How intelligent finance can be a business’s flexible friend

Many businesses are currently looking to refresh or transform their desktop environment by adopting utility computing and virtualisation. With support for XP ending in April 2014 there is pressure to migrate to Windows 7, whether to comply with regulatory compliance, or to benefit from favourable licence agreements, for example.

Embracing desktop transformation and moving to a utility computing model can reduce the level of migratory risk, whilst driving down the cost of adoption and the on-going expense of managed ‘break/fix’ contracts for aging physical assets. It can also reduce the drain on internal resources from powering, patching and maintaining expensive physical desktop assets.

In addition, using finance intelligently as part of the transformation process can enable organisations to switch budget between operational and capital expenditure (OpEx and CapEx) and deliver tax and other business benefits for a known price per user per month.

The concept of utility computing – whereby computing service including applications is sold on a price per user per month basis, and delivered via the cloud (public, private or hybrid) – has been around for some time.

Yet the enhanced availability of virtualisation technologies has ensured much better quality of service, with organisations now able to virtualise across the majority of the IT estate – i.e. the desktop (DaaS); the applications (SaaS); computing platform and/or solution stack (PaaS); and back-up, disaster recovery, and storage (IaaS).

Effectively, these service-led IT delivery models enable forward-looking IT departments to reposition themselves as ‘information services’, providing applications on demand via ‘service catalogues’. This mode of delivery is very much akin to a corporate version of iTunes.

Yet unlike iTunes, it is not so easy for a business to simply ‘pick and mix’ from the various sub-categories available on the open market (the public cloud), and those that do could face the prospect of losing control over their technology choice, becoming heavily dependent on their service provider.

Build or buy?

When it comes to investing in virtualisation technologies, adopting utility computing or indeed, any investment decision, businesses today have two choices: they can either build or buy. If they are happy with buying it in, they opt for public cloud. If they want to build, they opt for private cloud.

In reality however, they often take a hybrid approach. For example, firms have been buying-in externally hosted secure mail services for a number of years, but build and host major line-of-business applications internally. Under this ‘pick and mix’ hybrid cloud, whereby some budget is allocated for buy, and some for build, IT investment and business strategy are aligned.

In the current economic environment where margins are tighter than ever, businesses are increasingly looking to closely monitor and optimise their IT expenditure, taking it out of the hands of the IT department and elevating it to executive level. Utility computing thus becomes a business enabler rather than a pure IT tool, with the Finance Director balancing the procurement option against accounting rules and procurement regulations in order to optimise the commercial benefits that a business needs to achieve.

A growing number of enlightened organisations are therefore looking to use finance intelligently to realise a number of opportunities. From an IT procurement perspective, intelligent finance encompasses two options:

  • Finance lease – where a business wants to eventually own the IT assets but needs help to purchase them (a capital lease in accounting terms), effectively paying per user per month, and then owning the IT assets at the end of the finance period when title passes to the lessor
  • Operating lease – whereby the business pays a periodic amount for a fixed term of typically 3-5 years, but the IT assets are off balance sheet, and are not owned at the end of the finance period

The decision between these two options is purely commercial, and comes down to the impact on the business and the finance department, and also whether asset ownership (on or off balance sheet) is a strategic goal. Businesses buy IT solutions for four primary reasons: to reduce costs, reduce risk, to improve business efficiencies, or as an enabler for a corporate strategy – i.e. divestment or acquisition.

If the assets are to be owned, then a finance lease is preferred as it has associated tax and VAT advantages.

A further benefit of leasing is that it can enable firms to preserve their existing credit lines and borrow within their main corporate financial structure. Most importantly however, an intelligent approach to finance removes the traditional barriers of budget allocation between OpEx and CapEx, freeing up IT investment at a time when budgets are being cut and the options appear limited.

In the current economic climate, where the UK bank rate has been at 0.5 per cent since March 2009 and many economists do not envisage a significant rise until 2012, the opportunity to benefit now and pay later, and at a low cost of borrowing is enabling businesses to align business strategy with procurement (price per month).

Enhanced and flexible delivery with control

The dilemma faced by firms looking to refresh or transform their desktop environment and benefit from the price per user per month model, is how best to virtualise IT assets but at the same time maintain control of their line-of-business applications, and protect legacy investments and skill sets. Getting it wrong can leave a business stuck with a solution not fit-for-purpose, and facing significant cost in terms of buying infrastructure (if not the skills) back in-house.

Transforming IT service delivery by combining utility computing with intelligent finance allows organisations to benefit from a fixed price per user per month, within a private, public or hybrid cloud. The private or hybrid options allows them to retain a degree of decision making and choice of technology direction for the services that they choose to provide, whilst delivering greater flexibility in terms of being able to juggle CapEx and OpEx.

If CapEx is necessary but the budget is not available, a business can switch its expenditure to OpEx by adopting the utility computing model on an operating lease. The net cash outflow from the business either drops or remains unaltered, but the business benefits offered by the new technology ‘acquired’ are significant. For example, by switching to a utility computing model based on thin-client technology, a UK organisation previously using a well-known provider of managed desktop services was able to deliver two desktops for the same price as one – and with a hugely enhanced technical solution.

Similarly, if the business is under pressure to reduce OpEx, then a new capital investment with a transformed desktop delivery service can switch net cash outflow from OpEx to CapEx. Intelligent finance is the mechanism that allows the business to switch between budgets as required. Users benefit from a better than current IT experience, while the business benefits from new CapEx payments that are less than the previous OpEx outflow.

And although initial IT procurement costs (CapEx) can be fairly similar, the OpEx can be massively reduced. Over a three-year period, a desktop environment for 1,000 users delivered via a combination of utility computing and virtualisation has been shown to deliver payback within eight months. What’s more, IT investments become scalable and future proof, because a business can expand or upgrade their computing service with relatively small incremental adjustments to their monthly payments.

A sanity check: buy now pay later

The main advantage of taking an intelligent finance approach to utility computing is that firms used to the ‘pay now and benefit later’ mantra can effectively switch it on its head, using intelligent finance to enhance IT service delivery at the same time as improving their cash flow management.

The key however, is in aligning the objectives of not just the IT department, but the commercial and finance teams, and to fully understand the implications of asset ownership in relation to those that are leased, since the tax and VAT advantages differ according to whether an organisation operates in the public or private sector.

There are also a number of additional factors to address:

  • Make sure your IT objectives are clear and understood, and aligned with corporate strategy. Is the transformation designed to reduce costs and increase agility, outsource non-core activities, or as a strategic enabler for investment/divestment? In addition, the scope of your project must encompass both your current and future client (i.e. desktop) strategy.
  • Also consider the full scope of the investment. It is not possible to outsource only part of your applications and data, and going back is costly once you are committed.
  • Make sure you are clear on your route – will it be a fully public, private or hybrid provision?
  • Identify the complete budget requirement – i.e. the hardware, the software, the storage, the services – and be sure that there is a strong business case for doing it.
  • Last but not least, always consider flexible intelligent finance to overcome traditional budget constraints and realise increased flexibility.

With interest rates currently low, there is a significant opportunity for firms to exploit intelligent finance as a strategic tool and improve cash flow management. Just as IT service delivery has become more critical to the effective operation of almost every organisation, so an understanding of how best to match finance options to requirements and budgets is fast becoming an essential and invaluable skill.

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Rob Greenslade is the Sales and Marketing Director of Centralis. Rob is an experienced, dynamic sales and marketing director from the IT Industry with a 20 year track record of over-performance. Since joining Centralis in 2006, the Company has trebled turnover and rightly enjoys its place at the forefront of the desktop and application virtualisation sales marketplace. Prior to joining Centralis, Rob ran his own sales and marketing consultancy specialising in business growth plans and executive coaching services. He holds a Double Honours Degree in Engineering Production and Business Economics.