With digitalisation firmly on the board agenda, CFOs face the challenge of funding it

LanDynamix’s Ethan Searle unpacks how managed service business models could be just what CFOs need.

One lesson that everybody has learned from the Covid-19 lockdowns and what followed is that the more digitalised a business is, the better able it is to adapt rapidly to a volatile and highly competitive business environment. Unsurprisingly, then, every article on CFO priorities for 2022 highlights digital transformation and the imperative to pursue automation both within the finance department itself and across the business.

As always, keeping the lid on costs also remains a high CFO priority.

Gartner reports that 82 percent of CFOs are increasing their investments in digital, and that those investments now exceed investments in other areas. The real challenge remains – as it always has been when it comes to IT – how to ensure that these investments actually deliver value for the finance function and the organisation as a whole.

Given that IT is so crucial not only for the business’s current processes but its ability to adapt to change, it can seem obvious that it should be an internal function. In most cases, nothing could be further from the truth. Given IT’s importance to the organisation, it’s vital that IT is handled professionally by experts to reduce downtime, ensure access to scarce skills and best practice, and, yes, establish a more manageable cost environment.

This article aims to help CFOs understand what managed services are, and why they could be a viable strategy for a company looking to digitalise in the most cost-effective way while realising all of the benefits and reducing risk.

What are managed services? The managed services model is based on transferring the IT service desk and/or parts of IT support to a third party. Managed services can be customised to include other components of IT such as security, hardware, data backup, recovery and management, network monitoring, HR, and payroll. There is no one-size-fits-all solution – it all depends on the organisation’s digital maturity and strategy.

What are the financial benefits of managed services? One of the biggest headaches for CFOs when it comes to IT is the unpredictability of cost. Technology is changing rapidly and constantly needs to be refreshed, IT projects can be lengthy and often overrun budgets, and IT staff are in short supply (and so expensive and at constant risk of being poached). This variability makes financial planning difficult: and unpredictability is the one thing that keeps CFOs awake at night.

The managed services option moves to a fixed monthly cost, eliminating capex costs as well as the other costs associated with buying, maintaining, and supporting IT, including staffing. Depending on the scope of the managed services engagement, one would also have to factor in the cost saving of providing IT facilities and physical security.

Hardware as a service (HaaS) is exceptionally attractive to CFOs due to cost savings. Hardware deserves to be highlighted because it is not only a significant capital expense when bought, it also has to be continually upgraded. Managing and funding a full-on hardware life cycle is both challenging and expensive – and can safely be left in the expert hands of a managed services provider.

One of the primary benefits of a monthly payment service like HaaS is that customers can avoid the high upfront cost of hardware, as well as the additional cost of servicing and licensing fees. The subscription-style plan means that CFOs can monitor and forecast their outgoings month on month, allowing them to balance their budgets more effectively.

Covid-19, of course, and the need to move to remote working models in 2020, drove the need for accessible and adaptable services to suit extraordinary circumstances. This pay-as-you-go model whereby customers pay their managed service providers a monthly fee for a bundled hardware, software and maintenance service, has gained wide acceptance among small and medium-sized businesses during the pandemic. HaaS permitted companies to provide employees with fully integrated services, accessible remotely from the comfort and safety of their homes.

Forecasters predict that the global HaaS market will be worth upward of £218 billion (about R4.25 trillion) by 2027, demonstrating that demand for this model is strong and growing – possibly an indication that businesses dragging their feet on HaaS are liable to be left behind.

What are the other benefits of managed services? Aside from cost savings and cost predictability, CFOs should note other benefits from moving IT services to a third party. The first of these is a lower risk profile as the contract will specify service-level agreements that can be aligned to the organisation’s business continuity plan, thus ensuring control remains with the client where it belongs. The service provider will also take on the responsibility (and headache) of ensuring adequate staffing at all times, managing leave and, importantly, training.

Training is important because IT is a highly technical area that is changing all the time – keeping in-house staff trained is one of the major expenses and management challenges. The service provider can also access scarce skills more easily for specific projects.

Overall, perhaps the biggest benefit is that the service provider is an expert with a great depth of knowledge and experience. It is thus fully conversant with best practices when it comes to delivering IT and can also act as a trusted advisor when it comes to IT strategy.

For example, it’s easy for non-IT people to be swept up by current fashions like cloud computing. Cloud, however, must be approached with caution because its total cost of ownership can soar, and it is not suitable for all business models. A seasoned managed services provider can provide essential guidance to ensure the right IT direction is taken, irrespective of current fads.

A reputable managed services provider will also have an established programme of continuous improvement in place – a huge benefit to the client organisation.

In short, managed services can solve many of the CFO’s most pressing challenges when it comes to funding and managing IT, while greatly strengthening the organisation’s capacity in this vital discipline.

In a follow-up article, I will discuss various issues related to how CFOs should approach budgeting for managed services.