to ensure success?

When moving to a cloud environment, most of the IT organizations that I work with focus on defining processes such as provisioning, support, or capacity, but forget about how to market the services they will be delivering and communicate their value to their customers. The same IT organizations end up with a private cloud infrastructure without clear target customers or, even worse, their cloud services are not used by the lines of business, resulting in a poor return on investment (ROI).

To realize the full ROI that enterprises are looking for from their cloud investments, the IT organization needs to drive the uptake of those services and persuade the lines of business away from using external service providers (shadow IT) or alternative legacy internal service provision options.

In order to mitigate those situations and increase their integration with the business, I advise my clients to define a consistent approach—as outlined below—to market their (internal or external) cloud services.

Defining Your Cloud Services Marketing Strategy
The approach to defining a cloud service marketing strategy must be innovative and not follow the traditional approaches. You need to apply a special focus on your customers in order to build a stronger relationship between your IT organization and the lines of business. That innovative approach has to contain similar characteristics as those of your cloud environment —simple and agile while powerful and impactful.

Below are four steps your IT organization can follow when defining a cloud services marketing strategy:

4 steps

  1. Define a service marketing strategy. As an essential initial activity, the key elements of the marketing strategy have to be defined with your CIO and leverage the expertise of your CMO and his/her marketing organization (experience, models, tools, and so forth). Those elements include market research, branding, pricing, differentiation, and competition.
  2. Create a communications plan. As my colleague Alex Salicrup wrote recently in this blog, communication is the key pillar to a successful IT provider. Define an effective communications plan for your cloud that will communicate its unique value to your customers and why they have to believe that differentiation is real (“reason to believe”). Your plan must define at a minimum what information will be communicated, how it will be communicated, as well as when it will be distributed and to which audience. Always keep in mind to exclude any technical information from the marketing materials.
  3. Develop marketing campaigns. One mechanism to create new favorable consumer perceptions of your cloud services is the marketing campaign. When developing tailored campaigns, you must identify what you are expecting from the campaign, what your customers can expect, what the impact will be on the audience, and how you will measure success. Measuring the success of your marketing campaigns is key to knowing the impact they had on your targeted audience.
  4. Measure. Benchmark your cloud environment against your competition, and set achievable actions to improve the value to business (always provide the best to your customers!).

Bridging the Gap Between the Cloud and Marketing Organizations

Establishing an IT services marketing capability is not just about defining the above steps—it’s also about your people in your organization and how they will execute upon those activities. To be successful, you need a strong integration between your IT organization and the marketing organization at two levels:

  1. Executive level: While defining the marketing strategy for your cloud environment, both your CIO and CMO have to work in tandem to ensure consistency with the business strategy. This will lead to the cloud services vision or value proposition, its unique value including differentiating factors, and the four steps previously described.
  2. Departmental lead/individual contributor level: Once you have defined your strategy, your IT organization—through cloud tenant operations—will have to work together with at a minimum two teams: 1) the marketing communications team to execute your cloud services communications plan, and 2) with the field marketing team to develop the marketing campaigns and success measurements.

Bridging the gap between the IT and marketing organizations will encourage an open environment of collaboration. I recommend to assign champions to integrate both areas, whose responsibility will be to support the promotion of the cloud services whilst leveraging the IT organization´s functions and expertise.

In summary, an effective cloud services marketing strategy promotes the value of your services and drives the adoption of those services within the lines of business. Start your effort early and with a consistent approach, so you can compete effectively against other cloud providers and achieve the ROI the business is looking for from its cloud investments.

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Alberto Martinez is an operations architect with the VMware Operations Transformation global practice and is based in Spain.

Incorporating DevOps, Agile, and Cloud Capabilities into Service Design

By Reg Lo

ReginaldLo-cropShadow IT is becoming more prevalent because the business demands faster time-to-market and the latest innovations—and business stakeholders believe their internal IT department is behind the times or hard to deal with (or both!). The new IT requires new ways of designing and quickly deploying services that will meet and exceed customer requirements.

Check out my recent webcast to learn how to design IT services that:
• Take advantage of a DevOps approach
• Embody an Agile methodology to improve time-to-market
• Leverage cloud capabilities, such as elastic capacity and resiliency
• Remove the desire of the business to use shadow IT

BrightTalk webinar

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Reg Lo is the Director of the Service Management practice for VMware Accelerate Advisory Services and is based in California.

 

 

It’s Time for IT to Come Out of the Shadows

Chances are shadow IT is happening right now at your company. No longer content waiting for their companies’ IT help, today’s employees are taking action into their own hands by finding and using their own technology to solve work challenges as they arise—a trend that likely isn’t fading into the shadows anytime soon.

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