Cost Management should fire a discussion on IT’s value creation

Every budget needs proper management and our Boards request cost transparency from the IT department as well. So traditionally, we CIOs create numerous complex spreadsheets to detail our cost as much as possible. But does the business actually want a detailed cost? “We need to change the discussion on cost transparency into one on value creation”, said Ade McCormack at our latest master class. Every budget needs proper management and our Boards request cost transparency from the IT department as well. So traditionally, we CIOs create numerous complex spreadsheets to detail our cost as much as possible. But does the business actually want a detailed cost?

“We need to change the discussion on cost transparency into one on value creation”, said Ade McCormack at our latest master class.In 2009, the French-speaking broadcaster RTBf decided to merge its broadcast (technical) and information technology teams: 320 staff in total. Consolidation was required: radio journalists sometimes had up to four work stations. Cécile Gonfroid, appointed as director for the new department, decided to rationalize IT through 15 COBIT 4.1 guidelines, focusing on service continuity. “We have to be able to broadcast news, whatever it takes”, says the CIO of the Year.

There are two options for cost management: bottom-up or top-down. The first one will keep track of every penny in a detailed spreadsheet. It allows you to know where the actual spend is and break it up in a way that is meaningful to you. This is for instance the case at Vandemoortele, where centralization of IT within the group required better and more structured reporting as it is charged internally. “We charge every quarter: the IT services bill is divided by the four companies, and projects are invoiced per time and material. Every month we make an analysis for the services, and a budget recalculation for the projects based on staff timesheets. We share the full detail with the board”, says Luc Delombaerde.

While the bottom-up reporting is very detailed it might still be too complex, as the vocabulary is not the board’s and for that reason they may feel it is quite obscure. Ultimately we’ll turn it in a catalog of services that is more relevant to the business.

Details can also backfire

The top-down approach will calculate IT cost per capita. You invoice the services that you believe are required for the business. They aren’t bothered with the risks IT’s taking, e.g. leasing IT infrastructure or not. This high-level approach is followed by the CIO at Aveve, who went through an important IT transformation the past two years.

“Our IT department became an internal service provider for the entire group. We therefore made a detailed inventory of our IT assets, outsourced quite a lot and stopped time and means IT budgetting. We created a service catalog to better detail how we support the business”, says Erwin Verstraelen. “We can perfectly predict IT cost, as if it were a utility. We don’t provide too much detail. Not only because it can also backfire, but also because nobody understands IT. What they do understand, is money talk. If you move the discussion from costs to spend, your CFO will be an ally! At Aveve, the cost discussion has positively changed.”

One fixed price for your haircut

However, there are still a lot of companies that request granularity. “Which is strange”, believes Ade McCormack. “When you go to the hairdresser’s you don’t want a detailed cost either. You just want a single price for the job. In the front-end of the IT industry, we’ve found ourselves being judged on cost and we’ve been asked about our margin. Well, we shouldn’t debate cost management but value delivery. As a CFO, you want to know how many euros you get back for every euro you put into the IT department. That’s the answer they want and most of the CIOs cannot give, because value creation is not their responsibility – the business value comes when you add IT to users. The CIO has become the whipping boy, and we’ve gotten used to it!”

It will help if we move not sponsorship but ownership of IT to the business. Ade McCormack: “When a CRM system fails to work, it should be the sales director’s responsibility, not the CIO’s. That’s a technical shift many IT organizations haven’t understood, as were so used of being beaten up on cost. There are tree chapters in the IT story: one – IT just bought new toys to play with; two – alignment: do anything the users ask for; and three – entwinement: we’re both there to serve the customers. So anything we can do to clarify the amount we’re spending against each KPI of the business, the better.”

Such transparency is a large part of building the business’ trust CIOs need to enter value creation discussions, but it has to be translated into a spreadsheet structure the business can relate to. “You have limited bandwidth”, McCormack says. “IT is like marketing. CEOs know they have to invest in it, but they never know which part brings the real value. So you need to articulate your spend, compartmentalize it bullet by bullet with the strategic imperatives of the CEO. So when they say let’s cut cost, our answer should be: “Which imperative would you like to not achieve?” Anything else is just noise.”

“To build that trust you perhaps don’t need numbers over time”, Freddy Van de Wyngaert adds. “If you’ve been appointed just recently or if you are in a penny business, you will need to provide detail to have a discussion on cost versus value. Our business wants detail so that they can compare the value of IT to their business.”
Luc Delombaerde: “If you manage to gear IT as part of an entire business process, you can have your organization choose IT projects based upon business cases. That means you can report on cost on a much higher level. Giving clear figures helps us in that process.”

It’s all about benefit and risk

“It would mean that you are building cost models for the business that occurs today”, Ade McCormack warns. “Business in six months will be totally different. One needs to innovate if you factor in global energy security, global talent shortage or the shift in economic power further East or South. You can use cost management to be more innovative but in the end you’ll have to calculate benefit and risk. Cost management is going to be a frugality. Today CIOs tell their boards to invest a certain amount in IT for a given business strategy but they are not involved in the benefits and risk discussions.”
“As soon as we enter these, we can better define what’s important and what not. In terms of security, for instance. What data will you allow to escape? Data isn’t always top secret forever. Those radical discussions will also be driven by cost, because there will be some lean start-ups in central India or Africa who have refined an economic model that works in those parts of the world. Eventually, they’ll bring it to Western Europe. If we can’t compete with that, we’re toast. If IT is becoming a utility, why not give it to a utility player? You could get on with the more interesting aspects of IT. Technology management is being commoditized. The I in CIO stands for information.”

Cost management as a driver to change your mandate

“Actually, digital is the new information. Digital becomes more and more relevant to the business, while the CIO is not. Digital isn’t about ones and zeroes the CIO is associated with. The CDO is not a techie, he is a business analyst. CIOs should not be the senior technology manager, but investigate how they can create value from augmented humanity, 3D printing or wearable devices? You have these discussions at home, but in the office, where you should have them in the end, they only ask you to fix their broken laptop. That’s a problem. It’s a question of trust and also branding. So cost management is a good start to build trust so that you can work towards value creation”, McCormack concludes.

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