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Entering the Zone

Entering the Zone

If you don't know your IT costs, you don't know anything.

What it takes to produce higher bottom-line impact and more effectively manage IT costs

READER ROI

  • Why you need to look at lights-on activity with the same scrutiny you give new projects
  • How to create better investment alternatives, or in IT terms, creating better ideas for development projects
  • How to eliminate non-performing and poorly-performing existing IT resources from current spending

It is a pretty simple principle no sane CIO would argue against: A company should spend money only on IT efforts that directly support corporate business strategy and operational effectiveness and should not waste a cent on IT that does not. Scarce corporate resources should be spent only on activities that advance the business. Money wasted on poorly performing IT projects, systems and services is money not spent on other areas of the business (including other IT) that could potentially provide a better return.

However, if most organizations are happy to pay lip service to such notions, they might be amazed to discover just how much of a payoff can come from turning token support into concrete and determined action, say Bob Benson and Tom Bugnitz, Cutter Consortium senior consultants and co-authors, with Bill Walton, of the Beta Group book Finding the IT Improvement Zone.

"If you don't know your costs, you don't know anything," Benson says.

To be serious about controlling the cost of IT while increasing its impact on the bottom line means not just addressing the entire spend, including both "lights-on" and "project" budgets, but also introducing the management frameworks and management practices that will let the organization successfully control the growth of IT costs and at the same time improve the business bottom-line impact of those costs and investments, the authors say. Yet it is "very rare" that organizations examine 100 percent of their IT spend or introduce the frameworks that can determine whether all of those dollars are producing useful outcomes for the business.

That is a shame, because those that do are starting to reap some pretty rich dividends.

For instance, not so long ago the Beta Group helped a $US90 billion global insurance company to complete just such an exercise. It took two years to get the effort off the ground, largely because of the "immense number" of people who had to be educated in the new approach (the company operates in 140 countries and has six major business units, and perhaps 100 minor ones) and the challenge of changing the mentality of so many managers in so many operating units. But the payoff was huge.

"The first year we did it, when we re-recast the budget, they had a $US250 million line item that was unidentified infrastructure," Bugnitz says. "Nobody knew what it was, or what it was doing, why it was there. Next year it was zero. Now it isn't that they got rid of $US250 million. It is that they were forced to look at that $US250 million, figure out what it was doing, and either get rid of it or make sure that it was associated with something that was useful to the business that management could then look at.

"The game really was giving management a better way to look at the money that was being spent so they could make more intelligent decisions. And in fact they flattened out the budget and cut costs in numbers of areas because they had the tools to do it. What they did was very straightforward, although it takes a little bit of discipline."

It does not have to be a two-year effort, either. Another recent Beta Group client with annual figures of $US120 million in revenue and IT expenditure of about $US30 million completed a similar exercise in just two months, proving the authors' main point: This exercise does not have to be perfect to yield major benefits - as long as you include the total IT spend, if it is just 80 percent right, you will still be 80 percent better than you were before.

"This client included all of the $US30 million, and with a couple of accounting people and with some of the IT people helping to identify what the categories should be, and with a little bit of the pain of giving birth to a new idea, they were able to bite it off relatively easily - at least enough to give management an idea of what's going on," Benson says.

"In fact I was talking to the controller two weeks ago and he said it was an eye-opening experience. He said: 'We always talk about this application that we've got and everybody just assumes it's worth it, it's there and it's running well, and all of a sudden we find out it is 25 percent of our IT budget when we really assign all of the cost to it. That is interesting. Now we have to ask ourselves if it is worth that kind of money or should we be really cutting back on that'."

The keyword thematically is transformation, Benson says. That is, giving business transparency to the IT cost and, instead of thinking about the IT spend in black box terms ("I'm buying this number of computers and that amount of software"), thinking about the spend in terms of the services it delivers the business and the activities it buys in support of the business.

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