The Economics of Technology Investments

The 4th Industrial Revolution is moving at a pace so significant that there is no historical precedent. In the world of economics, too, we are experiencing a new kind of economy: a technology economy. In this evolving landscape, companies that understand the principles of technology economics and use them to make decisions are among the industry leaders.

So what does this mean for evaluating the cost and effectiveness of your tech stack and planned IT investments? Nice that you asked. Here’s a framework for managing your technology economy.

New asset classes are born

A key part of any economy is assessing risk and identifying value. Calculating the value of technology must consider how the technology will affect your operating costs, efficiency, customer satisfaction, and ability to bring products to market. As in traditional economies, any investment in a particular technology in a technology economy has a relative level of value and risk. However, rather than measuring these variables on a scale of profit, loss, and volatility, in a technology context, value and risk correspond to attributes such as economics, scalability, software capabilities, information security, reliability, availability, and sustainability impact.

Infrastructure, applications, network technology and other components, as well as building and maintaining systems all add up to one thing: a wide choice. But what if you changed your thinking? What if assessing risk was not a question of technology, but a decision to invest financially?

If you change your mindset, you can adopt a technology-economy framework—a framework in which IT investment decisions focus on balancing risk to achieve a stable set of assets. For example, you can make the financial decision to invest in stocks, bonds, cryptocurrencies, or bitcoin—decisions that are all based on a balance of relative risk. The point is to have a portfolio of assets that try to balance what’s safe with what’s at stake.

New asset classes are emerging within the technology economy: mainframe, distributed and cloud. Like traditional asset classes, each in the technology economy has a specific value and value proposition. And they have the same characteristics as traditional economics: scalability, risk profile, and business impact. The goal in this case is to achieve the right balance of assets by holding the most economically advantageous ones.

For example, individuals rarely dump all of their stocks and bonds and jump straight into cryptocurrency or NFTs, so why choose tech assets? Yet those who fail to view their tech assets from a technology economy perspective are all too often tempted to bet on the public cloud or other current headline technologies without considering the asset balance or direct relationship to business performance investigate.

The importance of a mix of technology investments

Managing a company’s technology economics involves evaluating technology asset classes over time. As you make these decisions, you must be smart about how you combine technology investments to achieve important business goals.

Everyone seems to be making everything loud these days, which is the opposite of a mix. However, when you compare public cloud revenue at Amazon Web Services, Microsoft, Google Cloud and IBM to $8 trillion in global IT spending, it’s not even 10%. These numbers show that not everyone is out there in the cloud. In reality, companies rely on a mix of asset classes and make decisions to create a balance based on scalability, risk and business impact. The latest mindset is no longer cloud first, it’s cloud right. It’s more important to make the right technology investments at the right time on the right platform – including but not limited to the cloud – to achieve the greatest overall value.

Evaluating the right technology asset mix is ​​about understanding the business value. Across 20 different industries, top performers have about 15% more mainframe compute power than average, 14% less distributed compute power, and 80% more public cloud power. The data also shows that average and high-performing organizations have significantly lower cloud usage than mainframe usage. Despite all the attention paid to the cloud, 85% of global computing is still on-premises. The end is inevitable. High-performing companies aren’t just moving more to the cloud—they’re using more mainframe in their hybrid cloud environment. The numbers clearly show that the top performers make decisions for their tech asset mix based on customer needs and business performance.

A closer look at how you pay for assets

Another part of thinking about the economics of IT is how you access and pay for assets today. Take the cloud for example. Besides the benefits and features, there are more things to consider. From an economic perspective, contractual agreements obscure the true economics of the public cloud.

Think of the payment structure of most cloud provider contracts as an all-you-can-eat buffet. It’s $19.95, but only if you can eat everything on your plate. The price goes up to $209.95 if you can’t eat all the food on your plate. This scenario illustrates the economics of the cloud. There’s a threshold, and if you don’t meet it, you pay for it. Literally. That counters the promise of elasticity with Cloud.

How you pay for assets is part of evaluating how to better understand your investments and get a better balance between them. Achieving equilibrium is also referred to as Technology Asset Class Optimization (TACO). We now have the data and models that enable IT leaders to evaluate and plan technology investments with the same rigor and language as financial investments, while considering desired risk profiles and return on investment.

Ultimately, technology costs translate into business results. Tracking your IT spend versus business profitability is a crucial metric for running a business in today’s technology economy.

Apply an economic perspective

Although the technology economy is relatively new, the technology in the economy is mature enough to be treated as an investment and managed like any of your other investments. Here are a few important things to remember:

  • Adopt a technology economics mindset and value your tech stack as a portfolio of investments.
  • Evaluate your asset classes based on performance and impact on business outcomes.
  • Take a closer look at what and how you pay for assets.

The benefits of applying an economics framework to your technology investments include improving risk management, maximizing returns and unlocking value. The result is balanced assets and a better understanding of where and how to invest in IT in the future.

Technology stacks reflect choices, but shouldn’t be treated as fashion statements. There is no need to follow the latest trend. However, there is a need to select asset classes and operate a technology economy based on your company’s unique performance needs and desired outcomes. When you do this, you’ll future-proof your technology, strengthen your business, and give your organization a competitive advantage.

When it comes to changing the way you think, we have a few ideas. Learn more here.

Copyright © 2022 IDG Communications, Inc.

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