Knowing the Cost of IT

by Bob Benson, Tom Bugnitz, and Bill Walton, Senior Consultants, Cutter Consortium

For years now, CIOs have contended with business management's questions about the value of IT. But this is only half of the issue: CIOs also have to contend with the cost of IT. In our experience, the ways in which IT cost is managed -- how IT's cost affects the business units -- is a critical element of IT management and governance. For example, it's hugely different whether business units pay for IT (with fungible money) or whether the costs are assigned to them. In either case, knowing what the costs are is critical.

In an upcoming Cutter Benchmark Review (Volume 6, No. 8), we analyze the results of a world-wide Cutter survey about IT budgeting (including cost and cost recovery practices). Our final paragraph states:

IT management needs to treat IT cost processes as the most strategic aspect of IT management -- probably more strategic than the more traditional processes, such as enterprise architecture, project prioritization, governance, and so forth. IT management ignores IT cost processes (budgeting, cost recovery, the definition of IT cost, the impact of IT cost allocations on business units, etc.) or relegates IT cost processes to junior members of the IT staff, at their peril.

Strong words. But they're borne out through experience. The fundamental issue is that business executives want to understand what they buy with their IT dollars -- and why they have to buy it. And IT management doesn't make it easy. Yes, project costs are usually pretty well understood, but the ongoing IT spend is almost always a black box or, as one of our clients termed it, "the IT glop." Chargeback often makes it worse, because the character of the chargeback is so often unrelated to the business activities employing IT (which business executive can possibly understand, for example, paying for "storage management" when that executive makes no decisions about, nor has any control over, the activities that drive those costs?)

What About Value?

But, you exclaim, isn't it more important to know and communicate the value -- the business benefits obtained from IT? Certainly value and benefits are important. However, unless there's an understood cost connected to them, the messages about value and benefits fly right past business executives. As we state in the title, "If you don't know cost, you don't know anything."

A large part of it is building the foundation for trust and credibility. If the IT executive doesn't understand and communicate IT costs effectively (and by "effectively" we mean understandably to the business), how can he or she possibly be credible on the benefits? Note that this is not an argument for chargeback per se. That is merely one method of implementation for understanding cost.

So what should the IT executive do? We recommend the following steps:

1. Adopt cost-process objectives. Provide transparency to IT costs for the business units; influence the behavior of business units about IT decisions based on cost, and properly connect ongoing costs (not just projects) with business values and business benefits.

2. Put someone in charge. This is not an accounting matter. It's a fundamental part of how IT connects to the business. This is a senior management responsibility. Many of our clients have senior-level "IT CFOs" charged with achieving the objectives.

3. Adopt a proper IT financial framework that enables management, not accounting. Generally, the CFO's budget/expense categories and the IT organization's cost centers are established for internal management purposes, not to communicate to and manage costs from the business perspective. (See our other Business-IT Strategies E-Mail Advisors about Service Portfolio Management for what a proper IT financial framework looks like.)

The bottom line: while communicating value is indeed important, its success is built on understanding and communicating cost. The IT executive must start here and build the proper IT financial management foundation for value.

-- Bob Benson, Tom Bugnitz, and Bill Walton, Senior Consultants, Cutter Consortium