Figuring Out How Much “Good” IT Costs

In my previous post, I made the case that many organizations haven’t defined how much “good IT” costs. Today I want to share some of the facts you need to gather to start answering that question.

Let’s start with a look at three views of the cost fact base: Controllership, Financial Planning & Analysis (FP&A), and Strategic Insights.

At the bottom of this chart is the Controllership version, the one Accounting needs to track to support financial reporting and financial controls. This version of the fact base simply accounts for all of the spending and ensures it’s in line with original resource allocations, but it won’t help you answer the questions you want to ask to really understand and manage IT cost.

Next version of the fact base is the Financial Planning and Analysis (FP&A) view, which indicates how spending varied from the expectations, what trends are impacting the spending, and how the year will end up. This analysis and forecast is built on top of Controllership numbers. They are a bit more useful, but still not nearly the right information for true cost transparency.

At the top of the chart is the Strategic insights view. These ask—and answer—vitally important questions about the ways that IT delivers value within your business. If you run a business supported by IT, this type of information is essential to answer your question, “What am I getting for my money?

To get your arms around what IT costs, you must reframe the work of IT – instead of being an internal set of people and departments, you should think of the work as a set of services delivered to internal company clients. This is the view that is most relevant to business stakeholders, as they define the outcomes of the services needed, have a hand in driving demand, and ultimately can evaluate performance based on this information.

This new strategic view of IT costs is an emerging trend in “managing IT like a business,” spurred on by the increasing dependence on IT in business execution, external solutions like SaaS and cloud services becoming more prevalent, and the sheer costs and complexities of IT operations and investments. 

At a practical level, an initial strategic cost view can be delivered for our clients in about six weeks and delivers a tremendous amount of value. If you need any more inspiration about taking this on, ask the following three fundamental questions:

1. How much revenue does it take to generate the operating margin to pay for the IT spend? The answer to this question can be shocking. What if you are operating half the year just to cover the costs of your IT support? Would that change the amount of attention and thought you give to the ways your organization is using (or failing to leverage) technology?

What if you are operating half the year just to cover the costs of your IT support?

2. Can our CIO easily outline the services that IT delivers and how “competitive” they are in the market? Educated consumers understand how one product compares to others they could buy. They can make wise choices about which services matter to them and which are unnecessary. Strategic analysis makes it possible for your CIO and his or her team to answer such questions.

3. How does the CIO reflect value in terms of services delivered and operating efficiency? A colleague related a story in which he met an actuary at a party and on the spur of the moment asked him, “What’s a good day for an actuary… when the correct number of people die?” That’s a bit irreverent, but you might ask the same of IT. In financial and performance terms, what’s a good day for IT? Simply hitting your forecasted IT budget number and availability targets is not nearly good enough. Both the CIO and all the leaders who “buy” IT services need to understand how to measure efficiency and value.

Demystifying the IT spend will create more engaging discussions and better decision making across IT and its business partners. Creating better IT consumers across the business will allow IT to focus on delivering value in the context of the IT market and services overall, rather than defending its internal capabilities and budgets. Over the course of a year, information technology changes dramatically. Market pricing for computing power and storage decline, new innovations leapfrog previous offerings, and marketplace needs shift in an often-volatile manner.

IT is such an integral capability for all businesses today, and there is always more demand than resources. Businesses that know how to measure IT performance and investments on an ongoing basis are more equipped to cost-effectively deliver the capabilities needed in the face of such volatility. Starting with the financial fact base, CIOs and other business leaders can make better decisions about IT investments and performance, and ultimately drive more business capability and value.

Robin Evitts is a Managing Director at Alvarez & Marsal. She specializes in delivering transformational business performance improvements, with a focus on IT Cost Management from her experience as a CPA and CIO.