All who remember how painful the budget process was understand that a CIO's negotiating power is, to a great extent, determined by how well clients understand the value they get for the money. There are three components to the concept of value: understanding exactly what IT delivers, believing that the cost is fair and evaluating the contribution of those deliverables to the bottom line.

Let's look at what we can do to build clients' understanding of the value of IT.

What Do We Get for the Money?

In many cases, clients' poor perception of IT value is as basic as not understanding all the products and services that IT delivers, and many IT departments don't clearly define the specific products and services they deliver for a given level of funding.

Sure, everybody knows that IT delivers essential services like desktop computers, network services, applications engineering and applications hosting. But that sounds simple. Many clients don't understand why IT has to cost so much just for that.

Explicitly defining IT's products and services also counters the less-honest outsourcing vendors who glibly offer to do 50 per cent of what internal staff do for 80 per cent of the cost, implying a 20 per cent cost savings. One can see the fallacy in that claim only if IT can clearly define all the products and services that it delivers.

There are two steps required to understand the exact list of products and services that the IT budget pays for.

First, IT must publish a comprehensive product and service catalog, at a level of granularity that portrays specific client purchase decisions. For example, "e-mail" is too broad. A fully defined catalog would distinguish a basic e-mail account, extended storage and BlackBerry forwarding as three distinct services.

Second, IT must define exactly what subset of that catalog the budget pays for, and in what quantities. For example, it might forecast the cost of basic e-mail for everybody, extended storage for only the customer service department, and BlackBerry forwarding only for executives. And it might forecast the cost by application for each major project, for necessary repairs and patches, and for discretionary enhancements.

Is the Price Fair?

The next question related to value is, "Am I getting a good deal? Is the IT department delivering its products and services at a cost that's competitive?" Answering this question requires benchmarking against the market.

The only way to demonstrate that internal IT is a good value is to compare the cost of products and services, like to like. IT must be able to answer the question, "What would this exact bundle cost if bought from vendors rather than staff?"

The easiest, but least accurate way to assess this is to benchmark the entire bundle all at once. There are two problems with this approach. First, it cannot distinguish an inefficient IT department from a highly efficient one in an overly complex business. Second, the data is not actionable; it does not tell you which IT product lines need cost reductions. A far more accurate and useful way to benchmark IT is product by product, based on unit costs. To ensure fair comparisons with the market, IT should calculate rates for each item in its product and service catalog ("service costing," as ITIL puts it).

All costs (including all indirect costs) must be amortized into those rates. It's misleading to allocate fixed costs, and then claim that rates based on only direct (or marginal) costs are competitive. But be careful not to amortize into rates any costs that are, in fact, entirely separate from the delivery of those products and services.