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The Storage Economist

Challenging the Tradition of Depreciation for IT Ownership

In my last few blogs, I discussed options to reduce costs, and how at certain points in time (right now for more and more clients), challenging and changing the IT ownership paradigm is one of the best ways to reduce both OPEX and CAPEX within the storage/IT department.

Let’s back up and talk about depreciation first. Depreciating IT assets was the preferred method to acquire IT assets in the past. IT assets used to be (and still are) very expensive, so from an annual report basis, capturing these long-term assets was best done with depreciation. When you spend millions on a solution, accountants want to sweat the asset and get every cent of value out of it (over time). With new innovations and advancements, keeping assets for 4, 5 and even 7 years does not always make the best business sense. Innovation with new technology is stifled. Flexibility to adopt new options to capture market share or revenue is limited. Depreciation makes sense from an accounting point of view, but not always from an IT agility point of view.

In the U.S., the government has sometimes initiated new depreciation options in the tax code to incentivize businesses to make large capital purchases. This worked rather well in 2003 with the Jobs Growth Act (JGTRRA) that also had a provision to shorten capital depreciation terms. This tax change was extended past 2010, and is set to expire at the end of this month. These expiring laws are at the heart of the ‘fiscal cliff’ that is mentioned so much in the news this week.

Anyway, depreciation with normal terms or accelerated terms is a process that is on its way out. There will be new methods to own and consume IT assets. This table is a short list and summary. I will spend more time in future postings talking about each one in more detail.

Managed Service Solutions (MSS)

Infrastructure on Demand (IoD)

Outsourcing

Public Cloud

Description

SLA-based, full managed service

Lease-based infrastructure

Vendor purchases & operates  IT infrastructure

Services or infrastructure are off-site, access via the internet

Also known as

Private Cloud

Out-tasked platform

Step-Lease

Off-shoring

Cloud Service

Asset ownership

Vendor

Client

Client or Vendor

Vendor

Asset Location

Local

Local

Both remote and local

Remote

Service level agreement (SLA) ownership

Vendor

Client

Vendor

Vendor

Flex up and down

Flex Up and down

Mostly flex up

Up only

Up and down

Expenditure Model

OPEX

CAPEX

OPEX

OPEX

Minimum commitment

500TB

No

Yes

Yes

Contract Duration

5 -7 years

3-5 years

5-10 years

Subscription

Migration and Transformation costs

Vendor

Client

Vendor

Client

Technology Refresh

Included

Not Included

Depends

Included

Management Staff

Vendor

Client

Vendor

Vendor

Staff location

Remote

Local

Both Remote and Local

Remote

Environmental costs

Client

Client

Vendor

Client

These 4 column summaries are not all-inclusive, there are many variations available right now. The bottom line is that the traditional purchase-depreciate-asset retire/disposition model is likely to be replaced in the future. These new options provide flexibility, but they can also have an impact to help reduce costs right now.

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David Merrill - The Storage Economist

David Merrill
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