Understanding the value of IT
The law of demand is probably the most famous of economics theories and one that we are all aware of in our daily lives – in general, the higher the price of a product or service, the less we buy of it. So, if consumers see something as free, it’s human nature to consume more of it. Free bar, anyone?
And the same law operates in IT, too. Projects or business units that don’t see the cost of IT will naturally levitate to their other drivers – risk or performance.
This means a range of behaviours such as over-specifying solutions, avoiding the routine of housekeeping to turn off services (e.g. test environments, phone lines, etc), ordering the best equipment rather than the best priced equipment to satisfy a need. This isn’t bad behaviour per se, but more a product of poor organisational structure, process or operating model accountabilities that result in common traits such as:
• Lack of information to make informed choices: Failure to understand solutions design impact on cost, resulting in customised solutions without recognition of overall cost of ownership
• Demanders rewarded only for performance rather than a balance of performance and cost: It’s hard to convince someone compromising their demands to save money is better, if they are only responsible for delivering the solution rather than the ongoing costs to run it
• Early adopter or refresh taxes: Business units being hit with unexpected or high take-up or refresh costs due to the need to recover all costs in-year and the inability for IT to carry refresh cost risk – causing frustration for all parties and a drive towards flexible supplier models such as cloud
When it comes to IT Finance, organisations tend to polarise into two categories:
• The Wooden Dollarists
Those that think cross-charge is a waste of resources (it’s only wooden dollars, after all), and therefore retain IT costs centrally or operate the most rudimentary of cross-charge based on number of heads or turnover of the business unit. This approach avoids the need to invest in complex pricing and recharge approaches but these savings can be eroded by the time needed to explain and justify IT costs to the business. Usually, the business sees a big block of cost and has little information as to why it’s the size it is. This also exacerbates any demand behaviours – if there’s no clear link between consumption and cost, then the individuals are unlikely to make sacrifices to reduce spend.
• The Consumerists
Those that invest massively to provide PxQ / consumption-based pricing models and improved accuracy of IT recharge, to provide business units with improved insights (and control) into their demand and cost of services This approach helps IT transfer accountability for IT spend to those that consume it, and can be useful to drive demand-led behaviours and support tax and financial control requirements in multi-national organisations.
However it is costly to implement/ maintain and can create the wrong impression to business units – e.g. having a consumption based price can lead to false expectations (reduce demand = reduced cost) which may not be achievable if the cost base is fixed within the period). It may also lead to the business “cherry picking” specific services it perceives to be better value. It also raises the question of IT’s P&L risk – who takes accountability for demand forecasting (upon which most consumption-based prices are based)?
If demand is lower than expected in one business unit, do all other business units pay? Both approaches have their merits but also implications; choosing the right approach for your organisation is dependent on a range of factors including financial policy, information availability/ maturity, organisational objectives and even culture.
The cost-based approach to recharge
My starting point tends to be in the middle ground – the cost-based approach to recharge. This involves channeling any effort into developing an understanding of costs, and then use this to provide financial MI to the business.
Recharge is secondary in this approach, as the Wooden Dollarists are correct – there is little intrinsic value in creating complex recharge mechanisms. Keep this simple, but invest time in showing the business why costs are what they are, and what they can do to reduce their costs in the short, medium and long term.
This moves the conversation to value – rather than seeing a lump sum it can’t understand or influence, the business is better able to understand, manage and yes, challenge IT on the costs. This builds a better basis for understanding the value of IT, for instance building awareness of why the cost of a laptop might be greater than the headline price of hardware. It also avoids effort to create and maintain pricing and recharge mechanisms – but better still, the effort used in creating cost insight is also imperative to running IT too.
With appropriate data, the business is better able to take accountability for decisions that affect its own cost base, and therefore make demand and design decisions accordingly. Above all, the lump sum charged by IT is finally demystified and user awareness of cost of IT is enhanced – IT is no longer a “free” service.
Of course, in the same way that consumers at the free bar may adjust their perceptions of value of the wine once a charge is introduced, the expectations of quality and perceptions of IT’s value may change once the real cost is known. But mature IT organisations must tackle this head on to build improved business relationships and value perceptions for the long term.
Further benefits of developing Cost Transparency was explored in more depth within the Coeus Consulting 2018 IT Leadership Survey (view) which identified a strong link between cost transparency and perceptions of value by the business).
Blog post by Mike Ward.