How Do You Know IT Costs Too Much

Curated by Paul Helmick

I’m a Technology CEO and Experienced Entrepreneur. I love helping people use technology to grow their business.

  • A great article I’m resharing here from CFO Magazine
  • For years I’ve worked with CEO’s an CFO’s who look to IT Spend as a Percentage of Revenue or IT Spend per Employee to get a handle on what to budget or invest
  • But in today’s hyper-competitive digital world, business models are being significantly disrupted and executives are more tech-dependent than ever before

For years, enterprise information technology organizations have been measured by a few simple metrics to give business executives and CFOs high-level insights into IT spending. The most widely used metric is the well-known IT Spend as a Percentage of Revenue or its corollary, IT Spend per Employee. Both of these metrics vary significantly by industry and do not factor in the current explosion in technology fueled by the data economy.

IT Costs

Given the constant chatter in the market that “we continue to spend too much on IT,” it’s clear the current metrics aren’t providing the insights senior leadership needs to understand the ROI they are getting for their IT investment. So, how do you know what you should be spending on technology and more importantly, how can you collaborate with IT to spend it more wisely?

The traditional methods of macro-level benchmarks, such as IT as a Percentage of Revenue, provide little help in addressing what an organization should spend. The role of IT is becoming increasingly complex as businesses everywhere transform through technology and digital initiatives.

In today’s hyper-competitive digital world, business models are being significantly disrupted and business unit heads are more tech-dependent than ever before. In an “as a service” business model, technology spend is likely to be spread across multiple organizations in the form of software as a service (SaaS) contracts or engineering spend to support “digital transformation” initiatives. This spend would likely be missed in the traditional benchmarks, but has a significant impact on the value gained from technology. The traditional metrics also don’t address the broader question, “Am I spending on the right things?”

According to a 2015 Forrester Research report, 54% of IT leaders said their top priority is to deliver data and analytics that improve business decisions and outcomes, while empowering the IT department itself to make transformative changes that reflect the value of technology investments serving those goals. The good news is CFOs and CIOs are aligned in their desire to understand the value of technology investments. The bad news is that many organizations do not have the insights or tools to make sound technology investment decisions.

The biggest impediment to effectively managing an IT portfolio is lack of transparency. Most organizations simply do not have effective analytics to manage IT spending. Sure, there are basic IT cost controls, such as counting the number of servers, dissecting the various storage layers, comparing labor rates, allocating capex and opex spending, or allocating costs to users based on service or help desk costs. These measures may give business leaders a sense of control, albeit a false one, but do they really indicate the value of the IT investment? Are these costs really aligned with the business drivers? The biggest challenge to transparency is in mapping these “tower-based” costs to IT or business services. But there is a way now to overcome that challenge, through a discipline known as Technology Business Management, or TBM.

TBM essentially is a financial discipline that creates a culture in which understanding costs and maximizing returns on IT spend become possible. Through TBM, CFOs and CIOs learn to speak the same language, gaining a greater mutual understanding of how technology spend and speed-to-market drive value and pay dividends for the business. A well-defined TBM approach, executed in close collaboration between the CFO and CIO, establishes the right balance between smart IT investment and smart cost control — moving IT from being a cost center to an engine of value creation.

At its core, TBM is all about transparency. TBM eliminates the mystery in IT budgets and spend, and provides data visualization and analytics to begin a meaningful conversation about technology investment. This transparency enhances decision-making by enabling IT leaders to model the impact of technology decisions and make appropriate trade-offs that reinvest potential savings.

Even as businesses accelerate their move to cloud computing and SaaS — options that allow them to buy services only when they need them, without large upfront investments — CFOs still need to know the total cost of ownership (TCO) for applications and other technology implementations, and what the business value will be to the non-IT consumers of technology. One of the ways to better exchange this information – and have better information to exchange — is to build a solid and flexible TBM team that bridges the finance and IT departments and balances their mutual demands.

Once you’re asking the right questions, you start to get the right answers. A TBM framework creates the “big picture” visibility needed to understand whether your IT investments are aligned with business processes and outcomes. TBM is needed especially to meet the challenges of “shadow IT,” where parts of the organization buy their own technology to meet a business need, often without the input or knowledge of IT.

Business units often take such matters into their own hands when they view the central IT department as too slow or unresponsive to meet their needs, or unable to deliver the technical expertise that advances the business in an evolving world. Rather than remaining in the dark, TBM brings “shadow IT” to light, revealing actual IT spend and illuminating its true business purpose and value.

But there’s also a reciprocity at play: TBM is, in a sense, “shadow finance,” and the CFO who has the determination and foresight to embrace TBM and lead a smart, agile technology finance team creates far more solutions than road blocks. The team will, in fact, deliver better budgets with more precision, and provide more informed forecasting with TBM analytic tools and metrics. But unless that information is used to justify IT investments that make sense — that deliver cost savings on streamlined logistics, generate new revenue streams, or enhance customer experience — it’s not really TBM.

Finding the answer to the question, “How do I know if my IT costs too much?” and moving on to the more significant question, “What is the ROI on my IT investment?” are dependent on finding that space where technology and finance intersect — across the entire business, not just within the IT and finance departments — and going beyond mere processes to build a culture of teamwork and collaboration, executive support, and best practices.

Steven Hall is a partner, emerging technologies at Information Services Group (ISG), a technology insights, market intelligence, and advisory services company. Steve’s knowledge and experience in cloud, automation, mobile, DevOps, Technology Business Management, and global service delivery models has been essential in guiding some of the largest multinational corporations in creating highly valued IT strategies.