Service-Based Finance: A key foundation to achieving real business transparency

IT doesn't matter.jpgAccording to leading analyst firms, Information Technology has been responsible for more than 50% of the productivity gain experienced by businesses over the last ten years. However, most IT organizations do a poor job of sharing and demonstrating the value they create. Most IT professionals in fact speak in a language of bits, bytes and things. This problem led Nicholas G. Carr to suggest that “IT Doesn't Matter” in his controversial  Harvard Business Review article that resulted in his book, Does IT Matter?

 

IT does matter

Since the publishing of Carr’s book, businesses have tended to take a contrary position, however.  In the words of a major insurance executive, “When the business  thought about this, it decided first that IT did matter. And,  since that was true, then some things must matter more than others.” This perspective is causing more and more IT organizations to want to create “transparency” into the value they create from existing and future investment. And while many internal service providers can explain their service quality, their inability to account for its cost prevents them from acting as a former boss of mine once said as a “businessperson.”

 

 

businesssspeople.JPGIT acting like a businessperson

Why is this the case? The easy answer is to blame corporate finance. After all, they labeled IT as a cost center. In the language of accounting, “a cost center is part of an organization that does not produce direct profit and adds cost to the running a company.” In larger companies, the IT department costs can be partitioned into as many as 200-300 cost centers. This fact has left the integration of costs for plan and actual to IT itself. This is a messy business of integrating Excel sheets.  I have found that  for of the vast majority of organizations I consult with,  financial performance reviews  by the IT department takes place only on a quarterly basis. As a consequence, projects and applications costs are reviewed as much as 120 days after the operating period starts. But even more important is how these costs get planned and reviewed with business management. Instead of discussing the business value received from IT services or applications—the actual products of IT—IT organizations discuss servers, storage, application software, and people in their financial reporting to the business.

 

value.jpgService component costing means nothing to the business

These so-called “service component costs” mean nothing to most business customers who consume IT services. In fact, IT bills often look worse than a cell phone bill because instead of showing service costs, they show 1/6 of a server or 1/5 of a router person. Let’s face it, IT customers consume services. This lack of knowledge and transparency has made IT the favorite place for the corporate knife. And while IT has done its best to cut the service desk and new project spending, what is needed is joint business and IT cost savings.   

 

 

Service-based finance involves putting together the cost of services

What IT leadership needs to do is to put together spending by service or application—service based financial rporting--and then make a comparison of each service against utilization and availability metrics. By comparing against utilization, IT as a businessperson can ask why the business is  continuing to spend money on a particular application when, perhaps,  only two people for example are using it. With this methodology you can demonstrate  a more true business impact on the IT services you deliver.For example, a large insurance company I know successfully implemented a new version of Siebel 18 months ago. The company then asked IT to keep the previous two versions of Siebel up and running “just in case there might be some data we need.”   But because ITcould not derive the cost of service, they could not drive a rational business decision whether to keep or remove the older versions of Siebel. Fundamentally, IT aligning and becoming a business person involves allocating the people, infrastructure, and maintenancecosts from IT cost centers to what the business consumes, services. In this manner, a progressive IT department can move away from being just a efficient cutter and become instead a valued business partner and opportunity generator. This delivers on the real promise of Business Service Management.

 

I’d be interested in hearing you describe the success you’ve had  or the challenges  you face in moving your viewpoint ofIT from that of acost cutter to a true business partner.

 

Related links:

Feature:  Peak performance demands precision control

Solution Brief: http://h20195.www2.hp.com/V2/GetPDF.aspx/4AA2-6385ENW.pdf

Solution page:  Business Service Management

 

 

 

 

Comments
PaulMuller | ‎02-02-2012 07:06 PM

Myles, this is the perfect post for the Discover Performance blog and gets to the heart of what it means to "discover performance" ie: measuring the "before" and "after" to determine if performance has indeed improved.

 

It's clearly a lot more nuanced than the title of Carr's article would have you believe (something Carr himself readily acknowledges) - for proof, I recommend that you take a look at the 152 responses on LinkedIn's CIO forum in response to the simple question "how do you define IT performance?" 

Mark Eimer(anon) | ‎02-11-2012 03:49 PM

Myles,

 

You are correct in that having IT tell the business what their price per widget is does not neccesarily help the business understand the value of IT unless they benchmark themselves against their peers in their specific industry.  The real value of IT is in it's enablement of the business and marketplace differentiation that can be created.  In Dallas where I used to work for the market leader in healthcare, IT was the market differentiator that helped to draw patients and physicians to the business.  We also showed how the cost of IT was impacting the prices that they were charging.  We benchmarked ourselves annually to show we were competitive with our peers.  The company was also a holding company and the IT costs were spread evenly across all hospitals.

 

Great article.

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About the Author
Mr. Suer is a senior manager for IT Performance Management. Prior to this role, Mr. Suer headed IT Performance Management Analytics Product ...
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