A few forward-looking CIOs of major enterprises are pushing a new vision of IT, based on paying for hardware and software as they are consumed in an OPEX rather than a CAPEX model, and exposing IT to internal users as services rather than monolithic systems. Essentially these IT le aders, like Royal Philips VP of Technology Infrastructure Alan Nance, (see video below) are adapting a cloud business model to internal IT operations, writes Wikibon Chief Analyst David Vellante.

A year ago on theCUBE (see video below), Nance said the core revelation that triggered this new approach to IT at Royal Philips was the CEO’s realization that “85 percent of our IT spend is non-differentiating for the business.” This, writes Vellante, is a critical point for several reasons:

• CEO-level awareness of the importance of digital technology is critical to the transformation of the business;
• The high percentage of non-differentiating systems adds urgency;
• These factors combine to create a top-down imperative to drive change;
• They dramatize the need for IT to adopt a new financial and operational model.

Under this approach, Royal Philips will pay its infrastructure suppliers for what it consumes, just as it does with cloud services, rather than making large upfront purchases of hardware and software. This, Vellante writes, creates challenges for some traditional infrastructure players. “No hardware vendor has ever been successful with this model,” he writes. And Philips is not alone in adapting this new approach to on-premise IT.

Few cloud or infrastructure vendors have found a way either to slow down Amazon Web Services (AWS) or create competitive offerings. That means it’s becoming increasingly difficult for vendors and their allies in corporate IT to sell CFOs and CEOs on a story that AWS is a risky bet, particularly since AWS is now disclosing its revenues and margins publicly. Both vendors and CIOs must find ways to improve agility and deliver end-user friendly environments to survive.

Few users have the market clout to push their vendors to a new OPEX model. But vendors that fail to respond to this trend will inevitably lose market share to the public cloud service providers and competitors that do adopt this as a new sales model. AWS has changed the economics of IT. “Consuming human capital to manage IT infrastructure,” concludes Vellante, “should be considered only in cases where it drives direct profit or clearly protects an organization’s assets.”

Photo via Steven Kreuzer