Consumption-Based Models Are Easy, But Managing Consumption Economics Is Not

Venugopal Lambu

Business and technology leaders have been well-trained in the digital economy to perceive the world through the eyes of a consumer. Consumers’ day-to-day lives revolve around easy-to-use, consumption-based, pay-as-you-go platforms: Whether we’re watching a movie or TV show, listening to music, arranging transportation, or planning a trip, it’s becoming less necessary to own a physical product like a DVD, CD, GPS device, or even an automobile. When we want to be entertained or transported somewhere … “click,” we’re on our way, without the burden of maintenance and ownership.

Now, the enterprise is a consumer as well. Whereas technology systems and applications were once physical, fixed-cost “things” with attendant management costs, they too have become consumable, pay-as-you-go services. Whether the business needs a more modern tech infrastructure or development platform, advanced analytics, Internet of Things capabilities, ERP software, or conferencing services, it’s no longer a matter of procuring physical servers and provisioning resources in-house. As in the consumer world, it’s a clickable, far simpler experience.

After the click

In some ways, however, the simplicity is deceptive. Sure, the act of procuring subscription-based services with variable pay-as-you-go costs has become dramatically easy to do. But the job of optimizing the economics of using services and ensuring that the capacities subscribed to are aligned with the business services actually consumed – that’s an entirely new discipline that many businesses, so far, ignore.

This can’t continue: In order to validate the return on investment of a consumption-based service, businesses need to understand whether they’re obtaining the full value of the services they’re being invoiced for. While pay-as-you-go/subscription models certainly offer great flexibility – and are here to stay – they present their own set of challenges for keeping costs down.

In short, while many businesses have made the shift to a consumption-based model of obtaining technology and business services, capabilities, and applications, most haven’t moved to a consumption-based economic model. While they’ve progressed beyond a fixed-cost infrastructure, many have not found a replacement mindset for the days of classic profit-and-loss balance sheets based on amortization schedules. They have no idea whether the services they’re paying for are being optimally utilized or – in some cases – even used at all.  They can’t distinguish the point at which buying something as a service starts or stops to make sense.

Key factors in managing the economics of consumption

So what does it mean to manage the economics of consumption? Businesses would do well to consider the following aspects:

  • Cost management. When you buy with a known capacity, you know the capacity you have. But when capacity is open-ended, there’s a real risk that you won’t know who’s using it, for what purposes, and whether those purposes align with business priorities. If the business is unaware of whether consumption levels are under the capacity they’ve subscribed to, the whole purpose of pay-as-you-go is completely obliterated. In short, businesses need full visibility into who’s consuming what and at what levels.
  • Technology lifecycles. Whether you purchase a fixed-cost technology asset or a subscription-based one, the value of the technology will decline as more updated technologies emerge. It’s just a fact of life that the technology you purchase or subscribe to today will have less value 12 or 18 months down the road. But in the days of fixed costs, the technology lifecycle had a clear beginning and end. That’s not so with a pay-as-you-go approach, which is open-ended. So key questions must be asked: How do you track the value of the technology you’re consuming? At what point in its lifecycle is the technology no longer the most effective choice for your needs? Businesses need to be aware of the point at which the original reasons for signing on for the service are no longer justified by the capabilities of the technology itself. By tracking the value lifecycle, businesses can ensure that they maintain the technology so it continues to deliver a competitive edge.
  • Standardization. When anyone in the enterprise is empowered to click a button to obtain services, businesses can end up with a portfolio of disconnected, overlapping, and redundant services. Without controls in place to oversee and standardize on which platforms are used, inefficiencies are bound to escalate, and the risk of noncompliance grows.
  • Agility. It’s simple to sign up for a subscription-based model – but how easy is it to cancel and move on when needed? As a consumer, if I’m not happy with, say, Netflix’s content choices, I can just move onto another provider. Similarly, businesses need to ensure that their subscriptions offer an easy exit. This needs to be explored well before making the decision to subscribe.

The consumption-based model has simplified our lives, both in and out of the workplace. But once businesses make the shift to a platform-driven approach, it requires significant discipline to manage and optimize it – a discipline that many businesses have yet to develop. The first step is to become aware that a new economic model is required with a consumption-based approach and then learn how to manage in a world driven by new consumption economics.

This article originally appeared on Digitally Cognizant and is republished by permission. Cognizant is an SAP global partner.

Ever-faster innovation cycles and increasingly complex IT landscapes make IT service management inevitable. See “Bimodal, Trimodal, Multimodal: What Role Does IT Service Management Fulfill?

Venugopal Lambu

About Venugopal Lambu

Venu Lambu is senior vice president of Cognizant Technology Services and Cognizant Security. In that capacity, he helps enterprises leverage technology across applications, cloud and infrastructure, and security to drive businesses to be ready, responsive, and secure. As SVP, Venu brings 25+ years of insight and experience to help clients' C-suite navigate business challenges to achieve their organizational goals across transformation, governance, change management, and driving ROI. Venu is passionate about helping businesses build strong IT foundations, and is a member of the Forbes Technology Council. Venu holds General Management Certification from London Business School & Bachelor of Engineering in Electronics from University of Mysore, India. He is based in London, where he enjoys short movie script-writing, supporting community schools, and mentoring early-stage startups and entrepreneurs.