IT Buyers Seek Flexible Pricing

Capital spending by businesses took a beating during the recent recession, but IT spending held up pretty well by comparison. Still, as the economy slowly recovers from the downturn, businesses are keeping tight control of their capital budgets and are looking for flexible pricing on IT products and services, industry analysts say.

“The underlying core demand for IT hardware, software and services is expected to outperform the economic environment,” says Joseph Pucciarelli, program director for technology financing and executive strategies research at IDC. He took part in the recent IDC Directions 2012 conference in San Jose, Calif.

Pucciarelli says business capital spending dipped during the economic downturn that took hold in 2008 with the banking industry crisis and the bursting of the housing bubble, but that as of the fourth quarter of 2011, capital expenditures (capex) by U.S. businesses exceeded capex in the period just before the economy took a dive in 2008. Further, when IDC separated out IT spending from all other capex spending -- for production equipment, transportation such as trucks, or office furniture -- IT spending was relatively steady while all other capex fell by 28%. IDC estimates that 45 cents of every capex dollar is spent on information technology.

Today, capital spending has largely recovered, he says, although budgets are lean, rising at most by 3% this year versus last. Still, business willingness to invest in capital equipment, including IT, is encouraging.

“Companies don’t invest in capital equipment unless they expect to get more money back in the future than they spend in the present,” says Pucciarelli.

Nonetheless, chief information officers still have some tough decisions to make about IT spending. With lean budgets, some are tempted to buy used equipment and Pucciarelli describes that as a “highly robust market.” But buyers could realize a better ROI buying new equipment if it is more energy-efficient and delivers high-computing efficiency than equipment they are replacing. Leasing is often considered a cheaper alternative for financing new purchases, but with interest rates at or near zero, leasing loses its cost advantage, he says.

Considering all that, “[chief financial officers] have redefined lowest cost,” says Pucciarelli. “They want a structured contract that allows some up or down with the economy.”Procuring software as a service (SaaS) is just one way that CFOs and CIOs are gaining flexibility in IT purchases. IDC reported that system management software vendors told the research firm that between 35 and 42% of software licenses they sold were SaaS deals. And in the networking space, Pucciarelli also singles out Brocade for an innovation called Brocade Network Subscription, which it described as access to a cloud-optimized network infrastructure without upfront capital investment. Instead, customers pay monthly for just the network infrastructure that they utilize.

Cloud computing is another way companies obtain flexibility in IT budgets, says Rohit Mehra, director of enterprise communications infrastructure research at IDC, who also presented at the San Jose event. His research, released in January, showed that 8% of IT professionals surveyed have already rolled out cloud-delivered business applications to mobile devices that their employees use, 25% more have completed a pilot project and plan to implement it, and that another 37% plan to implement such a project in the next 12-18 months. That adds up to a total 70% commitment to the flexibility of cloud computing.

“The trend is very clear,” Mehra says.

That's consistent with the recent InformationWeek Reports State of Cloud Computing Survey, which found 48% said they will use virtualization technology providers for cloud computing during the next 12 months, up 8% over last year, while 36% cite software as a service providers (I.e. Salesforce, SugarCRM, Intuit and NetSuite), which is up 5% percentage points. Among existing cloud users in the survey, 57% already use SaaS, 56% use virtualization tech providers, 42% use platforms and 27% use infrastructure.

In another InformationWeek Reports, IT Pro Ranking: Data Center Networking, 71% of respondents said they have recently completed a network rearchitecting project, are planning one in the next two years, or are in the midst of one, making the latter two groups ripe for a marketing pitch from rival vendors. The same percentage of respondents that are doing or planning a project say they are considering replacing their primary vendor, their secondary vendor or adding another vendor.

Learn more about The Rent vs. Buy Decision by subscribing to Network Computing Pro Reports (free, registration required).