COMMENT
It's not just the technology that's important - how you account for its cost can also have a huge impact on your organisation at large, says the Naked CIO.
I am very troubled by a new trend that is impacting IT departments across the country and around the world. It has nothing to do with critiquing the pros and cons of a particular technology but rather strangely enough with the financial accounting of how we pay for technology.
For decades IT has been a very capital-intensive area of the business. Projects and equipment have been funded out of the capital expenditure portion of the budget. The downside of this was the difficulty in accurately predicting cost expenditures in line with future initiatives. The upside however was that the majority of costs did not show up on the P&L other than as true operational costs.
With the advent and popularity of cloud computing, software as a service such as Salesforce.com applications, managed datacentres and other services with ongoing costs, the impact to the expense side of IT is increasing - yet arguably the output and performance is the same.
While it may appear to be a case of simply putting things in different buckets, the problem is that now the IT department is under increasing scrutiny when it comes to controllable expenses.
Even if you believe in the power of the technology that these options provide, it is important you also look at how they will impact the IT department and the overall earnings of the company.
Most bonuses and incentives are based on operational performance and if IT is adding operational expense on projects, applications and hardware which traditionally have never been operational, inevitably there will be fallout - and you can bet this will fall in the CIO's direction.
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Smart CIOs will also look at how these payment models affect operational performance in your organisation and properly prepare the business for the true costs.
An organisation I was once with decided to go with Salesforce as a CRM against other options like purchased applications or in-house development. Before they knew it they were spending more than £500,000 per year on user fees annually associated with the application. Compared to the other options, this turned out to be a very expensive alternative that directly impacted operational performance.
Indirectly this financial model will start having a real impact on how and what projects and initiatives can be accomplished.
My advice: before you sign your next services or user fee agreement, consider the very real business impact that the way you pay for your technology has.
Comments
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1. anonymous
Companies also have the option to look to the concept of a PrePaid Asset if they want to capitalize the cost of SAAS. Under GAAP, the cost of upfront payments for SAAS could be in fact capitalized, under the theory that these are “prepayments for future service”. Prepayments should be capitalized and charged to operations as the benefits are realized. Prepayments that relate to specific time periods (e.g., service contracts) should be recognized as an expense over the period of service. In comparison to the capitalized cost of a fixed asset,
2. Nick Skelsey
What a truly pointless article.
Just starting to get interested in the comparisons between cloud and in-house and it finished.
My 3 year old could have completed this article.