Podcast: Aligning IT Cost Optimization with Business Strategy

July 29, 2009

Frank Schiewer on IT/Finance Communications: .

Making bad investment decisions can be devastating to an enterprise – especially in a tightened economy. You can’t achieve product leadership and customer intimacy by uninformed cost-cutting. True, you need capital expenditures and new projects to support sales, marketing, etc. But money is not unlimited and trade-offs need to be made. The question is: Which ones and at what consequence to the company?

Most organizations suffer from an absence of sufficient transparency into the relationships between business goals, business capabilities, proposed and running projects. Without strong communication between IT and finance and actionable business intelligence, it’s impossible to make decisions such as the following:

Which business capabilities need to improve to best support business strategy?

Which projects target improvement of those particular business capabilities?

Which projects can be discarded to make room for the truly important ones?

How will cancelling these projects affect other projects that are planned or running?

Reducing operating expenses with the goal of improving efficiency — running business processes at lower cost, outsourcing or reducing vendor costs – is just as fraught with potential risks. Without the ability to capture costs appropriately so as to be able to aggregate totals for individual business services, processes and domains, organizations can’t identify:

True costs of IT’s support for business processes or business capabilities,

Redundant or inefficient IT support of business processes and capabilities,

Consequences of system roll-outs, postponements or cancellations,

Or processes that are candidates for an outsourcer that can deliver at lower cost.

The Truth is in the Data
For optimizing capital expenditure, finance should promote or discourage projects based on their potential contribution to achieving the business strategy. Achievement of business strategy, in turn, is dependent upon the strength of the business capabilities needed to support the relevant activities. And the strength of business capabilities is dependent on the quality of IT support for those capabilities. To ensure the proper level of IT support, organizations need to analyze project proposals.

To identify where to target improvement, evaluations must demonstrate the difference between the required capability strength and current strength; and prove whether a project will support closing the gap between current and desired strength.

Part of the evaluation of the project portfolio should include the impact of project decisions on other projects. In cancelling a project, you don’t want to endanger projects that are supporting critical business areas. Further, proposed projects may overlap with other planned or existing projects based on the IT solutions they plan to build or modify. Identifying these dependencies can make projects easier to finance and create space in the budget for projects that are lower down on the list of criticality but nonetheless important.

In mapping the IT architecture information to the project portfolio, finance can see which IT systems are addressed by which projects and where multiple projects address the same IT systems.

Operating expenses can be addressed in a similar fashion – understanding the information, relationships and processes needed to reduce operating costs without increasing risk to the business.

Unfortunately, many companies employ the “lawnmower” method to cut costs, using ERP systems to capture IT costs, which provides limited views of IT costs as cost types or cost centers. So they take 20% off the top (or bottom) of hardware, software and staff and - voila! – they’ve saved the company a few million. Or, they reduce individual cost centers by 20% across the value chain – R&D, production, marketing, sales, service, etc. These methods not only miss true savings potential, they also put the business at risk by cutting resources that may be critical to important business processes, capabilities and achieving business strategy.

By capturing and analyzing the IT landscape and the cost of the elements it’s made up of, finance can gain the transparency needed to find the redundant systems so often prevalent in distributed global enterprises. Seen as individual building blocks, IT objects can easily be mapped to business processes or business capabilities to be able to evaluate the IT cost needed to support the individual process, identify inefficiencies in support, and find inappropriate SLA levels and outsourcing candidates.

As a result, they can identify the gap between required and provided IT support, business capabilities or processes that can be outsourced to improve economies of scale for business transactions and IT systems that can be outsourced to improve economies of scale for IT servicing.

Summary
Rather than employing the lawnmower method to reduce costs, organizations should consider analytical approaches that capture business processes/business capabilities, projects, the supporting IT solutions and their costs and enable them to analyze IT cost structures and gain insight into activities with high IT cost and low business value. By integrating information on the business requirements, IT project portfolio, IT cost and budget and IT landscape, they’ll gain a holistic view of IT cost for IT financial management. As a result, instead of budget slashes that cause long-term harm to organizations, they’ll know which business capabilities are critical; whether IT support for critical business capabilities are sufficient; in what areas IT costs and planned IT investments are disproportionate to business strategy; and what will happen to critical business areas, existing projects and future business plans if they cut operational budgets or cancel projects.

–Frank Schiewer

About Frank Schiewer: Schiewer is a Member of the Board of Directors of alfabet AG, an internationally operating software house and recognized leader in the IT Planning and Enterprise Architecture market. Since joining alfabet in 2005, Frank Schiewer has grown alfabet’s market reach from Germany into Northern Europe as well as to the US and APAC regions. Before joining alfabet, he was Vice President for Central & Northern Europe at Think3. Previous to this he worked as Country Manager at J.D. Edwards Germany where, among other things, he was responsible for the merging of the professional services organizations after the company’s acquisition of Peoplesoft. Schiewer brings almost 20 years of experience in international IT software to alfabet.

Posted by Carl · Filed Under Business Intelligence, Risk and Compliance, SaaS, partnership pages