Yesterday I wrote about the long moments of panic and dread I felt when the power went out and our back-up generator did not come to the rescue.
Although crisis was averted when the electric company repaired the problem in a few moments, I immediately drew up a capital expense request for a newer, larger generator and some related upgrades. And that's when I got a lesson in the language of finance.
As the saying goes, people spend money for two reasons: to acquire a benefit or avoid a penalty. And acquiring a benefit is a lot more glamorous reason to spend money than avoiding a penalty. And maybe with a little finagling, one can avoid spending the money and still avoid the penalty.
The CEO wanted to find a way to make do with what we had. It was suggested that since the weather was supposed to cool down soon maybe we wouldn't need a new generator after all. One executive even related a story about how the generator light in his new Cadillac had recently come on, and the dealer wanted him to spend a lot of money to fix it, but he had just ignored the advice, and the problem went away.
I was learning a lesson in the logic and politics of capital expense investments, or capex, as the finance people say. It wasn't that people didn't appreciate the importance of having proper backup for our systems. It was just that they weren't personally responsible for it, and they also had bonus incentives and other reasons to resist and question the need to spend a big chunk of money at that particular time.
I was the guy on the hot seat. Since our off-site disaster recovery project was also not fully funded, it could easily take a couple of weeks to restore all our systems and data. In addition, several of our most important customers had begun using systems of ours to support their own operations. We had, of course, promised that everything was properly backed up and covered in the event of power or equipment failure.
The money for a new generator was finally approved and there were no further power blackouts, but I don't wish to go through something like that again. During that time I learned valuable lessons about business decision making, and the roles of IT and finance in making those decisions.
Given what I knew about our IT infrastructure, I could vividly imagine the sequence of events caused by a sudden power outage. It kept me up at night. It gave me the willies. But the finance people and others did not see things quite so vividly. In working with them I came to appreciate some basic financial concepts that have served me well ever since.
Several years earlier when business was booming, I had no problem requesting and getting even larger amounts of money for capex investments. I had built out the datacenter, added more gear to support the growth of our e-commerce business, and hired more people to run the expanded operation. But now I found that asking for capex to do unglamorous things like disaster recovery, data backup, air conditioning, and emergency power generation was a much tougher proposition.
Capex investments come from company earnings or bank loans. Finance people like to give earnings to owners and shareholders instead of spending it on overhead like IT infrastructure. They also like to minimize bank loans because that debt changes balance sheet ratios and can affect bonus payouts. So in tough times when it's hard to predict what your real needs will be, it's better to pay for what you need when you need it as operating expense, or opex, and avoid using capex.
Next time, in a similar situation, I would give myself more options by redesigning my IT architecture. Instead of building everything as in-house infrastructure, I would create a hybrid cloud infrastructure where I connected the internal system to cloud systems. I would put many of those unglamorous things like disaster recovery, data backup, and extra servers in the cloud and keep my in-house operation as small as possible. I would pick a reliable cloud vendor and pay a bit more for high levels of service. I would do that because all my cloud operations could be paid for as opex, not capex.
Then, when business was booming, I could expand my infrastructure and capacity, and when business wasn't booming I could shrink my infrastructure and my costs. My expenses would rise and fall with business activity. I wouldn't need to ask for capex to buy hardware and handle all those unglamorous things that are needed to keep hardware running.
Finance people like opex in uncertain times because opex gives them flexibility where capex does not. And since finance is the language of business, it pays to speak the language if you want to become a senior executive in IT or any other area of business.