As the Total Cost of Ownership (TCO) of IT consumes a larger percentage of revenue, it becomes incumbent upon CIOs to demonstrate the business value and cost-effectiveness of their IT services.
Most CIOs have confronted the issue of IT’s value to the enterprise over the course of their careers. The challenge often comes from those not familiar with routine IT budgetary constraints and the seemingly insatiable demand for their skills and services.
Historically, the IT department has been a cost center within the corporation, where IT infrastructure, data center, applications and support services have been procured and dispensed, based on budgets not always closely aligned with business requirements or strategic vision. This approach has led to a type of impedance mismatch between the services offered by IT and business stakeholders.
This was acceptable, if not tolerated, when the cost of IT was a smaller percentage of the overall revenue. Consider:
- IT’s budget has traditionally been built around planning for and purchasing software products and IT support for the business.
- The business views IT as a purveyor of technology and technology-related services versus business value. As a consequence, the IT department’s capital and operational budgets are not always closely aligned with services provided by the organization.
- IT budgets are driven by the cost of infrastructure, software licensing, maintenance, and personnel, among other things. The business sometimes has difficulty seeing the value IT provides, but the costs are clear. A CEO who does not understand the value of technology will more likely demand across-the-board cuts to IT to meet budget targets.
The failure to operate IT, or some significant portion of it going forward, more like a business will result in an uptick in IT outsourcing and managed services proposals, and business stakeholders contracting directly for IT products and services. As the TCO of IT services consumes a larger share of the company revenue, CIOs must be able to clearly articulate and demonstrate the business value of the services they provide and the cost-benefit trade-offs. CIOs must also have a firm grasp on their costs and the competitive intelligence to defend their prices or rates.
Articulating value will not be enough to transition IT to more of a business-like posture. IT will need to define a set of services, set forth in terms that the business values and understands, to support the company as it evolves and adopts new business models in a changing marketplace. A strong business orientation will allow IT clients to better understand the IT value proposition and related costs and overhead, and will make it easier for them to identify and select the services and level of support they require.
The value of IT will be determined, in part, by the CIO’s ability to govern, deliver and manage a complex IT infrastructure and application portfolio, with increased cost and service level transparency and accountability. IT value will be determined by the CIO’s ability to focus on value realization and optimization.
Express your IT services with an understanding of business and company values.
Build an IT Service Catalog: The CIO must define a set of services, a service catalog, to support the company’s existing and emerging IT requirements and adapts to a competitive marketplace. These services must describe the business capabilities the IT services provide, rather than focus on the technology used to provide them.
The IT service catalog is derived from business requirements set forth by business stakeholders. Costs must be assigned to each service based on the true costs of providing them by considering budget actuals, licensing costs, contracts, maintenance and support agreements, the cost of labor and all the other things that real businesses do to determine pricing and profitability. Cost and service-level transparency make it possible to benchmark against others. Company business leaders must validate that service capabilities and performance levels are what the business needs to succeed. IT value statements must be crafted in a manner that relates IT products and services as clearly as possible to specific business outcomes.
The IT service catalog must:
- Support existing operations and lines of business and new business models resulting from business outcomes.
- Enable the company to optimize IT TCO.
- Become more performance-based and service-oriented so as to achieve the right level of enterprise IT budgeting and spending.
As the organization continues its transformation, IT will become ubiquitous. Competitive advantage will be determined by the CIO’s ability to select, implement, deliver and manage IT. As the cost of IT services consumes a larger share of the enterprise budget, it will become incumbent upon CIOs to clearly communicate the business benefit of IT services, so their enterprise customers understand the cost and benefit trade-offs and the value of IT services they provide.