IT budgets pointing to the cloud, expansion

IT shops are in search of variable infrastructure pricing, which will take them to the cloud

When debt collection agency Deca Financial Services LLC was formed last year, it had a choice of two IT paths: It could buy its own servers and software licenses and hire an administrator, at a total of cost of about $700,000, or it could turn to a cloud provider -- an option that would cost about $60,000 in the first year.

At first, James Hefty, director of operations at the Fishers, Ind.-based company, didn't believe the cloud was an option, since Deca had to ensure the security of its systems and data, comply with various financial regulations and be prepared for situations such as client audits.

But the hosted services provider, BlueLock LLC in nearby Indianapolis, said it could address all of Deca's security concerns, meet agreed-upon service levels and satisfy its disaster recovery needs. "We very quickly realized with a little bit of analysis that everyone benefits from it," Hefty said.

Deca has its own network, router, firewall and server in an environment featuring Hewlett-Packard Co. blades and VMware Inc. virtualization technology.

Brian Wolff, vice president of sales and co-founder of BlueLock, said Deca is getting cloud services even though it has some dedicated IT resources because the hosted offering can scale on demand and is virtual and fault-tolerant.

As a new company, Deca had the option of choosing between the cloud and on-site IT resources. Large established companies, on the other hand, are unlikely to make wholesale shifts to the cloud, but they are setting budgets that are geared toward spending money on hosted on-demand IT services rather than making capital investments in on-site IT systems, said analysts.

"We have never had the ability to run hardware on a software operating model," said Robert Whiteley, an analyst at Forrester Research Inc. But now that IT managers have the ability to buy hardware as an operational expense, they are budgeting for it, he said.

IT managers have typically devoted about 70% of their infrastructure budgets to ongoing operations and maintenance, with the balance for innovation.

But a Forrester survey of some 2,600 companies of all sizes found that IT managers intend to reduce IT operations and support spending to 50%. The innovation share of the budget will remain at 30%, but the balance will go to expansion of capacity to support business growth.

Whiteley said companies are, for example, making plans to buy cloud-based storage services that can scale to meet business expansion needs.

The Hackett Group Inc., an Atlanta-based advisory firm, has seen the need for a variable IT budgeting approach in its own surveys. Companies want the ability to maintain IT cost with revenue changes, which is making on-demand sourcing critical.

Honorio Padrón, an analyst at Hackett, said users want as much variability as possibility -- and they want pricing that's based on daily usage and consumption.

"We believe that the highly unsettled conditions that characterize the economic climate today will never fully abate," Padrón said in a Hackett report he co-authored. "Therefore scalable, pay-for-use systems are favored over inflexible, fixed-cost, capital-intensive technology."

As a start-up, Deca had an advantage over other financial services companies because it didn't have legacy systems to worry about. There are more than 4,000 third-party debt collection companies in the U.S., and most of them are small.

The Association of Credit and Collection Professionals says 80% of its member companies have 13 or fewer employees, but 80% of the people who work in the industry have jobs at larger companies. The industry employs more than 300,000 people.

But even the larger companies in that industry will likely begin to show more interest in cloud services, said Rodney Nelsestuen, an analyst at Tower Group Inc. He said he expects to see an uptick in interest in the cloud in the next 18 months, as large IT services providers begin to tailor their offerings for the financial industry.

"The internal IT shops are going to be under increasing pressure to reduce size," Nelsestuen said.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov, or subscribe to Patrick's RSS feed . His e-mail address is

Copyright © 2010 IDG Communications, Inc.

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