Does your IT team need to change to fulfil the requirements of your business? IT costs are increasing as a percentage of revenue and operation expenses and, at a time when many organisations see themselves as technology companies, they are set to further increase.
Many IT professionals are not as commercially savvy as they could be: we don't treat IT spend as though it were our own, there is a lack of governance, transparency, commercial challenge, focus is on new and not reuse, and decommissioning rarely happens. This means new applications are added into the funnel, but very little is removed.
CEOs are looking to CIOs to help with cost reduction to support the current pressures of falling revenues and increasing costs, so the CIO needs IT professionals who are commercially savvy. Organisations need people who ask, 'do you really need to consume that?', 'do we already have one to reuse?', 'can we deal with lower level service, reduced volumes or just take the risk?' 'is the supplier offering value for money?'
CEOs are quick to bring together a short-term transformation function if revenues are falling, given IT costs at many organisations are the largest spend, by creating teams to perform a short sharp controls process change to lower costs. But sustainability comes from the creation of an IT commercial/performance management function.
Once the culture has improved to become more cost-conscious, the delegation of powers move back to cost centre owners/consumers. Then this needs to be sustainable at an IT leadership level – all senior IT professionals need to ensure that they keep the level of service their customers expect, while delivering value for money.
Tech-only senior resources lack commercial skills and this can cause conflict at a leadership level. There is a balance between getting the job done and getting it done in a value for money way. CIOs are often reactive about cost optimisation, waiting for cost reduction targets to be handed down before organising cost optimisation activities.
IT leaders typically fail to maximise the benefit of their cost optimisation activities by not managing these efforts collectively as an ongoing programme, and can be too focused on the next 'quick win' rather than what will enable them to effectively reduce costs.
'Good' is often the enemy of 'best'. IT cost optimisation often stops when an organisation hits its targets, rather than creating a culture of continuous improvement. This needs to be an ongoing discipline, embedded in the IT organisation's DNA.
An IT Commercial Director
Strong commercially savvy CIOs will appoint someone in the IT organisation responsible for IT commercial and performance management. This is often someone from the IT leadership ranks, who can lead a cross-functional team to drive accountability for commercialisation of IT costs. This IT Commercial Director will set targets and choose initiatives for cost-optimisation activities using frameworks, such as Gartner's Four Levels of Cost Optimisation and Decision Framework for Prioritising Cost Optimisation Initiatives.
This needs to involve operational leaders and key staff to look at IT costs in the context of end-to-end business processes. Also the business must be involved, as effective IT commercialisation requires making value-based trade-offs about which projects, services and service levels the enterprise can afford.
The IT Commercial/Performance Management Director will be responsible for the following tools to drive value and reduce costs for the CIO/CEO.
1. Treat the IT commercial challenge as an ongoing discipline
The 'reactive' IT commercial model fails to maximise commercial challenge activities and leaves money on the table. It lacks the involvement of other key IT staff and the business. However, the expectation of CIOs and IT leaders is to continue to reduce costs, while providing additional innovative business solutions.
Having a commercial-savvy IT organisation will free funds to enable the business to have innovation to support business growth while IT costs either remain constant or reduce.
These increased demands require a renewed focus on how to manage IT commercials. A proactive approach is centrally planned and managed at the CIO level. Embedding commercial challenge within the IT organisation's DNA requires leadership and planning by CIOs and IT leaders.
While IT cost management should never be a number one priority – delivering and maintaining IT solutions that add business value should be – effective cost management often needs to have a higher priority in most IT organisations. This requires increased focus, visibility and – most importantly – accountability.
The IT organisations we have seen optimise costs most successfully did not discover new ideas before their peers. They chose to organise their cost optimisation activities centrally, focusing on identifying the best ideas, making their objectives clear throughout the organisation and then holding people accountable for proper execution.
In order to have everyone in IT thinking about cost optimisation and innovation, idea generation should involve all IT staff via crowdsourcing online tools, and should employ a measurement system to evaluate and prioritise all ideas.
A key element of success will be to incorporate the commercial challenge practices into a larger IT strategy. The success of the strategy will partly depend on the success of the commercial initiatives.
These should ideally be managed as part of a programme of work. Via performance management framework, you can report progress against key milestones and targets needed to achieve the desired results, report on any risks and opportunities against delivery of the initiatives, and schedule monthly meetings to discuss performance. All these elements further instil the discipline needed to continuously manage cost optimisation at all levels within the IT community and assists with cultural change to a cost conscious environment.
2. Commercial challenge and supplier management
Supplier contracts, if not managed well, can very quickly become out of date. Contracts need to have sufficient flexibility built in when first let to enable business change. For example, fixed price contracts are not good in a declining business, whereas capped time and material contracts are good when the business are not specific on their requirements because this puts the onus on the supplier to take some risk.
Certain clauses need to be mandated in contracts, such as termination for convenience, continuous improvement cost and performance, benchmarking, and so on. Measurable outcomes need to be agreed and measured against during the life of contracts.
All IT professionals who are responsible for working with the supplier need to be conversant with the contract, performance measures and commercials. This should include the business analyst level, as they will be responsible for the day to day management of the supplier against the contract.
Additionally, supplier management governance is key, monthly operational and quarter senior strategic reviews, utilising actual factual data and KPI measures.
Suppliers should also be asked to invest in your company for strategic reasons, to share innovation specifically for your company to show that they are real value add partners to your organisation.
All contracts should be reviewed regularly and via the IT commercial function challenged with the supplier when they are not fit for purpose or no longer add value to your organisation.
Your IT workers should be empowered to challenge suppliers. All too often they feel uncomfortable with this, but working with and watching the IT commercial function undertake this can build confidence over time and it becomes a way of working.
3. IT budgeting - managing multiple views
An inability to manage the traditional asset- or general ledger-based view of IT spend will mire the CIO in continuous dialogue with the CFO and undermine IT's credibility, thereby impeding the ability to demonstrate value so successful CIOs and IT Commercial Directors typically manage multiple views of IT spend. Sometimes this is driven by the complexity of the enterprise requiring views by business unit, region, product, and so on. More often, the need for multiple views is driven by the complexity of IT itself. The fact that IT delivers projects and services often requires views of both.
The project or portfolio view is needed to enable organisations to prioritise investments, understand associated cost (typically capital-intensive) and communicate how IT enables change. The services view should be focused on presenting the operating expense (opex) budget by IT services. The value of ongoing costs of IT services is typically demonstrated through price/performance – this gives financial transparency in a language the business understands.
The ability to slice and dice the IT budget into different views aids in demonstrating the business value of IT. This additional transparency can begin to answer the question, 'Why is IT so expensive?' along with communicating the IT budget in business terms.
4. Cost transparency and chargeback/show back
Does the organisation know every penny it spends in a price multiplied by quantity model: price being the service provider's responsibility to reduce and benchmark for continuous improvement and quantity or demand model being the consumer's responsibility to reduce consumption? Having sufficient transparency enables the business and service provider to identify savings.
Benefits of cost transparency:
Culture and behaviour
- Driving cost-conscious behaviour to reduce overall spend.
- Enabling lines of business to make informed decisions when committing to spend.
- Demonstrating that the use of technology is delivering value for money.
- Helping the COO and lines of business work together to focus on spend that delivers the maximum business value.
Volume and demand management
- Reducing unnecessary consumption and spending.
- Identifying decommissioning and simplification opportunities.
- Consuming only what is necessary and eliminating waste.
- Facilitating benchmarking to identify cost-saving opportunities.
- Aligning contracts to current needs and consumptions.
- Informing the COO costs of business processes.
- Simplifying processes where appropriate and driving value for money.
There is an ongoing debate about the value of chargebacks/show backs. More than one third of organisations see limited value and choose not to charge back or even show the client what it costs to deliver IT services (show backs). Others simply allocate costs based on high-level metrics (such as the percentage of revenue or the percentage of employees). However, IT leaders who understand that effective chargeback/show back practices have many benefits invest in the necessary resources to implement full cost transparency and the right chargeback process for their organisation.
While there are multiple approaches to allocating and charging IT costs I have seen a shift in recent years to IT service-based pricing. This approach goes beyond traditional IT cost pools based on technical domains (such as mainframe, server, storage and network) to the creation of IT services in business terms, in other words business process costing.
5. Investment planning – effective project financial management
More than 30% of IT spend is typically invested in new initiatives or projects. In addition, the enterprise often sees the 'project portfolio' as the primary value IT delivers. Effectively managing the project portfolio requires an end-to-end view of an investment, prioritisation against business objectives and key metrics such as payback, ROI, then starting with an approved business case that outlines expected benefits as well as total costs.
IT needs to communicate the lifecycle cost of a project at the time of project approval, so that more than just implementation costs are funded and tracked. These new operational expenses are also required as part of the financial section of a business case to calculate financial metrics such as ROI, net present value (NPV) and payback period.
IT often is involved in the process of creating the assumptions that drive the benefits required to complete a business case and receive funding approval. Accountability for ensuring that business benefits are actually delivered is often missing in many enterprises, driving some IT organisations to lead the benefits realisation effort in order to demonstrate the value of IT. Decommissioning opportunities are considered within the business case and benefits are realised.
Once a project is approved, IT needs to track both the actual and forecast project cost through to completion. This is the most common form of project financial management, and is required to ensure that the individual project is delivered in a cost-effective manner, and to effectively manage the capital expenditure (capex) and opex associated with the project portfolio.
6. Benchmarking IT costs
Benchmarking IT costs is one of the most overlooked of the commercial tools. It is an effective way to track your own performance over time, while comparing it to your peers and also allows you to challenge suppliers' spend on run and change costs, to form the basis for commercial negotiations.
Incorporating effective benchmarking into the annual planning process will not only provide additional financial transparency, it can also be used as a mechanism to identify areas of opportunity. This should be incorporated into your continuous improvement supplier contract review process, and clauses should be inserted in to every supplier contract that can be enforced to benefit from benchmarking costs.
7. Continuous IT cost optimisation
CIOs and IT leaders have always attempted to optimise IT costs. But too often cost optimisation activities happen organically in different areas of the IT organisation with an IT leadership team scrambling to put together ideas in flight to meet the cost reduction target. Once the cost reduction target has been met and the 'fire drill' is over, IT leaders typically return to 'business as usual'.
Due to increased demands for IT projects and services, some IT organisations have begun to employ a proactive approach that is centrally planned and managed at the CIO level. The primary focus of cost optimisation has often been the IT operational budget. More recently, however, the focus is on where IT gets the business involved, thus requiring organisations to make difficult choices about what projects, services and service levels the enterprise can afford.
Governance processes ensure that we focus on the right things with our scarce IT funds and challenge alternatives. Implementation of governance processes to commercially challenge often initially causes conflict at an IT leadership level. This could be perceived as lack of trust, and taking away autonomy. However, when benefits are delivered, it is a main driver of behaviour change – IT professionals begin to challenge each other. This, coupled with cost transparency and performance management, drives the cultural change to becoming a cost-conscious organisation within IT.
8. Performance management
Many IT leaders avoid the opportunity to communicate IT performance and business value. For some, performance metrics focus on the 'five nines' of system availability (99.999%) and operational metrics. But these types of metrics often lack anything that can be considered truly strategic once the original problems are solved.
The key is to create a set of performance metrics that will communicate multiple activities (such as the delivery of project and services, financial performance, operational performance, supplier performance and innovation). Often, we see IT organisations separating their IT performance scorecards into two parts – the supply-side scorecard and the demand-side one. The audience for the supply-side is IT, and the metrics measure IT processes. The audience for the demand-side is the rest of the business, and the metrics measure IT business service delivery, including IT-enabled business initiatives.
The demand-side scorecard can be used to illustrate the value IT is delivering to the enterprise by increasing the maturity level of IT performance management, scorecards and dashboards.
A performance framework ensures that what we work on is aligned to the organisation's strategic objectives; we are focused and accountable, and can measure success. We would monitor delivery through performance management via a performance hub process. This starts with a business strategy that aligns project delivery to strategy, deliverables against projects and KPI (key performance indicators) against this strategy. This process is rolled out in the organisation, enabling the business to see its performance in a number of ways; for example, through the customer's eye, the employees' eyes, our finances, our projects, our suppliers and our operations.
A performance hub is a dedicated space where people can gather to view and discuss performance data. By displaying this data and related information in a highly visual way, the hub makes it possible to discuss performance issues openly and interactively, helping senior leaders to run their business more effectively by enabling them to take prompt, properly informed strategic decisions.
The IT commercial functions should additionally be responsible for driving innovation into the business from internal and external sources. This innovation will be cost reduction, but also drive business growth and value. In today's increasingly competitive and disruptive environment, organisations are realising that agility and innovation are crucial to challenging and beating competitive threats.
While most organisations will never need to be as innovative as the high-tech giants, the ability to quickly introduce new processes, practices and technologies that have a measurable improvement on business performance, is increasingly being seen as normal.
Good innovation companies structure their approach and focus on:
- Establishing a culture where innovation is seen as important.
- Analysing and planning innovation.
- Having a well-established innovation process.
- Allocating dedicated resources.
All of these are critical components in capitalising on innovative ideas and turning great ideas into real results – nurturing a culture that allows for innovation is the key. The right planning, processes and structures then provide the mechanics required to deliver real results. Some ideas for innovation generation:
- Portfolio planning exercises.
- Supplier strategic innovation events.
- Staff and partner surveys.
- Hackathons, and so on.
The value of the IT commercial and performance function
I have been lucky enough to have been able to build this function in four successive organisations, all with the same results: immediate sustainable cost reductions of circa 25%, and more recently share price increases as a result.
This has worked for many sectors: IT, government, financial services, and transport. By using common commercial tools, the success has been mirrored in all sections we have worked in. The value of an IT commercial and performance management function is that it sits across all IT functions and pulls together costs, performance and commercials into a central view to provide the CIO with valuable directional data to aid his decision making.
This function won't work with commercial tools alone; it will need to be suitably senior IT professionals within an organisation to have teeth. It will need top down support. It won't be the most liked part of the organisation – cost centre owners will see their challenge as a criticism, procurement will see them treading on their toes, finance will like end results, but never manage to achieve this themselves. The CEO and shareholders will, however, love them.
This function can benefit from all IT professionals becoming commercially savvy to enable greater synergies driving value across the business. CIOs should recruit those who have more than one dimension in order to deliver value to the organisation to enable free cash for business growth, company survival, and innovation into new technologies.
CIOs and their teams are continuously on the lookout for ways to better control IT costs and get the most from every IT investment. In addition to looking for funding from individual business unit initiatives, reducing the ongoing IT costs associated with running the business is one of the best ways to free up funding for new, value-added IT initiatives. This is of particular importance to enterprises making the transformation into digital businesses, with IT-driven innovation becoming a necessity.
Organisations mature enough to have IT commercial and performance management functions don't build up inefficiencies are that are carried for years, until another transformation happens. It uses the tools and processes to prevent it getting that far. This, coupled with transferring the skills to all IT professionals, will ensure that the CIO has a commercially savvy organisation all driving in the same direction with measurable outcomes and free cash for innovation and growth.
All IT professionals need to process commercial challenge skills. All CIOs need to invest in the commercialisation of professionals.
Louise McCarthy is CIO Commercial Transformational Director at Specsavers