The Nature of the Problem
Since the birth of business computing, business senior management has criticised IT management for the seeming high cost of its computing services. This is fuelled by the perception that computer hardware is expensive, computer software is expensive and computer people are expensive. This view is exacerbated by IT’s perceived inability to communicate in terms and language that the business understands.
IT is inclined to communicate in terms like MIPS, Gigabytes, Bps and seemingly impenetrable technical reasons for failing to deliver on time or the sudden outage of key operational services. It is also a truism that most of the population of an IT organisation is not properly inducted into what the company does, how it does it and what it really needs in terms of IT support. There is often no understanding of fundamentally important aspects such as the company’s products and services, what the business strategy is, the competition in its markets and an understanding of the company’s Key Performance Indicators, such as share price, level of profitability and market share.
As the consequence of this miasma, CIOs in most large corporations are struggling to come to terms with the issue, seemingly having no clear idea how to resolve it in a diplomatic and enduring way. Thus, the standoff remains to this day, much to the discomfort of both parties.
Why is it that IT suffers this constant flagellation when other service departments like HR and Finance seem immune? Is it because IT is still viewed by the business as nothing more than an ‘expensive pencil’?
The impact of the problem
The nature and extent of this problem vary from sector to sector and, obviously, from company to company.
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Organisations that do not successfully manage this situation are left with a variety of business problems.
Firstly, the company itself suffers from this basic communications failure between the two parties which means that business finds it difficult to be accountable for its spending on IT.
IT management and staff are demoralised by the constant criticism from the business.
From a finance perspective, the real cost of business processes cannot be accurately determined because management accounting has no clear understanding of technology cost drivers. Also, without rigorous IT costing it is impossible to manage product profitability. Finally, cost reduction efforts are limited by the inability, on both sides, to discern cause from effect.
In highly regulated sectors such as Financial Services, the regulator is increasing pressure on in-house IT to undertake regular market testing to demonstrate that the services provided are at a lower cost than can be delivered by an outsourcer. Whilst there is no cogent argument against undertaking these exercises, they will use up precious time, resources and investment which will be lost to other initiatives aimed at achieving the company’s stated strategic objectives.
These symptoms are almost certainly not a complete list of those experienced by large organisations. What, then, needs to happen to resolve this situation once and for all?
How all this can change
Clearly, the long history of this conflict demonstrates that there is no quick and easy solution which can be implemented efficiently and effectively.
The hidden truth behind this conundrum is the lack of a ‘lingua franca’ with which both parties to the problem can communicate. Acknowledging this and the requirement to redress it is, thus, the start point of its resolution.
Implementing a Collaborative Solution
My personal experience suggests that the resolution to this issue lies in cooperation between IT and the business, and that it should be IT initiated and led. The following approach delivers immediate benefits for the CIO, These are in terms of strong marketing to, and the generation of goodwill in, the business community in the determination to resolve the problem for the benefit of all.
Properly applied, it will create an enduring solution to this long term problem which both parties can agree upon, and believe in its benefits, both now and into the future.
So, problem solved, but how is it achieved?
The crucial first step is getting the engagement of the business. The key to this is to discuss and obtain the endorsement of the approach with the Finance Department as their backing with be hugely valuable and their accounting acumen a necessity. In my experience, getting the ear of the CFO will make a lot of difficult and political problems disappear. However, CFOs have limited ‘air time’, so getting the premise and the benefits of what is to be achieved clearly documented and articulated is fundamental.
Creating a Service Catalogue
The start of this breakthrough project is the creation of a Service Catalogue. This document will define the services as delivered by IT to, and with the agreement of, the business. These definitions are classified within the document in terms that the business can understand in the context of its support for business processes. A straightforward example of a service, in this case, is the provision of email. Most people in all organisations understand this requirement, and remain increasingly dependent upon it, thus ensuring common understanding.
Each Service entry in the Catalogue will contain, together with a concise definition, an explanation (again in business terms) of the attendant service levels provided. The Service Catalogue entries each need to be agreed with all key areas of the business and understandable and acceptable to them on their terms.
The mere act of going out and discussing this exciting initiative with the business will, by definition, bring huge marketing benefit to the IT department. The diplomatic, conciliatory and business benefiting approach will almost certainly be warmly welcomed.
Establishing Service Costing
The second step to success is the creation of an agreed accounting model for Service Costing. This will be dependent on having ready access to accounting systems and service management information on resource utilisation. Another good reason to have Finance on board!
Using an activity based costing approach, the combination of the above two information sources can be used to calculate the cost of each service defined in the Service Catalogue. So, and as with the previous example, this would reveal the cost per mailbox for each user of that Service.
It is relatively easy to isolate and quantify the IT costs of an organisation and to, simplistically, allocate them per user.
The Consideration of Service Pricing
The third, and optional, step is the creation of a Service Pricing regime. This is relevant where the business is requesting the option of ‘menu pricing’ where there may be a requirement for differential pricing for different standards of service. So, for example, there could be the provision of a Gold, Silver and Bronze standard of service for PC maintenance, dependent upon the demand of each area of business.
This approach, if adopted, can be somewhat more difficult to handle and may need the newly honed political and diplomatic experience to effect to the satisfaction of all.
Taking the above PC maintenance example, and in my experience again, various parts of the business often clamour for a better standard of service as their needs are, in some way, special and different from those of the rest of the company. When offered ‘menu pricing’, however business units will almost always opt for a Bronze Service. Thus the problem is solved and, should it arise again in the future, a simple flourish of the Service Catalogue pricing for PC maintenance will do the trick.
Service pricing can also be used to change behaviours. This also needs to handled very carefully and with the agreement of the business.
For example, raising the price of printing above its actual cost will encourage the business to examine and reduce, where appropriate, its printing requirements. This would have the joint benefit of the protecting the environment and reducing costs overall. My experience has shown that, in this example, a lot of printing automatically generated was received in departments who, not requiring it anymore, sent it straight for recycling.
The Value of IT
The ultimate deliverable from this initiative and its enduring heritage through its focused and equitable delivery is that the business will better understand the value it derives from the IT services provided to underpin its business processes and management.
This significant change is delivered at a cost. Its implementation is a non trivial exercise and requires business backing and, as stated, the support of Finance is imperative
The final, and arguably most important, benefit of this overall approach is that the business now understands its IT services in business terms that are agreed and understood. It also understands what they cost (or are priced at) in terms that relate to its business operations.
Extrapolating that to the benefit for IT, it can now enjoy involving the business in its capacity planning and management. Using the Service Catalogue definitions to drive the budgetary process will enable the business to more accurately predict its usage for the coming year based upon its own business projections. Clearly this is not a ‘one off’ exercise and can be revisited, for example, monthly to enable IT to manage capacity and for the business to manage its costs. There is the additional advantage of on-going dialogue using an agreed and documented ‘lingua franca’
In Conclusion
This short narrative paints a rosy picture of a brighter tomorrow. It’s not rocket science and the right intellectual input, inter-personal skills and finance expertise are implicit in making it a success.
However, the biggest challenge is the desire, on both sides, to create a new tomorrow and for the programme sponsor to be able to engage, with external assistance where necessary, with the business to create mutually trusting relationships into the future. Now, wouldn’t that be nice!
