Become a super CIO
Run IT as a business by focusing on transparency, ROI and how IT is driving corporate performance
The massive growth in IT over the past decade has moved it from being a back-office support function to a critical business unit. IT now ranks among the top five expenditures of most companies.
CIOs have to show how the money is spent, the returns they're getting for their investments, and how IT is driving corporate performance. This increased role requires focus, vision and, above all, transparency – into services, costs, demand, processes and impact on corporate performance.
Cost management and transparency
For the CIO to compete for resources, the IT function needs to operate as a business within a business – providing valuable services to the rest of the organization. The CIO must effectively educate the organization and provide clearly articulated and relevant cost information.
A detailed understanding of the cost within the IT business provides clear and positive advantages to the CIO and the wider organization:
- Ensuring optimal resource allocation to areas of greatest value.
- More effective allocation of resources to areas of need.
- Reducing complexity within IT and simplifying internal processes.
- More informed budgeting (capital and operating) and pricing of new projects.
- Greater understanding of IT capacity and ability for delivery.
- Ability to link IT investments to overall organizational benefits.
- Facilitating practices and tools such as total cost of ownership (TCO) and return on investment (ROI).
IT now ranks among the top five expenditures of most companies.
The importance of chargeback
It is difficult to maximize returns from IT when the product appears to be free to customers. Ideally, IT operates as a service provider with a catalog of products and services that are aligned with customer needs and corporate goals. For this, IT needs:
- Accurate pricing for its services that reflects the cost to provide them.
- An understanding of what drives both demand and cost.
- An equitable, repeatable and accurate method to track and invoice customers based on their usage of the services.
- To encourage user accountability for ROI.
Cost control is the greatest benefit that comes from IT chargeback. Gartner research has shown that these cost savings often exceed 15 percent in the first year because of reduced demand and smarter service use.
Chargeback gives clear transparency into the benefits and the value that IT brings, and the impact on the bottom line means better relationships with the rest of the organization.
Budgeting and planning
IT financial management processes are often resource-intensive, involving the manual collection of financial data that is scattered across the enterprise. With a lack of data to support accurate forecasts, the resulting budget is often based on political biases.
A usage-based chargeback model creates the foundation on which to transform the budgeting process to a streamlined practice that quickly produces trusted and reliable figures, increases governance, encourages collaboration and ensures accountability and ownership by stakeholders. This reduces the time and effort involved while increasing the accuracy of forecasts and simulations, and forms the basis for the financial budget, aligning organizational objectives, requirements, volume and cost.
Chargeback gives clear transparency into the benefits and the value that IT brings.
To maximize returns from new and existing infrastructure, IT needs a consolidated, end-to-end view of use of its applications and infrastructure, both physical and virtual, to understand how all IT components interact. IT organizations have made substantial cost savings through repurposing underused infrastructure and combining server workloads.
Real usage data is used to feed the IT chargeback cost models and forms the basis for forecast calculations. IT can ensure that infrastructure is sourced and implemented based on actual demand, and achieve better returns on investment.
Alignment with corporate strategy
IT often has difficulty linking organizational strategy and objectives to IT investments and financial performance. Aligning IT with organizational strategy is critical to focusing IT planning, resourcing and service delivery. Mapping IT strategy to enterprise goals ensures that IT planning is optimized to support business success. The IT strategy should involve assessing technology capital readiness to support organizational goals, and should value IT not in terms of cost, but in terms of capacity to support strategic goals.
IT needs to track not just technology-based metrics, but also the impact and benefits that IT brings to an organization. In addition to operational KPI measurement, IT should measure how well it is improving the capabilities of the organization to achieve its corporate strategies and maximize customer satisfaction, corporate productivity, profitability and competitiveness.
Success in IT business performance is measured through the achievement of optimal returns from new and existing infrastructure and resources, but this requires several steps.
- The first step is to develop a catalog of the services that the IT organization provides to its customers. It establishes a standard set of deliverables by creating business-oriented agreements and organizes services in a way that customers understand and use them.
- The next step is to understand the resources and activities that are required to deliver these services. The costs of the resources are then allocated to the activities that consume them, and then in turn to the services that consume those activities. This builds up a cost model that reflects the work done by IT, and the costs required to provide the services demanded by the organization.
- Gather, consolidate and organize all IT performance measurement and usage data from sources across all IT infrastructure into an IT-specific data mart.
- Feed the above usage information into the IT cost model to generate accurate and equitable charges for each business unit based on their consumption of the service catalog.
- Analyze the cost model to understand which services have above-average costs, and why this is so. Develop cost-cutting strategies to decrease the cost to serve while still maintaining productivity and customer satisfaction.
- Combine the information in the IT data mart with expert opinion to accurately forecast demand and cost based on both statistical and judgmental forecasts, while ensuring that budgets and plans are aligned with strategic goals.
The result is an optimized IT function that provides the organization with cost-effective services that are tuned to improving organizational productivity and profitability in accordance with its strategic goals.
Managing IT as a business is now an imperative. No longer can IT be seen as a technology supplier – it must be seen to be adding value to the organization and providing corporate strategic capability. IT business performance allows IT to change the focus from technology and production to customers and services. It enables IT to become service-oriented, aligning itself with the organization to provide customer-driven solutions to business problems.