Do you know where your IT spend is really going?

The IT environment is becoming increasingly complex, and with the emphasis firmly shifting towards greater accountability, improved efficiency and improved transparency, there is a growing need for organisations to reconsider their IT cost management systems

July 7, 2010

By Steven Woods, South African Country President at Compass Management Consulting

The IT environment is becoming increasingly complex, and with the emphasis firmly shifting towards greater accountability, improved efficiency and improved transparency, there is a growing need for organisations to reconsider their IT cost management systems.

One of the major challenges faced by the modern organisation is how to effectively manage IT resources. Declining unit costs in terms of hardware, storage and so on have been more than offset by the ever increasing demand for resources, and this has in turn led to a steady rise in the amount of money spent on IT, something which may or may not be justified from a business perspective.

Having an understanding on whether the costs are justified or not and managing the cost of IT effectively is therefore becoming increasingly important. Because of the greater synergies between business and IT in the modern enterprise, IT is no longer simply considered to be an overhead cost.

Businesses are becoming smarter about overall costs and efficiencies, and this has further brought the cost of IT into sharper focus.

The general trend, especially in larger organisations, has been to transform IT to a centralised ‘shared service’. This has provided many benefits, such as consolidation and standardisation, improved economies of scale and increased productivity. However it has also led to a disconnect between business strategy and IT strategy, a separation of cause and effect in terms of user behaviour and total costs of IT, and a focus on reducing costs in certain business process areas rather than looking to improve efficiency across the organisation.

This model makes it nearly impossible to accurately assign costs and values accurately to various business units. Because of this and the need for greater transparency and accountability due to recommendations such as King III and legislation like the Company’s Act, the business world has seen a shift towards IT cost allocation, along with chargeback models, to more accurately assign costs and help to understand the true value IT delivers to business units and the organisation as a whole.

In the past, allocating IT costs may have been done based on revenue, or simply shared out between business units. However, this does not allow for an accurate picture of usage, and due to the requirement to become more efficient and accountable, this is simply no longer a feasible option. IT cost allocation and chargeback models offer mechanisms for allocating the costs of IT back to the business and more importantly to the relevant departments on a consumption basis.  In some instances, the most profitable divisions within an organisation become the least profitable divisions once the IT ‘shared services’ costs have been charged back.

By using a cost allocation system, costs can be allocated accurately to the business units or divisions that use the IT resources the most. This may involve allocation of costs according to use of storage, the number of emails sent, the number of applications running on the server and so on.

This means that costs can be closely matched to consumption and charged back to the relevant divisions accurately, giving a far clearer picture of the true profitability of a particular division.

Managing costs in this fashion also helps to drive behaviour in terms of usage. If departments and divisions are held accountable and charged according to usage they will be more likely to be more responsible and think twice before simply using IT resources, such as storage, indiscriminately.

It drives accountability from the point of view that there is more interest on the part of business users in where IT spend is going and why that money is being spent, as well as how the IT spend is providing value to the business.

In an increasingly competitive business landscape the ability to get a more accurate picture of business processes and the various drivers of costs puts organisations in a strong position when it comes to complying with regulations and legislation, which in turn will make the organisation more efficient. The knock on effect of this is an increase in shareholder value, greater market share and a greater understanding of where all of the business costs originate.

When it comes to implementing a chargeback system, the time and cost of doing so is dependent on the complexity and level of granularity required by the organisation. In order to understand the real costs and true profitability of business units it is necessary to understand the true drivers of IT costs– for example how many emails are sent, how many pages are printed, how much bandwidth is used and so on.

Cost allocations and charge backs can be as detailed as individual usage, however this is costly and time consuming. What organisations should look at doing is finding the cost allocation that is fit for the purpose of their business.

One trend that will continue into the future is that of creating a better understanding of IT costs, in order to manage the amount of money spent on IT and to drive behaviour in a more responsible fashion. The Company’s Act as well as King III will set the precedent for more accountable IT spend, and businesses will be increasingly interested not only in how the money is spent but what value IT gives the organisation as a whole.