Improving Small Business Profitability by Optimizing IT Management

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1 I D C E X E C U T I V E B R I E F Improving Small Business Profitability by Optimizing IT Management Global Headquarters: 5 Speen Street Framingham, MA USA P F March 2011 Adapted from Worldwide Small and Medium Sized Business Forecast: Recovery and Change in SMB IT Spending by Category and Region by Raymond Boggs, IDC # Sponsored by Symantec Introduction Several factors contribute to the growing need for small businesses to deploy and manage their IT resources as efficiently and effectively as possible. Firms that have grown beyond the start-up phase face the organic challenge of optimizing the IT systems and processes with which they've "grown up." The ad hoc resources that have been put in place need not only updating but also effective coordination. The cost and complexity of just adding to your infrastructure as you grow (the most common approach) eventually becomes overwhelming. The need for system optimization becomes especially compelling at certain critical transition points. The most natural point is when companies reach the 50- to 100-employee mark, which is often when the first full-time IT staff or branch office locations are added. But there is a real opportunity for firms to proactively anticipate these transition points to prepare for a less disruptive change. This doesn't have to mean higher IT costs, but it does mean thinking more creatively about how IT should be preparing today to meet future needs. Another driver of IT optimization is financial basic capital constraints which may be an accelerator (improve productivity and slow expense growth) as much as an inhibitor (avoid all spending). The economic downturn has left staffing levels lean, especially at smaller firms. The resulting productivity pressure on the remaining staff means there is a continuing need for new technology to help businesses do all things they need to do. Doing more with less (as in people) often translates into doing more with more (empowering current staff to be more productive). As companies consider the resources they need, they're looking more at new technology delivery and business models, such as cloud computing and IT outsourcing in general, as a way to cut IDC_1107

2 capital expenditure costs. So far, midsize firms have been the first to embrace this approach, but a growing number of small businesses are moving in this direction as well. The New Thinking Another driver of IT optimization is what IDC calls "the new SMB thinking" a combination of cautious conservatism (not spending unnecessarily) and bold innovation (investing to expand market share when others are scaling back). While seemingly paradoxical, these contrasting forces guide business decisions in ways that have important implications for company success. The new thinking looks favorably on adopting new types of technology deployment (cloud computing and software as a service) as well as new types of worker engagement (more remote workers with higher levels of resource access). It's characterized by a sharper focus on advancing company objectives even if methods are different from those used previously. At the same time, the combination of caution and innovation sets the stage for the application of a comprehensive vision of how technology should best be applied and managed. This means a change from the typical patchwork of solutions that invariably grow over time in most midsize firms. It may mean consolidating approaches to identify and rely on a single supplier for greater efficiency as well as buying power. Ideally, this sharper focus can help save recurring acquisition costs as well as management costs by avoiding shifts in direction and decentralized purchase decisions that can complicate coordination and end up accelerating replacement schedules. It can help firms get their arms around all the moving parts of their IT infrastructure, putting them in a better position to reduce the risks of data loss and security breaches by knowing what's going on and making sure the right solutions are in place. Key Success Elements: Impact on Financial Performance Two common threads run through all these drivers: Revenue growth Profitability These two key elements to success build on effective technology investment to optimize available resources and how they are deployed. IDC demand-side research shows that small businesses consistently cite revenue growth as their number 1 business priority, but efficiency has become more important, especially as firms grow in size beyond 50 and 100 employees into the midsize space IDC

3 In their continuing quest for growing profits, firms are examining both P&L lines: driving revenue and managing the growth of costs. While firms might ideally like to see actual cost reductions, IDC has found this to be a somewhat unrealistic goal unless some major inefficiencies can be addressed. It's almost always more appropriate to strive to trim the growth rate than to actually push for budget reductions. With both perspectives in mind, firms should look hard at better control of the costs of their IT assets in terms of both capital expenditures and operational expenditures. The Cloud Computing Opportunity Cloud computing is emerging as a new way to gain online access to technology resources as an alternative to having them on premises. While many firms are interested in cloud capabilities, most are cautious in their approach to what is sometimes positioned as "a revolutionary approach to technology deployment that renders your current infrastructure obsolete." This isn't the kind of message that resonates with senior management and IT staff. Fortunately, it's also not really what the cloud offers to most small businesses. Cloud computing is really nothing new a service provider delivers technology infrastructure or software resources that are hosted or located offsite, with access made possible via a high-speed Internet connection. In fact, many small firms engage online resources without realizing they are part of the "cloud computing revolution." The cloud can make possible affordable delivery of a new application across an organization. For IT staff, this can mean obtaining secure access to advanced technology without spending the money otherwise required to obtain the necessary software and supporting servers. However, firms need to thoughtfully integrate cloud resources into their current IT environments. They should think of cloud as an enhancement, not a replacement. IDC research indicates that a comprehensive movement of IT resources to the cloud is simply not an approach that resonates with small or midsize businesses. Is Cloud Right for Your Business? Two Views to Inform Your Decision IDC recommends that when considering cloud services, small businesses use the following two perspectives: The General Management Perspective: ROI Should Rule Classic ROI, typically associated with cost savings or cost avoidance, is the traditional measure for any investment decision. If the payback offsets the cost of capital, then it's worth making the investment. But be skeptical, and keep in mind the old saying, "Trust but verify." 2011 IDC 3

4 Cost predictability is also a major benefit associated with cloud resources, especially in a growing company. On-premises solutions often have a "step function" component, where capabilities can be expanded up to a point, but then major additional investments are required (more hardware must be purchased or the next level of software licenses obtained). Knowing precisely how much expansion will cost may not save you money, but it can save the disruption associated with unbudgeted expenses. A best practice is to look at the easy-to-measure potential savings of licensing costs and hardware upgrades of an on-premises approach. Moving forward, small businesses should track results over time to confirm that anticipated benefits are being realized. The nature of the cloud is to support scaling up or scaling back as appropriate. If things don't work as anticipated, adjustments may be warranted. The IT Perspective: Enhancing Organizational Agility and Flexibility Matters The financial aspect of cloud computing is certainly compelling: paying for just what you need without having to own capabilities that may not be fully utilized. In addition, companies (especially growing ones) also cite the following cloud benefits: Ease of management Consistent versions of software used throughout the organization Speed with which new users can be added and upgrades implemented with clear predictability of related costs These benefits will appeal to IT managers, but they can also make a company much more agile, ensuring that everyone is relying on the same resources. On the surface, the cost savings of these benefits will be reflected in lower IT costs (like overtime), but improvements in efficiency can be difficult to quantify. However, just because they are hard to measure doesn't mean they are not important! Other measures like time to implement new procedures or the ability to coordinate different activities in more efficient ways can also be useful to consider. Related to ease of management and improved agility from an IT perspective are the resources that can better empower branch offices and remote workers. In today's increasingly distributed work environment, coordinating and supporting the activities of multiple branches and remote workers ("branches of one") can be especially challenging. The ability of cloud resources to provide uniform consistency of resources throughout an organization and do so efficiently and effectively can lead to productivity gains for all, not just the IT department IDC

5 IT Outsourcing and Managed Services as Cost Management Tools IDC research indicates that companies recognize that other outsourcing approaches, including managed services and even leasing, can provide benefits similar to those provided by cloud computing (i.e., immediate access to technology while spreading out the related costs, which can be offset by productivity gains). Of course, smaller firms in particular often choose to keep technology longer and prefer on-premises solutions (similar to how some people prefer buying rather than leasing a car and then keeping the car on the road for a decade). For IT, however, this thinking is problematic when it means sacrificing the latest performance gains to avoid upgrade costs. Four Considerations in Choosing a Managed Service or Cloud Resource Provider While price invariably emerges as the most important influence on the selection of a service provider, it really should come into play only after basic performance criteria are established. Four important elements should not be overlooked when selecting the most appropriate managed service provider: Guarantee an agreed-upon level of customer service. Large companies typically negotiate service-level agreements (SLAs) that specify the level of performance they require and are prepared to pay for. Do you need "five-nines" of availability (99.999% uptime), or can you make do with lower levels of performance to save money? Make sure you understand what a half hour (or 10 minutes) of service interruption every month (or every three months) could mean to your business. Offer flexibility regarding the length and structure of an agreement. If your business is changing rapidly, you may want to avoid being locked into an arrangement that may ultimately be less appropriate than it may seem today. Provide high visibility into the actual cost breakdown. Understand the billing basics and how different levels of service and different levels of use, including number of users, will change your costs. As noted, predictability of costs is an important benefit of outsourced services, but it is your responsibility to make sure to understand all the cost components from the start. Make certain to have an "exit strategy" to ensure a smooth transition for the end of the relationship with a service provider. Changes in the environment may make it necessary for you to bring capabilities back in-house. This should be set forth ahead of time to guarantee the secure return of your data and any other resources that may be under the care of a service provider. It is critical that this provision survive beyond the life of a service provider so that your data remains secure IDC 5

6 Overall, small businesses should seek a service provider that can offer an entire solution, with no surprises or extra costs related to IT infrastructure. A consistent, predictable, and affordable payment schedule is only the beginning; the ultimate objective is to achieve reliable, secure performance that can be adjusted to meet changing company needs. Conclusion Small businesses are under increasing pressure to sharpen their business practices. Cloud computing and technology outsourcing provide affordable access to resources that can make a competitive difference. Improving productivity and efficiency will be at the heart of the success of many small businesses in the coming years. Liberating resources through effective IT investment will be especially important for firms looking to free capital to invest in new initiatives whether in expanding geographically or in exploring market adjacencies within current operating areas. The "why" in the decision process is especially important, with the basis for decision making grounded in the following three related but still very different requirement sets: The pure financial ROI story. This is relatively easy to prepare, assuming the numbers are available. The impact on IT environments. Don't underestimate the IT challenges moving forward. As always, plan to operate with redundancy for a while until you're sure that things will work as anticipated. The impact on people. Changes in processes can be disruptive in unanticipated ways. Make sure your organization is prepared to tolerate (and even embrace) the likely step backward that will be necessary to allow you to move two steps (or 10 steps) forward. Related to this decision process is the understanding of how any new changes will ripple through other infrastructure capabilities. In introducing new capabilities, how will the existing IT environment be stressed? Do you have the storage and security resources in place to support new initiatives, especially new cloud initiatives that may seem painless but may complicate the IT environment at company headquarters and even more so in branch offices? An incremental approach to new solution implementation can help ease the stresses and build the kind of organizational muscle flexibility that will be invaluable moving forward. Make sure that senior management shares the excitement and actively joins the process of motivating and encouraging staff moving forward. Challenging economic times provide real opportunity for firms that can take their performance to the next level. Advanced technology will play a critical role in providing the agility that a growing company IDC

7 will need to take advantage of emerging opportunities. Across your organization, staff members will be interested in gaining access to the kinds of resources that will make them more efficient and productive whether through remote worker support, advanced CRM solutions, or a wide range of other capabilities. Innovative approaches to technology deployment will be essential in preparing your company to respond effectively to the changing competitive environment. COPYRIGHT NOTICE The analyst opinion, analysis, and research results presented in this IDC Executive Brief are drawn directly from the more detailed studies published in IDC Continuous Intelligence Services. Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from IDC. Contact IDC Go-to-Market Services at gms@idc.com or the GMS information line at to request permission to quote or source IDC or for more information on IDC Executive Briefs. Visit to learn more about IDC subscription and consulting services or to learn more about IDC Go-to-Market Services. Copyright 2011 IDC. Reproduction is forbidden unless authorized IDC 7