The global economic recession is driving organizations to adopt aggressive green IT strategies and flexible financing options to fund them. Increasingly, enterprises are leasing IT assets and refurbished IT machines as a way to reduce capital expenses from their balance sheets, while corporate chief financial officers are involving themselves in green IT and its financing structure.
Large organizations turn to flexible financing options for green IT funding
The global economic downturn has encouraged large organizations to aggressively pursue green IT strategies as a way to reduce costs. Typically, they seek to slash their electricity bills by making their datacenters more energy-efficient. Their motivations are transparent: large enterprises typically spend between $21m and $27m per year on datacenter electricity, according to a recent survey by Symantec of more than 1,000 enterprises worldwide. Among the least capital-intensive methods for making datacenters more energy-efficient are software and services. However, even these require a significant financial outlay. According to the world's largest IT bankroller, IBM Global Financing (IGF), with IT budgets remaining flat, droves of large enterprises are turning to flexible financing solutions for green IT projects.
There are various kinds of green IT in the datacenter, but the most popular - and arguably most affordable - is software that lowers the energy consumption of existing datacenter hardware. Symantec, for example, sells datacenter, storage and client-device optimization software that promises to reduce electricity costs by 20% on average. Various IT vendors are also reporting large increases in demand for datacenter virtualization software, which optimizes existing hardware resources with a shared, on-demand environment that typically requires fewer machines to run (and consumes less energy).
Beginning about 18 months ago, IGF has been seeing a wave of large enterprise customers employing its financing options for green IT projects. Increasingly, at the center of these financing deals is the corporate chief financial officer (that is, the CFO of the organization, not the CFO of the IT department). This has been a phenomenon of the recession, as organizations strive to reduce capital expenses throughout their operations with corporate CFOs taking a more 'hands-on' approach.
Energy cost and supply as well as datacenter space constraints are driving green IT
Two main factors are driving the trend toward financing green IT. First is the increasing cost of energy and a limited local power supply. It is not uncommon for large organizations in Asia, Europe and the US to have limited access to power increases to meet their growing computer demands. Oftentimes, public power utilities are unable to provide additional power on a reasonable schedule, if at all, because of the limitations of their power generation and distribution systems. The utility may be able to add power but only with a large capital investment, which customers may not be able to afford to subsidize. Some organizations have their own power generation capabilities, but this is not a feasible solution for most operational datacenters. Large organizations are experiencing a surge in demand for data storage, driven by regulations and business growth, as well as the need for additional processing power.
The second main factor driving green IT financing is organizations being unable to fund a physical expansion of their datacenters in order to add more storage or processing capacity. They simply cannot afford to add an additional building to house new hardware, so they are instead seeking asset utilization and virtualization software as alternatives.
Flexible financing vehicles are in demand
Datamonitor research shows that the majority of IT budgets in 2009 and 2010 will remain flat. IT departments around the world are being asked to slow or halt their spending. Many customers are now looking to avoid upfront capital investments by using flexible financing vehicles that plot payments against returns on the investment, such as IBM's Project Financing program. This is a unique financing vehicle for projects or transformations like green IT where the repayment terms for the combination of the hardware, software and services may be on a longer schedule and sloped so that payments may be made from the anticipated benefit stream. For some organizations, financial vehicles like this one from IGF may be the best option. Even during economic upswings, many lenders have shied away from 'soft financing' (the financing of software and services) as they are not hard assets that can be recovered in case of default.
Green approaches to reducing expenses
There are other ways in which organizations are reducing expenses and eliminating assets from their balance sheets. Companies in the financial services sector have historically been leaders in leasing IT equipment. But a far greater number of organizations, large and small, from across all industry sectors are now looking to leasing as an alternative for raising their capital requirements. Most leased equipment, once returned to the lessor at the end of the lease or some extension period, is either re-leased, sold as complete used machines or its parts are reused, which makes leasing an environmentally sustainable proposition. For example, IBM reuses 85% of returned leased IT equipment. Beyond parts, it separates metals and other commodities so that less than 0.7% of equipment ends up in landfill, usually as the sludge left over from smelting metals' separation process.
To take leasing a step further, organizations can transform what would be a capital expenditure into a monthly expense by entering into leases that qualify as an 'operating lease'. This is where a lease meets the accounting standards test that allows the assets to remain on the books of the lessor. The lessee (the user) in effect pays a monthly rent that is in fact an expense. Also, since the lessor is the owner of record of the equipment, the downstream disposition in accordance with environmental regulations is the lessor's responsibility.
Another green capability that exists for many high-end servers and some storage is the ability to upgrade the technology in place. Organizations can add or swap in the newest technology components on site in the datacenter, upgrading the level of the systems and adding to the computer power while taking advantage of whatever the new technology has, including energy power savings and more computer power in the same footprint. The result is a system that retains its original serial number yet has the guts of a current-generation model without the need to manufacture an entirely new system. This approach also saves on the packaging and the transport of bulky machinery. There are also potential accounting advantages to this approach if it is a customer-owned asset.
Moreover, when a leasing customer repopulates its existing hardware with newer energy-efficiency technologies - such as the latest-generation processors or storage - a set of economics come into play whereby the lease can be restructured to take advantage of the enhanced residual value that comes into existence when a base system is upgraded to a new technology. IBM in its last System z announcement showed a leasing example where, as a result of a technology upgrade, the customer benefits from the new and green technology advantages while also upgrading their processing power by 26% and reducing their monthly lease payments by 5%.
An increasing number of organizations are turning to refurbished hardware as an alternative that can meet their needs at a lower price point. This 'used' equipment is also a green solution in that there is the avoidance of the energy and materials used and the carbon emissions generated if a new product had to be manufactured.
Another green IT trend to emerge from the global recession has been for many organizations to move the accountability for facilities and utility costs to the chief information officer. By making the CIO accountable for these expenses there is now far more incentive to focus on IT solutions that are greener. Changes like this and the heightened involvement of the CFO are putting a new spin on the way IT decisions are being made today and probably for the foreseeable future.