Our thoughts on the future of digital innovation and the cloud.

In my previous post (Why Microsoft Cloud will win the Enterprise IT market), I introduced the concept of moving your IT department up the value chain by freeing them up to work on tasks that will add value to the business. For example this could mean helping to increase productivity and revenues, or decrease costs.

What is a Value Chain?

Very briefly, “a value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market” (Wikipedia). In the IT context, we are talking about the product(s) or service(s) that an IT department provides and the market is the business stakeholders who consume that service.

Value is created by any business through the use of inputs from various sources (IT being one of them) and producing outputs that the business can derive value from (revenue, productivity, profitability, etc). “How value chain activities are carried out determines costs and affects profits” (IfM, Cambridge). “The success of a company is measured by its profitability, which is closely connected to the efficiency of the performed activities” (Avijit Saha, Nash Technologies GmbH).

Every company is different in terms of what adds value, but I can tell you that managing physical servers, swapping dead hard drives or troubleshooting your SAN does not add value leading to greater profitability of the company. Instead, these tasks are only a necessary evil to ensure that the business applications are running (because these apps are what really drive the business and add value).

Service providers are better positioned to provide these lower value tasks much more cost effectively than an individual IT department because they can spread the costs across multiple customers to achieve greater economies of scale.

Enterprise IT as a Strategic Partner

In non-technology driven companies, Enterprise IT is often viewed as a non-strategic cost centre that doesn’t add value, and is only a necessity in order for the business to function. If you are a CIO, IT VP or Director, this is probably not how you want your business stakeholders to view your IT department. You most likely want to be viewed as a strategic partner that works with the business to make the company more competitive and profitable.

Using the OSI model as a depiction of what layers of the IT stack truly create business value, you will notice that I highlight the presentation and application layers. These layers are where you will find the business logic, reporting, user interface or any part of an application/process that truly add value to the business through things like revenue generation, cost savings, efficiency gains and so on.

Looking at the On Premises portion of the stack on the left side of the diagram, you will notice that Enterprise IT is responsible for managing all seven layers in this case. This means that your limited IT resources are not focused on creating value or something that is a core competency for the organization as a whole.

IT Department Options

If your IT department (like most) is resource constrained, but you still want to be driving business value rather than simply being viewed as a cost centre, then you have two options:

• 1) Hire more staff; or
• 2) Look at outsourcing some of these non-core functions in the IT stack to service providers, which will in turn free up existing resources to work on higher value tasks.

Moving to the middle of the diagram, with IaaS, your IT department is outsourcing some of the low value physical layer operational tasks to a service provider who can achieve much greater economies of scale. Although slightly better than the on premises example, you will notice that this model still requires your IT resources to be responsible for many of the lower layers of the stack that are not really creating value for the organization.

Now transition to the PaaS model where almost all of the lower level tasks are handled by a service provider. As you can see from the diagram, this means that your constrained IT resources can focus on what really matters to the business and let someone else handle everything else.

The way in which most businesses remain competitive is by constantly reinventing themselves and not becoming complacent. They do this by inward reflection to understand how they can gain an edge over their competition. Often this comes down to businesses shedding functions that are not core competencies in order to increase profitability or efficiency.

Focus Less on Non-core Functions

Just as businesses look to shed non-core functions, so should Enterprise IT. When you consider the core function of your IT department, is it to service your end users and provide a platform for their business applications, or is it to help the company become stronger and more competitive? Most people would (I hope) answer the latter; in which case you should be focusing your resources on functions within IT that can make your company stronger and more competitive. Ultimately this is what will help you to become a strategic partner to the business.

You should ask yourself, “Do tasks like managing and procuring physical servers, racking equipment, or monitoring cooling of your data centre improve the bottom line for your company?” The answer for most of you is hopefully a resounding “No,” which means you are on the path towards at least considering IaaS from service providers like Microsoft Azure or Amazon AWS. If you can wrap your head around that, then why wouldn’t you consider going one step further and leveraging PaaS wherever possible too? This would help to push your IT department even further up the value chain, creating real business value.

Footnote: I recognize that currently PaaS (or even SaaS) offerings are not available to meet every single need for an IT department, but as time goes on that is going to continue to change. All I hope by writing this post is that it gets you thinking the next time you need to make an IT investment decision, or you’re faced with cutting costs, that you consider leveraging the cloud to help get you there.