Assesing Financial Impact of Subscription-based IT Services

ROI - Return on Investment is by far the most used/abused/misused term in IT - as I mentioned in the last posting...

In this one, I am going to talk about the financial metric that may be used to measure the impact of using "subscription-based" or "consumption-based" services in an IT organization.  The advent of Cloud Computing and the resurgence of SaaS as the next generation software delivery and consumption models leads us to think of an IT Consumer with no CAPEX outlay.  In other words, today's CIOs do not need to  project CAPEX for their Data Centers and Call Centers.  They have been tasked to "Optimize" their organization - "doing more with less" or "...with what you already have".  This leads to the whole idea of "scale" i.e. spend when you need and don't spend when you don't need.  With a heavy CAPEX budget and a high fixed-cost proportion, it makes it harder to spend less when you don't scale.  Hence the popularity of Cloud and SaaS models.  Here we discuss about the best way to measure the financial impact of migrating to such models.

Return on Operating IT Assets (ROOA)

Not a widely used ratio, however, a great ratio to measure the impact of your OPEX dollar.  Here is how it works:

Formula

ROOA = Net Income (Net Savings)/ Operating Expenses to Run Business As Usual

We see that there is no CAPEX component in the formula i.e we are not talking about the "one time" return from an investment in Capital for the company.  We are talking about the Profit (Net Savings) that we can create using the Operating Budget used to run business as usual. One needs to pay a lot of attention to the IT assets that are included in the denominator.  They need to be directly used to generate revenue.  Any obscurity on that part leads to the elimination of the asset from the list of IT assets used directly to generate revenue for the company.

Rationale

ROOA shows the impact of the following on the business' Net Income or Profit:

• Efficiency attained by changing process
• Efficiency attained by reallocating existing Operating IT Resources (could be dollars spent in hardware, software, staff, power, real-estate and communication)
• Scalability of the existing IT Operating budget to address growth in business

Cloud and SaaS Business Impact

The financial impact of embracing Cloud-based or SaaS-based business clearly has the following characteristics:

1. No CAPEX
2. No Depreciation related issues arising from CAPEX
3. All growth (if addressed using Cloud/SaaS-based services) is a factor of "stretching" the OPEX dollar and not CAPEX
4. Much clearer view on the relationship between IT Operating Budget and Net Income rather than "point-of-need" and "growth" investments (CAPEX)

Have now answered the million-dollar question then...

"Is Cloud the best IT services delivery model to maximize/optimize Revenue?"