Warning: Your Journey To “Demonstrating IT-Delivered Value” Passes Through The Quaint Little Town Of “Understanding IT Costs"

Last week, I presented at the itSMF UK’s annual conference on the subject of value or, more specifically, I hid an awful lot of IT financial management-related content behind the title: “Anybody Questioning Your Value?” Importantly, this is not IT value; I am referring to business value.

It was a surprising session in many ways. Firstly, the number of attendees (I didn’t count them but I would guestimate about 80 ... I’m sure my IT service management peers in attendance will now quickly tell me it was a lot, lot less). Secondly, that they all seemed to stay to the end (well bar one worried-looking lady who left in a rush early on ... I assumed a Sev1 incident or an upset tummy, or both).

The third surprise was the response to a simple question I posed:

If your CEO or CFO stopped you in the corridor and asked, “I like the look of this Gmail-for-business thingy, how does it compare cost-wise with our internal email service?” Would you know the per-unit cost of delivering your corporate email service?

The surprise? Not one person in the room admitted to knowing what their corporate email service costs. I expected to see a low number of raised hands but not a wave-less sea of hands-in-laps. Unfortunately, being unable to answer such off-the-cuff and more formal questions around costs and value can only expose the absence of I&O’s business savvy and lack of cost-awareness. This is not a place I&O wants to be in right now (or ever).

So what does I&O need to do?

 

My Jerry Springer-like final thought?

I have said (well blogged) it before and I will say it again: I&O needs to have answers before the business asks awkward questions about costs, performance, and value.

If YOU don’t get to grips with costs and value, your successor will.

 

Related blogs:

http://blogs.forrester.com/stephen_mann/11-09-12-it_value_like_beauty_is_in_the_eye_of_the_beholder

http://blogs.forrester.com/stephen_mann/11-10-07-run_it_as_a_business_do_you_really_know_what_this_means

http://blogs.forrester.com/stephen_mann/11-10-17-five_steps_to_improve_your_it_financial_management_maturity

Please check out my latest blog ... http://blogs.forrester.com/stephen_mann

Comments

Full Presentation ...

... can be found at http://conference.itsmf.co.uk/pc87sj (track C, #3)

Good job!

Stephen,

Just read through your deck. Nicely done, sir.
I think that the financial management aspects of IT have been ignored for far too long.
You're prompting folks to start having some good conversations inside of their organizations.
I hope that they give due consideration to your advice and start.
Yes, it does take work, but it doesn't have to be unbearable and what comes on the other end of it is worth the effort.

Best,
kengon

P.S. Thank you for the reference to my HDI blog. Was happily surprised to see that in there! :-D

Great Minds think alike

Stephen,

Just published a similar column with real world "awkward question" promoting the idea that these financial questions are going to be the benchmarks IT is measured by, and not the traditional measures...
http://www.itsmportal.com/columns/emerging-benchmark-it-operations

IT Financial Management

Quote:
“I have said (well blogged) it before and I will say it again: I&O needs to have answers before the business asks awkward questions about costs, performance, and value.
If YOU don’t get to grips with costs and value, your successor will.”

That’s the final thought this blog ends with. And it is all true.
When you summarize Stephen’s blog, it is all about accountability: where does the money go and is it well spend?
There are several methods that can be used to track costs. The difficulty lies in assigning activities, licenses, hardware capacity etc. Questions to answer are: who is using which service, in which quantity, how to keep the balance between executing chargeback/show back and the cost of costing? This is the puzzle many CIO’s have to resolve and let’s be honest, most IT departments lack the knowledge and financial skills to implement a simple and effective chargeback method.
As mentioned in your blog, fundamental for an effective and transparent chargeback method are the Services defined in the IT Service Catalogue. These Service need to be made available at well-defined business conditions and the price composition should be transparent.
The capability of calculating a reliable and correct price through a proven model is a rare skill. This can only be realized when using an integrated set of tooling through which the separated cost items can be made transparent: the ERP of IT.
Implementing tooling for the ERP for IT process is not easy, but if done well, the result delivers value for IT and Business.
We call it: IT Financial Management. This consists of the integration of the catalogue, demand, cost-price, budget and chargeback process. If these five processes are connected and supported by the ERP for IT, then IT is in control and the business can manage IT to support the business goals.

Peter van Loon & Harry Rensen
It’s Value

I&O Transparency

Hi Stephen,

Thanks for the article. Costs are critical for successful management of any area for any enterprise. A couple of things that you might want to consider for future discussion topics...

1) Costs need to be broken down into two (2) clear areas...
- The Cost to Puchase/Deliver, and
- The Cost to Own and Maintain (post-purchase/delivery)

Understanding the above two, and how they're tracked and managed, shows that they're very different. As bad as many enterprises are at understanding the first/former, the second/latter is often either totally ignored or grossly under-managed.

2) Managing Costs starts w/ proactively collecting and proactively tracking the data that drives costs, such as but not limited to:
- Contracts
- Purchase Orders
- Licenses
- Software Assets
- Physical Assets
- Headcount
- Facilities
- etc.

In the case of the second point, many I&O leaders are guilty of not tracking what goes into, exists in, or leaves their environments (this includes "all" environments and not just their Production environments). How many I&O leaders do you know of that keep clear track of, accounting for, and traceability of "everything" that is in their operating environments? Doing so is the key to getting to any Cost Transparency, let alone getting to good Cost Transparency.

It's very interesting to me that there is so very little expectation on most I&O leaders to track everything that moves through or exists in all of their operating environments. As a result, it would appear that far too many I&O leaders are simply not "managing" their environments, at all.

Anyhow, thanks again for the post.

My Best,

Frank Guerino
Chairman
The International Foundation for Information Technology (IF4IT)

I also think that there is

I also think that there is something that goes beyond Finance. IT services create values by creating new perceptions or changing existing ones. If a service does not deliver on its functionalities AND on its promises than the value creation will go down the drain.

Thanks, Dan
http://www.itsiders.com