In 2020, organisations allocate a lot of money to their IT budget – up to 11.5% of total revenues at the top end of the scale. That’s a pretty serious overhead, especially if revenues start to drop. Which, unfortunately, is exactly what has been happening at one of our e-commerce clients.
The good news is the current situation has acted as a catalyst for our clients to optimise their IT budget by quickly prioritising infrastructure upgrades that will not only slash their overheads now but leave them in a much more cost-efficient position going forward.
This is how, together, we’re now well on the way to a 15% saving on their entire IT budget.
The company is fortunately in a strong financial position but, like any other business seeing its income stream take a major hit as a result of the Covid-19 pandemic, (the holding runs B2B as well as B2C e-commerce operations and the latter also haven’t escaped the slowdown) they quickly looked at where they might tighten their belts.
And, with their IT and technology budget much, much higher than the industry averages the Computer Economics table below shows (they are an online business after all) looking for efficiencies there was an obvious first step.
Our client is a far from uncommon example of a mid-sized e-commerce holding that has evolved nicely over the years through a combination of organic growth and acquisitions. It’s been a very successful business strategy for them but it has meant having to deal with a fractured IT infrastructure.
The company does have a cloud strategy that we’ve been helping them evolve and implement. But a significant chunk of the workloads executed across the holding’s IT infrastructure are still run on physical bare metal servers.
Security and other considerations mean there will always, or at least for the foreseeable future, be a place for physical servers as part of a hybrid cloud strategy. But we’d been discussing with management for some time our view that the organisation’s IT infrastructure set-up was a classic case of bloat and ‘capacity hoarding’. They were covering the cost of running physical servers that had always offered far more capacity than needed as a ‘moat’ to deal with moments of peak demand.
A few years ago, that was sensible. But in the meanwhile, more and more of our client’s IT infrastructure has been migrated to the cloud. As that has happened, physical server capacity has been retired to an extent. But not as quickly as the migration of workloads to the cloud has happened. As a result, the ‘capacity moat’ of the physical servers has increased.
We’ve also been discussing for quite a long time now how many of the workloads still being executed on bare metal servers could be handled more efficiently, both in terms of performance and cost, if migrated to the cloud. There was general agreement, the case presented was pretty air-tight, but feet dragging on actually getting started on doing it.
Take a look at the image we’ve put together based on data presented by IT services marketplace Spiceworks. It shows how IT budget is, on average, allocated differently depending on company size. The pie charts here show European companies.
You’ll notice that the smaller the company, the larger the percentage of IT budget that is spent on ‘hardware’. You’ll also notice that the largest companies spend a larger percentage of their budget on hosted and cloud-based services and managed services.
That’s because larger companies tend to be further ahead than smaller companies in their cloud strategies. Smaller companies still have more of their IT infrastructure on physical servers, so spend a larger portion of their IT budget on hardware.
The problem with that is these companies are usually not just keeping on physical servers the workloads that should be there for security or operational reasons. They are also often still running a lot of things there that could be migrated to the cloud, where they won’t have to pay to maintain an often really significant spare capacity moat for occasional moments of peak demand.
That has been the case with our client. And they were absolutely ready to move more to the cloud and fully intended to. Just not this month or quarter. Other priorities we really do need to focus on. Let’s look at it again next quarter and get it signed off on etc. etc.
What changed to suddenly upend priorities and suddenly propel the stalled cloud migration project to the front of the queue? Well, in good times the hoarded capacity moat was a significant expense that only occasionally justified itself during demand peaks. As the unexpected Covid-19 pandemic started to hit demand, that capacity moat suddenly looked as deep and wide as the Grand Canyon.
Demand on physical server capacity was way down and revenues moving in the same direction. But the cost of keeping those servers running? Exactly the same. Unsurprisingly, kicking on with the extension of the holding’s cloud strategy suddenly found itself at the front of priorities queue for management.
Or rather, cutting costs did, and the migration of appropriate workloads to the cloud and slashing physical server capacity, and running costs, became an obvious ‘quick win’. So, we got to work.
The positive side to an emergency situation and management coming under some pressure is that the work we’re executing now is something that should have, and eventually would have, been done anyway. The IT budget coming under pressure to find efficiencies simply concentrated minds to readjust priorities. Sometimes, in fact surprisingly often, less can turn out to be more. Tightening budgets, in this case an IT budget, can often highlight ‘organisational slack’ – inefficiencies resulting from bloating that can often sneak in when times are good.
The visual from Deloitte Insight’s report on Technology Budgets, part of the consultancy’s CIO series, supports the argument that IT budgets are not as efficient as they could be in many organisations. As a percentage of revenue, IT budget spend of ‘U.S. High Performance Companies’ is over 25% lower than it is across all companies globally. That could well mean that the CIOs of these companies make more efficient use of their IT budget.
As Deloitte concludes:
“Take a page from the high performers’ playbook. Larger budgets may not always be optimized budgets, as demonstrated by CIOs in HPCs, where IT budgets account for a lower percentage of overall revenue”.
“CIOs with smaller budgets may find that necessity is the mother of not only invention, but also innovation. By aiming for more efficient use of budget dollars, CIOs may be able to burnish their reputations as effective technology investors who can be trusted with larger budgets and more responsibility for funding”.
A recent KPMG report (which we may or may not have borrowed the term ‘Cloud Economics’ from for this blog post because it had a nice ring to it) found a typical IT organisations spends 30% of their budget on infrastructure – with the majority of that going on data centres and data networks.
The same report found that migrating all or even just some of that work to the cloud could save organisations “anywhere from 10%-20% of their annual IT budget”.
Together with our client’s management, we’ve calculated the cloud migration initiative we now have underway will come in pretty much bang in the middle of that range and save them somewhere around 15% of budget. That’s really quite significant. The company may not be enterprise size but that is still comfortably a six-figure annual saving. And it’s taken the squeeze to revenues currently being experienced to prioritise that saving.
Right now, the cost of ownership gap between traditional physical server-based IT infrastructure and cloud services is estimated at between 30% to 40%. That’s already pretty huge for many companies and organisations when calculated in hard cash terms. And that gap is expected to widen over the next few years. Which is why the market for high-quality and secure externally-hosted cloud capacity is growing at over 40% per year. Whatever your savings from cloud migration are today, and there’s a good chance they’ll be big enough to bring tears to your eyes when you consider they probably could have been made over a few years already, they’ll probably be even more next year. And the year after that.
Source: KPMG Analysis
In this particular case we are confident of realising IT budget savings of around 15% by moving more of our client’s operations onto the cloud to reduce their physical server overhead.
But in other cases, we’ve seen that it’s been possible to optimise on-cloud costs for other clients by up to 30% by redesigning architecture, right-sizing and then further optimising by monitoring and adjusting the set-up.
There’s almost always something to do to improve server cost efficiencies. And whenever you might be reading this, now is always a good time to prioritise cutting the fat from an IT budget. Think of what else you could do with that money?
If you would like to discuss your server infrastructure costs with us, we’d be happy to see if the experienced eyes in the K&C offices can spot any obvious room for improvement. And maybe even some less obvious optimisations that will give you some extra money to play with in your IT budget. Just drop us a line!