Want To Restrain IT Spending? Move More To Opex, Gartner Analyst Tells Midmarket Tech Execs

Business spending on information technology may comprise only four percent of the average corporate budget, but there's an opportunity to save more by shifting some of that cost from capital expenditures to the operational costs, midmarket IT executives were told Tuesday.

That requires such strategies as renegotiating contracts; standardizing and simplifying platforms, providers, applications and services; and automating processes, Gartner analyst Jim McGittigan said in Tuesday's keynote at Midsize Enterprise Summit East in Nashville, Tenn. The event is hosted by CRN and ITBestOfBreed parent, The Channel Company.

From a financial management perspective, "most of us" are still struggling to manage IT spend, McGittigan told the audience, which included more than 200 midmarket IT leaders.

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"What is it that we control in IT, and can do something about, versus what we don't?" McGittigan asked.

To put that in perspective, reining in IT costs is not that difficult and doesn't yield much savings compared with the 96 percent of corporate spend that's dedicated to business optimization and joint work between IT and the business units, McGittigan said, citing Gartner research.

The IT spend "has lower savings potential over time, but it's easier to do," he added.

He urged the midmarket executives to look at the cost of something that can be a candidate for a capex-to-opex shift, its value to the business and the potential risk of a shift into the operating budget.

"There's an opportunity here to do more than what we're doing today," McGittigan said.

Where among the many cloud offerings should a midmarket IT executive look? Start with Software-as-a-Service (SaaS), which is seeing a 17.9 percent combined annual growth rate over five years, about six times that of non-cloud software, according to a Gartner forecast from 2016 that was part of McGittigan's presentation.

To begin the shift from capex-to-opex, CIOs and other IT leaders need to understand their businesses' enterprise-wide financial strategy, then communicate the move from being an internal "software house" to help explain the capex-to-opex shift.

One challenge, however, is that many enterprises prefer sticking with a capex model, McGittigan warned.

That resonated with Daniel Erlenbusch, director of IT at Penrad Imaging, a medical imaging services provider based in Colorado Springs, Colo. There, the company prefers a mostly capex strategy, he told CRN. But whether to stick with that or shift to opex is a question Erlenbusch said he has been asking of his financial people for two years.

While Penrad is "looking a lot" at cloud-based options that would shift some costs to opex, what he has seen in cloud offerings "hasn't passed the test" so far, he noted. But Erlenbusch is exploring cloud options for disaster recovery and backup; he said Penrad has a lot of files that can't be compressed or de-duplicated.

What can companies target in a potential shift to opex? The biggest potential gains lie in the IT project portfolio, which Gartner says is mostly funded through the capital budget. Today, 73 percent of all IT spend comes out of opex; in 2018, Gartner believes that will rise to 86 percent.

McGittigan offered these recommendations to his audience:

In the annual budgeting process, midmarket CIOs should "shift the focus" to opex, McGittigan said, adding that most CEOs and CFOs don't understand IT operating expenses and believe that 20 percent of the IT operating budget is wasted money.

And as for IT spending in the business units, which McGittigan believes has "light" oversight, "find it and make sure it's governed appropriately."

While cloud is part of the solution for a capex-to-opex shift, "this isn't about moving to the cloud," he said. "It's about making the right decision."