Technologists are quick to point out that if automobiles improved as much or as fast as computers they would run a million miles on the gallon of fuel, have more features than a driver could ever use, be able to carry an unlimited number of passengers – you get the picture.
About this time, a business executive will chime in that the IT/Car would only carry about 10 – 30% of its passenger capacity, would take forever to start up, and go about a thousand miles before it a better model comes along that the company just has to buy in order to stay relevant. Finally as you sign the papers for the car another dealer is telling of a new model that will render the one you just purchased irrelevant.
This is the tension behind item number 11 – IT requires ongoing investment in its core. The technologist sees investment as progress, adopting new technologies with new levels of performance and value. The business thinks of IT as an asset that once purchased operates, depreciates and needs to be replaced when it has ended its useful life. The point is that for most capital equipment the useful life ends when the equipment breaks down or the cost of operations and maintenance becomes prohibitive. This is easy to see for most capital equipment, it is a challenge to see it in IT capital equipment. Here are two reasons why.
First IT capital equipment is not really maintained or repaired as much as it’s replaced. Second IT capital equipment has about the fastest level of planned obsolescence in the economy. Business executives need to be aware of both of these factors to recognize the need for consistent investment in IT capital assets.
IT capital equipment is replaced more often than it is repaired.
Pick up a wireless router feel how light it is. Now turn your laptop computer, your cell phone, the technology at your fingertips is fairly lightweight. Yet you use these assets constantly. When they break its actually easier to replace the equipment rather than repair it.
The reason I am brining this up is recently a company President asked why the company was paying to buy new routers in the factories less than a year after the plant went wireless. When the CIO mentioned that a forklift truck ran into a support, bringing down a section of the ceiling and breaking the routers – his answer was “they are just a year old, you should be able to fix them, after all we have equipment that is in there working for more than 30 years. That’s the problem with you IT people, always want to replace stuff, never want to fix anything.” When the CIO brought in one of the smashed routers, a soldering iron and a motherboard from an old PC, the CFO understood.
IT capital assets are consumed more than they are depreciated or depleted. The need to replace IT hardware is constant because IT does not run on shifts, it runs all the time without going down minutes a week for backup and minor maintenance. The pace of modern business requires IT to operate at all times particularly for companies with global suppliers and customers. Routers, storage, servers run 24×7 supporting thousands upon thousands of transactions generated by people working systems and increasingly from systems and devices transacting on their own. You pick up a laptop take it home, to a customer, on the road, in a plane. You drop it, others spill things on the keyboard, the person in the airplane seat in front of you reclines quickly catching the screen – you get the picture.
Time erodes the value of IT equipment.
CFO’s and other business executives remind IT professionals of Moore’s Law and interpret that if computing power is doubling that means that the cost of IT must be declining all the time. They are only partially right. Yes the cost of computing declines more or less according to Moore’s law, but that lay only applies to hardware and the company has to purchase the new equipment to take advantage of the lower cost of computing.
Now consider how long that technology remains state of the art? One year, two, most firms have a policy of replacing the laptop every three years. Think of the last time you were at the end of the replacement cycle and it became time to turn in your ‘old’ PC. What branch of the dinosaur family did you think it belonged to? My bet was you saw it as a brontosaurus compared to your new computer – big, heavy, old and slow. The technology at your fingertips also becomes obsolete at rates that are a heartbeat compared to your company’s other capital assets.
How do you value a car that can go a million miles on a gallon of gas, last forever, but you only keep for two years and use less than 30% of its capacity? Probably not the same way as a piece of capital equipment on the production line. However, business executives and finance views these two things the same. Personally I am waiting for people to subscribe to IT capital asset capability beyond outsourcing ITO that merely shifts assets across balance sheets. I am sure that is part of the promise of the “cloud” but that carries other interesting aspects to IT and its future, subject for a different post.
Executives should be aware of the realities of technology capital equipment and how they are different from other capital assets. These differences need to be incorporated into capital planning processes and decisions. Perhaps for some it may make more sense to expense IT equipment or at least a significant part of it to reflect the realities of IT capital asset consumption and depreciation.
What are your approaches?
How do you explain the differences between IT and other capital assets with executives?
Do you allocate IT capex the same as other capex? If so why if they have such different realities?