CIO Leadership, IT Performance

Driving transparency for IT costs, benefits and risks

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In one of my recent posts (“Using COBIT 5 to show IT’s contribution to financial performance”), I mentioned that the new COBIT 5 standard provides a scorecard for IT to rate itself on how it supports financial performance. One goal in particular – driving transparency into IT costs, benefits and risks – is especially difficult for IT. It’s so difficult (but so important) that I wanted to look at what’s keeping IT from realizing this goal.

Being considered a cost center is a problem

So why is something that sounds so easy, so hard? For one thing, IT is considered by corporate finance organizations to be a cost center, and that’s a problem. In the language of accounting, a cost center is an entity or organization that has cost but no revenue or value. Of course the latter is not true because IT organizations are a major driver of business productivity. The problem is IT organizations do a terrible job of showing it when their cost is bucketized into cost centers.

Making matters worse is the fact is that there is not just one cost center for just about all IT organizations. In fact in many cases, there are hundreds of cost centers. And because IT is often focused on technology, its costs centers are about technology—network, storage, etc.

IT finance is focused on the piece parts of IT

These are what I like to call the piece parts of IT. Now, here’s the rub. With cost centers based on technology how does IT present its budgeted and actual expenditures? It does so by these piece parts. So why isn’t this transparent or helping to explain benefits and risks? The reason is pretty simple. The business does not consume IT’s piece parts. What the business consumes are services—email, financial management, internet banking, etc.

IT and the business need a universal communicator to explain IT costs

This means that as long as IT organizations present costs from a cost center or technology level there is no chance for transparency on costs, benefits and risk. It is like people on Star Trek not being able to pull out their universal communicator—there is no chance to communicate or create mutual understanding. IT and the rest of the business are just speaking different languages.

However, with service-based costing, the gulf between the business and IT can be eliminated. In the budgeting season, the business and IT can talk about IT and its services from a value perspective. And even more important, IT can have a seat at the table and talk (as a boss of mine once said) like a businessperson. IT can ask: Why we are still investing in this service when only one person is using it and it’s costing us Xdollars?

The secret to refocusing expenditure away from keeping the lights on

Not only does a change like this add to IT’s credibility, but, even more important, it also allows IT to un-stick the imbalance of expenditure from keeping the lights on. To do this, IT organizations need to get to service-based costing and then a business dialogue with the rest of business.

Next week, I’ll discuss how you get to service-based costing. But before concluding, I want to tell a real life story to make my point. Several years ago, a friend told me that they had been asked to keep supporting two revs back of Siebel even though the production instance had been running fine for 18 months. When I asked why the business had asked for this, he said the business thought there might be some valuable data in the back versions of Siebel it might want at some future time. When I asked about what that would cost, he shrugged and said, “If we knew that then we could have prevented this expenditure.” What a waste of money! Put simply, nothing is taken down in IT because IT cannot talk costs, benefits, and risk at a level that the business understands. And if you want to be COBIT 5 compliant, it is time to change this!

Related links:

Blog post: 3 ways IT leaders can strengthen compliance and control

COBIT 5

Solution page:  IT Performance Management

Twitter: @MylesSuer

 

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Discussion
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myles.suer
Myles Suer 142 Points | Wed, 07/25/2012 - 16:58

 

John--Alignment here involves fixing the IT balance between run and build and dealing more effectively with business demand for further cost reduction. At a Gartner conference a couple of years back, it was announced that IT organizations have done all the cost cutting that they can do on their own. The next wave involved the business helping IT to intelligently decide what to grow, what to keep, and what to scrap. Until IT puts its costs at a level that it and the business can have a prioritization discussion, intelligent IT design is impossible.

myles.suer
Myles Suer 142 Points | Tue, 07/24/2012 - 00:45

Jerry,

I agree completely. It takes work, but alignment is essential. And this starts by getting the IT books together in a way that the business can make sense of things and participate in the discussion of where to invest and deinvest.

 

jdodge
John Dodge 1439 Points | Tue, 07/24/2012 - 12:36

I agree, but there is a backlash about alignment because some IT departments have always been aligned with the business.

Check out what the Air Products and Chemicals CIO said about alignment and how he "lives and dies' creating customer value.

http://www.enterprisecioforum.com/en/blogs/jdodge/im-so-done-alignment

 

Jerry
Jerry Bishop 100 Points | Mon, 07/23/2012 - 23:56

You know, many IT organizations directly support revenue or are a component  part of the value chain and product development. Unfortunately many CIO's and CFO's fail recognize those relationships so all of IT gets charged to overhead (SG&A) instead of charging some to cost of goods or amortizing it into new product development costs.

Similarly, because there is so much resistance to cost allocations IT can't show up under the cost of sales or customer support or warranty service and so on.

I tend to find this is due to a lack of awareness on the CIO's part for the accounting benefits and a lack of willingness on the part of CFO's to implement project accounting or do the work needed to segregate IT costs. 

myles.suer
Myles Suer 142 Points | Mon, 07/23/2012 - 17:12

I agree--a cost center--approach as effectively limited IT transparency and a true business discussion.

pearl
Pearl Zhu 90 Points | Mon, 07/23/2012 - 15:35

The blog reflects IT's cost center image, due to over-emphasizing on IT driven KPI, over-focus on internal customer, and not so transparent process and silo thinking etc. byond effective governance tool, people' mindset shift is also critical for the IT transformation. thanks.