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Demystifying IT

Demystifying IT

THE CFO of a large multinational computer company had a problem. He had to slash a sizeable chunk from the company's total budget. But when his eye scanned the IT department's line items, he winced. He could already hear the CIO's protestations that cutting the IT budget would be tantamount to cutting off the organisation's lifeblood. And he knew the CIO was right. But how were they going to convince the CEO? Fostering this enterprisewide understanding of IT is a critical part of a CIO's mission. At some banks and insurance companies, for example, IT spending accounts for nearly 20 per cent of the operational budget. But the CIO must convince those who view IT as a "necessary evil" that such a mind-set is increasingly dangerous. The following model can help non-IS executives better comprehend the value of their IT investments.

The IT Process Landscape

Several years ago, Ernst & Young LLP developed the IT Process Landscape as a business-process improvement tool. This tool enables top management to better understand how cuts -- or investments -- will affect the business. The landscape also provides a solid framework for analysing the trade-offs that are inherent in the IT planning and budgeting processes.

The CIO and CFO at this company decided to build their budget presentation around the IT Process Landscape, which breaks IT spending into three categories. They presented the chart at right to the senior executive committee to use as a basis for developing a sound IT plan.

How It Works

Rather than lumping all IT activities together, the landscape divides them into three categories: - Ongoing Business Support: The day-to-day operation and support of existing systems for activities such as payroll, billing, customer service and e-mail.

- Business Value Creation: The identification and development of new IT-based systems and underlying infrastructure components that help create business value. For example, IT may be called upon to provide new systems for a company's business-process re-engineering efforts or entry into new markets.

- Business Resource Management: The management underlying a company's IT activities, including the salaries of the CIO, the IT architecture group and the IT financial planning group.

Each of the categories requires a different management approach. To understand why, it's useful to draw a parallel between the IT function and a manufacturing organisation. For example, ongoing business support is like basic production and distribution -- it should be viewed from an operational management perspective with a focus on efficiently meeting required service levels.

However, the business value creation element is like a manufacturer's product R&D division; budgeters should look at IT investments in this category in terms of what business benefit will be gained from the investment. And the business resource management element must be approached from a manufacturer's asset/capability management perspective. In other words, managers must make sure that decisions made today will become assets, not liabilities, down the road.

Linking Business Drivers

Let's assume that the management team's interest has been piqued by the landscape. At this point, the landscape model gives you the opportunity to discuss the business dynamics that drive planning and budgeting.

To make such a discussion fruitful, the generic landscape framework should first be adapted to fit your company's way of thinking. At this particular company, the CIO and CFO changed the model slightly, dividing IT expenditures into five categories. They decided to allocate management salaries across the five chosen categories, rather than focus on business resource management as a separate category. These are the categories they created, followed by examples: - Ongoing Business Support: Infrastructure support (network, e-mail) - Ongoing Business Support: Current business-process operations (payroll, inventory, customer service) - Business Value Creation: Support for functional system changes (infrastructure, business processes) - Business Value Creation: Business-process re-engineering projects (replacing old systems with new ones) - Business Value Creation: Competitive advantage efforts (pursuing new business opportunities) Next, they told a story for each category. Each story had two focal points: the business driver for the activity (such as number of orders, number of lines of code) and the unit cost of meeting the need. Those two factors multiplied together determine the total cost for an IT activity.

The CIO and CFO found that linking activities to business drivers fostered a better understanding of IT's role and, ultimately, IT's budget needs. For example, the category of ongoing business support/infrastructure support sparked useful discussion of the department's workstation support activities.

The business driver for the workstation portion of this IT budget item was the number of employees needing workstations.

Next, the costs of providing workstation support were analysed. A study showed that the company's workstation costs were low compared with those of other companies. However, they set a target for reducing costs further. Then, having established the business driver (number of employees in the selected work areas) and the unit cost of providing a workstation (the target chosen from the analysis), the level of the IT budget for workstation support became the product of the two factors. Using a similar approach for each category, an overall IT budget story was built until the whole picture emerged.

Once the CIO and CFO painted the picture, the interplay of business drivers and IT unit costs became clear. The senior business executives were able to discuss trade-offs intelligently and make sound business decisions about IT. If unit costs were out of line with other companies' costs, they established targets and plans to reduce them. In some cases, they changed the level, or priority, of a business driver. For example, by dropping some requests for changes to existing systems, they were then able to shift more IT support into competitive advantage programs.

Interestingly, when the dust settled, the overall IT budget was larger than originally envisioned. The presentation had worked -- management had come away with a greater understanding of the importance of IT's role. Equally important, the budget was more directly linked to the company's strategic goals. As the CEO of this company observed after the meeting, "I realise now that we can't just cut IT across the board. We need to think about each IT activity in an appropriate way. This presentation really helped me understand our options."Charles L Gold, research fellow at the Ernst & Young Center for Technology Enablement, can be reached at charles.gold@ey.comMap Your Company's IT Expenditures Do they reflect your strategic direction? Breaking out expenditures according to the IT Process Landscape model provides a good basis for managing IT in a more businesslike way. As illustrated in the pie charts, which present data from three actual companies, IT allocations often vary significantly -- reflecting each organisation's specific business focus.

For instance, the major business-process re-engineering efforts under way at Company A are reflected in its relatively high levels of spending in business value creation. On the other hand, Company B is a manufacturer striving to be a low-cost provider -- so its funding for ongoing business support is much higher. After Ernst & Young completed this study, Company C decided that it was top-heavy in IT staff (as indicated by the high level of funding for business resource management), and it began reallocating staff to more hands-on activities.

-- C L Gold

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