IT Budgets Pointing to the Cloud, Expansion

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

At first, James Hefty, director of operations at the Fishers, Ind.-based company, didn't believe a cloud provider was a possible option. It had financial compliance rules and concerns such as a client audit.

But the provider, in this case BlueLock LLC in nearby Indianapolis, said it could meet all the security rules, service levels and 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 and firewall and server in an HP blade system and VMware environment.

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

As a new company, Deca had options. Larger companies are unlikely to make a wholesale shift to the cloud services, but they are setting budgets toward on-demand services and the cloud and away from capital expense, 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 manages do have the ability to buy hardware as an operational expense, budgeting for it, he said.

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

But a Forrester survey of some 2,600 in companies ranging from SMBs to the enterprise 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 users are reinvesting in capabilities, such as making plans to buy storage from a cloud provider that can scale to business expansion needs.

The Hackett Group Inc., an advisory firm, saw 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 Padrn, a principal and global practice leader at Hackett, said users want as much variability as possibility, and pricing that is based on daily usage and consumption.

"We believe that the highly unsettled conditions that characterize the economic climate today will never fully abate," Padrn said in the 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 advantages over any company in financial services, with no legacy to worry about. There are over 4,000 third party debt collection firms in the U.S. and most are small.

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

But among the larger financial services firm, Rodney Nelsestuen, an analyst at the Tower Group Inc., expects interest by this industry in cloud services to pick up, especially in the next 18 months because of the efforts by large IT providers to tailor their services for this industry.

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

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 .

Read more about cloud computing in Computerworld's Cloud Computing Topic Center.

This story, "IT Budgets Pointing to the Cloud, Expansion" was originally published by Computerworld.

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