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The Storage Economist

Considerations for Project-Based IT Funding

by David Merrill on Jan 25, 2013

There are probably a dozen ways IT departments get funding (primarily CAPEX) to handle new growth and daily operations. I am going to present a few of these traditional funding models, and some of the risks that these funding types may experience to non-traditional IT ownership models. I have been writing about some of these non-traditional methods for the past few months, and you can see them here:

Back to 1999 CAPEX Ratio
Challenging the Tradition of Depreciation for IT Ownership
Alternative Acquisition Methods
An 11-Step Program

The difference of these new modes is a pay-as-you go approach. Even if these methods reduce cost, it will cause a disruption (in the force) on how project-based funding works today. Let’s review the approach and the possible conflicts going forward. Again, there are dozens of funding models for IT, and this post will cover just 1 type of project-funding.

Some IT departments depend on new projects to bring company-approved funding to the table to acquire new storage, servers, apps etc. that the project needs. Characteristics include:
• Project brings CAPEX dollars to have IT purchase the needed hardware and some software
• This is a one-time infusion of cash; the project does not pay for on-going or recurring costs
• IT may be forced to provide 3, 4 or 5 years worth of assets for the project, even though it will take years for the project to grow into the capacity (therefore there is a lot of waste)
• Some IT departments use this cash to add capacity to the shared services pool of IT resource leadingnew projects to provide all the new cash for internal organic growth
• The project usually does not pay on-going costs that will exist over the life of the project, such as:
o Labor
o Backup services
o HW and SW maintenance
o Migration services at the end of asset life
o Monitoring, tuning, optimization
• Sometimes the project does not even pay for organic growth required during the life of the project
• In this mode, the IT department has to maintain a separate budget to cover the above costs. Sometimes new projects fund the on-going costs of older projects (sounds like a modified Ponzi scheme…)

Now if an IT department wants to consider a pay-as-you-grow or consumption-based model, there will need to be some pretty hard changes to project-funding methods
• A charge-back method will usually be needed as the service provider will charge on a per TB or per-volume basis
• Project funds that come into the front door will have to be placed into some type of escrow account to fund the OPEX model over several years
• Projects may have to change from a one-time CAPEX budget to an annual OPEX spending budget
• New incoming project funds may not be allowed to pay for older project OPEX costs (from the utility OPEX model) due to accounting and SOX-type legislation
• IT central budgets will have to undergo a transformation around run-rate costs and utility pricing that they provide for projects

Some of these accounting practices will require significant re-design, and in some cases may delay a move to utility or consumption-based IT resourcing. My next few blogs will review other funding methods and the impact to traditional accounting and funding practices.

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David Merrill - The Storage Economist

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