So often, I have heard skeptics who would criticize and cynically discard away the concept of measuring, accounting, and charging for IT services within an organization. “Why would you want to do that?“, “what good does that do?” or “there is no value in charging users for IT services“.
Businesses in today’s environment is very different from the past. The markets which businesses operates in are shrinking as they become more competitive, barriers to entry are often getting lower, and in order to grow, many businesses need to go beyond their current market to reach outside their current borders or geography. Selling a product or service to a customer in Singapore will be no more different than selling to a customer in Russia. Whatever it takes, businesses can never confine themselves into a small boundary within a geography or region or market segment. Likewise, consumers and buyers of products and services are no longer confined to a single vendor or supplier. They have ample choices. Advancement of sourcing avenues globally, proliferation of technology and Internet allows consumers and buyers to easily seek, source, compare and purchase from alternative suppliers within several mouse-clicks.
Therefore, the traditional IT function within an organization is no longer just the bunch of backend soldiers managing your email and accounting system. The IT function is slowly transforming and morphing into a business enabling function, providing critical platforms to put the business online, enabling marketing and direct selling of products online, closely coupling the use of IT to complement traditional products (such as IP-enabling products to provide remote monitoring services, data backups, control and management services, analytics services, etc.) and all this means that the traditional IT budget, which used to be a small part of the overall corporate budget, is going up. In the past decade or so, most businesses’ IT expenditures have gone up significantly, but many are still without adequate tools, processes and policies in place to address the accounting and allocating of IT costs.
Back to the question: Why do we need to account and allocate IT costs? Firstly, lets start with the users of IT services. Everyone in an organization uses IT services. The email and calendaring we so conveniently cannot live without, the Internet connectivity which we all take for granted, the video conferencing facility, payroll, accounting, reporting, materials requisition system, vacation / leave application system, online B2C site, etc. Yet, does the Marketing, Sales, Finance, HR, and other departments in the organization pays for these services today? No. And when the business faces a crunch, where do they start cutting budget? Obviously IT. Will there be a deterioration of service levels, performance and support thereafter? Obviously.
Secondly, every CIO or IT director are constantly in pursuit of a closer alignment of the business and IT, and in pursuit of more efficiency, improved services, higher utilization of resources and assets, etc. However, as with every other improvement initiatives, most will require investing effort and resources. If so, how do they go about justifying the investment of effort and resources? Simply by working out a business case and justifying some form of returns. But how would you go about measuring a return or benefits when you don’t even understand your baseline? If all the CIO have is a $x million figure (annual IT budget), then how do you measure the returns or benefits of virtualization, consolidation, optimization? What are the existing costs of supporting each physical server today? Without understanding these baseline, it will be challenging to justify embarking on any improvement initiative and difficult to measure the actual benefits of the target state.
Lastly, what we can’t measure, we can’t manage. In a company I know, the management faces a quarter by quarter erosion of gross margin. Lets just let it be that this company delivers all sorts of IT services such as integration, application development, installation, implementation and consulting services. Unfortunately, they do not enforce their staff to clock hours to projects and neither do they track effort spent on pre-sales. So, in other words, whether a staff works 8 hours daily, or 2 hours, or 16 hours, they still earn their salary and to the company, these costs are fixed costs. Since each projects they undertake differs in scope, size and deliverables, each are essentially different. So, how do they know if they have sized the required effort for each project accurately? It will be difficult to tell, because they have no way to benchmark or analyze their past projects without the data. Therefore, without data, the probability of under-sizing is higher. There is also no way to tell who in their staff are being utilized more, or less, or not utilized at all. Stuck between a hard place and a rock.
Whether you are an IT service provider to end-customers, or an IT department serving internal customers, if you can’t measure and account for IT costs, there is really not much you can do to manage your services and you are merely just a cost to the organization. To the CFO, costs is just a dollar number on the books (which have no significance relation to the business).
Tags: Business, Cloud Computing, Consumers, Cost, ITIL, OPEX, Service Management, services