Like the cobbler’s children. who lack shoes, most IT departments lack the expertise for managing the business of IT itself. IT departments can boast of long experience automating business processes, in this function or that, but when it comes to automating the governance and business management of IT there is no ERP in place. Those chickens seem to be coming home to roost. IT is asked more frequently to explain the business value it provides to the organization as a whole and a very clear demonstration of the financial value of IT is expected in the answer. Cost reduction, cost avoidance, or, at the very least, cost optimization, continue to be a big concern in corporate boardrooms.
Cost control is not the only reason the business side of IT is more in focus. Since the collapse of Enron and the accounting crisis of the last 10 to 15 years, corporate governance has gained a high profile. In some jurisdictions, it is the law, such as the Sarbanes-Oxley act of 2,002. IT governance is part of corporate governance.
An IT services perspective has also taken hold in the last decade. The value of IT is calculated as a function of utility plus warranty. There isn’t much value in a product that matches all the required features. but isn’t stable or secure, doesn’t scale and is impossible to maintain. Services are also easier to map to business processes and IT governance is definitely about insuring that limited IT assets are allocated to the business processes that define an organization’s competitive advantage, in the market spaces it competes in.
Last time out I discussed how mature IT financial management was a winning pattern in those organizations that are well governed, the ones with higher profits and a greater return on their IT asset investments. In those organizations, IT is a profit center or a business partner, rather than a cost center, which is the most common view of IT departments. In some organizations, IT hasn’t even matured to the level of a cost center. IT is viewed as an unpredictable cost and there is very little visibility into, or accountability for, IT costs. In other words, there is essentially no accounting, charging or budgeting for most IT expenditures.
Cost centers regard IT as an expense only. There is no serious effort put into service valuation or IT investment optimization. The IT department is a cost recovery organization, where the budget is designed to match revenue with costs. IT is not driven by a profit motive. If IT services are charged out at all, through a tax or perhaps a crude, charge back mechanism, it is simply to recover costs.
The change currently taking place in the business of IT is the demand for an IT that can be described as a profit center or a business partner. As a profit center, organizations are looking to IT for a positive return on investment. IT budgets are evaluated much like other capital expenditures, with respect to business impact. Financial management is aligned with customers and services and IT develops transparent charging methodologies based on the actual consumption of IT resources, rather than equally shared usuage estimates.
The most mature organizations see IT as a business partner, from a financial management perspective. IT is a key contributor to corporate strategy. These organizations deploy value added financial management activities, like service investment analysis, to evaluate the best way to provision services, internal, shared or external. They setup mature IT charging systems, internal and external, and deploy automated tools to gather and charge actual resource usage. They also engage in extensive service valuation, to determine if IT services are adding to the bottom line and by how much.
The business of IT is changing, just as the technology is. In essence, it is becoming more like a business itself.