Buying IT has changed. It is now as much a business decision as a technology decision and that makes the financial analysis of the costs and benefits and the return on investment very important. The implication for those selling IT is that a technically oriented sales pitch is no longer enough!
With a range of projects competing for limited funds, the business case is the new basis for decision-making. Those projects that cannot demonstrate a sufficient return on investment are at risk of being stalled, or scrapped. To win the sale the seller must help the buyer to justify the business decision and build the business case.
In the past managers of IT departments had a significant level of autonomy over spending decisions, including the selection of a preferred vendor and solution. However, those decisions are now increasingly governed by procurement procedures and cross-functional buying committees. The salesperson must now sell to a wider business audience and a diversity of stakeholders.
The increased involvement of finance and procurement in so many IT spending decisions adds greatly to the complexity of the sale. One thing is clear from the research published here – Financial executives have a very different take on IT decisions to their IT colleagues.
IT Managers must be able to justify the decision if it is to be sanctioned and budget secured. What is requires is an economic justification. But putting numbers on IT is not easy. Some of the challenges include:
- Building a business case for hardware or software
- Calculating the return on investment
- Establishing the total cost of ownership
- Monetizing the benefits
It is now the seller’s job to help the buyer to overcome these challenges. Our new book called ‘Selling In The Cloud‘ provides sellers with the the tools and frameworks to meet this challenge.
Today’s IT decisions often involve a choice between a traditional, or a cloud-based solutions. But it not a straight-forward one. This is evidenced by some of the surprises revealed by our research, where executives:
- Don’t necessarily expect IT in the cloud to be cheaper
- See the certainty around the cost of cloud computing costs as being worth paying extra for
- Are sceptical about reductions in IT overheads (e.g. salaries) as a result of hosted solutions
- See a reduction in project risk as a key advantage over the traditional approach
- Expect that cloud computing will make IT’s role more strategic in the longer term
- Fear a ‘free for all’ where individual departments, managers and end users by-pass IT to avail of new apps, or other cloud based services
As far as the ‘typical Joe’ from the Finance is concerned the business case for, or against cloud computing follows many of the same principles as any other business case. And why wouldn’t it? After all it is to use the words of one of the executives ‘a business decision first and an IT decision second’. In this respect, helping the customer to make the business decision is key to winning the sale.
The essentials of building the business either for or against the cloud are as follows:
These are the topics in an effective dialogue between the vendor and the customer. They are also the key headings of the sales presentation, or proposal. We call it the business case for IT.
The Economics of the decision
The most important part of the IT investment decision remains the economics of the decision, or the benefits and costs. However, the most difficult part of the IT investment decision tends to be the quantification of benefits. This applies to cloud as well traditional IT decisions.
From our research we see it time and time again, buyers are struggling with the numbers. That is an opportunity as well as a challenge for vendors. In particular buyers can struggle to quantify the benefits, establish the true total cost of ownership and to calculate the Return On Investment. To overcome this challenge vendors must help their customers to quantify benefits, using customer case studies and third party validation where possible.
Certainty around costs is a key selling point of cloud computing. Indeed, it appears that this is something that some managers are prepared to pay a premium for. In other words cloud-computing does not need to be cheaper for it to make sense. There is a key lesson in here for all IT departments and vendors in respect of the accuracy and visibility of the total cost of ownership, or lifecycle costs of IT.
Cloud computing with its typically lower upfront investment, ability to more easily associate benefits and costs and ease of trial can have an advantage in demonstrating the payback from IT.
Risk is a key factor in the decision
The business case is not just about the cost – benefit equation. That is only a part of the mix. The issues of risk, compliance and most of all strategy or what the organization is trying to achieve matter every bit as much as the relative cost.
The view appears to be that there are pros and cons in respect of both technical risk and project risk in respect of the decision for IT in the cloud. On the one hand cloud computing may offer advantages in terms of scalability, reliability and usability/adoption. On the other hand it may limit customization and result in diseconomies of scale when volumes reach a certain point.
IT departments with a poor track record of delivery, cost management, stakeholder collaboration and end-user support are most at risk of migration to the cloud. Therefore being sensitive to the history of IT in the customer’s organization is very important. Managing project risk and concerns about delivering on time and within budget is key for the vendor of either form of IT solution.
The political dimension cannot be overlooked – this has a major bearing on what happens to IT budgets and head-count. Clearly this is not just an economic decision within many organizations. For vendors showing that moving to the cloud will cut the numbers in the IT department is a double-edged sword.
Many would seem to hold the view that ‘you cannot say that cloud is better than traditional – quite simply it all depends’. Whether the issue is costs, risk, or anything else – it needs to be addressed on a case by case basis. As one finance executive put it:
‘I don’t think there is a business case for cloud computing per say. That is relatively meaningless. It is very much on a case by case basis.’ The lesson for vendors is that the business case is application, situation and company specific.
Perhaps not surprisingly for a group of accountants and financial controllers there was a clear emphasis on ‘doing the analysis’, ‘running the numbers’ and ‘building the business case’. This was accompanied by a cynicism regarding sweeping claims either in favour of, or against cloud computing.
The lesson for vendors would appear to be avoid sweeping claims and instead to inform and shape the debate within the customer’s organization. That danger is that sweeping claims kills the dialogue between buyer and seller. The objective is to help the buyer to arrive at the best decision for his business given the unique requirements of the project.
Helping the customer to build the business case is key. However, be warned you can’t simply provide the customer a compelling business case. The customer has to be involved – he, or she must own the numbers and the analysis.
It could be argued that the discussion summarized in this document presents as many questions as it does answers. This is reflective of the fact that the cloud is in its infancy. It may also be explained by the fact that the cloud is all encompassing – from platform as a service to software as a service and from the public cloud to the private cloud and everything in between.
Perhaps there is a lesson in this for vendors. The challenge is to help customers and prospects to develop their strategy – to address the issues and explore their options, rather than presenting them with the answer. The debate about computing in the cloud is only beginning.
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