Cost Control Through IT Planning

By Rawlson O'Neil King, theWHIR.com

February 11, 2004 -- (WEB HOST INDUSTRY REVIEW) -- Cost controls are measures any business should implement in order to increase cash flow and retained earnings. Web hosting companies and Internet service providers are no exception.

Technology-intensive businesses must watch their spending to ensure that their purchases are reasoned and affordable. Servers and other Internet-related appliances are quite expensive. The nature of information technology also demands that service providers regularly upgrade their software, in order to offer the latest services and ensure security.

Consequently, IT spending constitutes the largest expense category for hosting companies and often consumes more than 50 percent of a firm's revenue. This cost can represent a real challenge in today's increasingly competitive environment, as service providers seek increased operational efficiency.

The creation of value with information technology can be a difficult task since substantial returns on such assets have decreased due to the declining prices charged for commodity services such as shared and dedicated hosting. As a result, the goal for all service providers is to create greater value with their current IT infrastructure.

Greater value can be achieved by maintaining constant functional output with lower inputs and by increasing that output with a constant input. In other words, technologies such as servers and software should achieve more, yet cost less in terms of their real cost and their associated expenses (i.e., labor costs). This can be accomplished if hosting companies put realistic IT plans into place that specifically aim to control costs while increasing efficiency.

An effective plan should consider three key factors: scale, simplicity and timing. Scale determines when it is efficient to actually own technology outright. Simplicity acts to remove complexity from IT architecture in order to reduce ownership costs. Timing defines IT infrastructure in order to limit the number of alterations needed over time.

While the scale at which a service provider grows cannot be controlled, as hosting is a commodity business and requires substantive, continual growth, it is critical to understand the economies of scale to know how to leverage growth.

Most have traditionally thought of scale in terms of "purchasing power," but this is not the right approach with respect to technology. While it may be possible to purchase expensive servers it might not be worthwhile to do so if the operational expenses to maintain that equipment drives much of the ownership costs.

The staffing and general infrastructure required to operate servers and networks can be fairly static regardless of size and scope and therefore very scalable. If you understand the economics of scale you can determine what areas of your operation can be outsourced at a considerable savings.

The exercise of determining where scale is applicable is one of systematically breaking down an IT budget into functional categories. With these defined, a service provider itself can then look to outsource various non-strategic and highly scalable functions.

To pursue simplicity, and the cost control that it provides, service providers must implement a model that allows them to adopt all new technologies. With a strategically designed and deployed infrastructure, service providers can eliminate most of the ad hoc work that has overtime or consulting dollars associated with it in order to enact infrastructure upgrades.

Creating a framework of simplicity begins with the scale exercise. Once a firm has categorized the different components needed, the provider must assess the changes required over the last few years and engineer them out.

The network should be designed from inception to accommodate fluctuating growth. The network therefore needs to be well planned and reflective of the needs of the provider, rather than reactive to unanticipated growth.

By utilizing the guiding principles of scale, simplicity and timing within the context of a well-devised plan, service providers can control IT costs, with the ultimate goal of increasing cash flow and earnings.