Proliferation of commodity IT services makes it ever more important to rigorously account for the costs and value of internal IT.
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With commodity IT services proliferating in the cloud, IT organizations are under more pressure than ever to prove their value.
While their peers were off studying the latest trends in wireless and software-defined networking, one group of Interop attendees was exploring the challenging art of budgeting for technology and accounting for its value.
"If you're doing things well, you should be able to compare your costs to outsourcing," said John Custy, principal consultant of the JCP Group, as part of his lecture for a class originally developed for the Help Desk Institute. Often, the comparison will show that internal IT services are more economical and effective -- but only if you have a good cost model, he said. "Shame on you if someone says they want to do comparison of costs and you can't pull out the last cost comparison that was done."
Custy's two-day class on "Financial Management Skills for the Technical Manager" was offered as part of the workshop program leading up to Tuesday night's opening ceremonies and Wednesday's first keynotes for the Interop conference. Many technology leaders still budget on the basis of their experience -- their best guess of what their real costs are and will be, Custy said. The problem with that approach is your superiors can guess just as well as you can. The only way to make your case for an appropriate level of funding is to have a more rigorous approach to costing and funding IT services.
Attended by a couple of CIOs as well as network managers, project managers and people from technology services firms, the class addressed the need to come up with more complete cost models that go beyond the original hardware and software purchase costs to long-term maintenance and support. On the other hand, it's important to provide a complete picture of the services provided, particularly when company leaders are tempted to compare IT services to cloud services that are free or close to it, Custy said. An example would be corporate versus cloud email, and all the help desk, archiving and e-discovery services IT provides to make email reliable and meet regulatory requirements, he said. "You're doing a whole lot more than that free service, but who knows that?"
Although it's possible to use this accounting to charge departments for the services they get from central IT, it's better to "stop pretending" that everything can be handled as a chargeback, Custy agreed. The point of tracking the cost of technology services implemented on the behalf of the business, as well as the value of basic services delivered by IT, is to ensure they are funded appropriately to allow IT to continue delivering quality service, he said. Meanwhile, the goal of providing the organization with a complete catalog of IT services can only be achieved if the organization has a firm grasp of the real cost of those services.
Jim Smith, senior VP of innovation and trends at PDX Incorporated, said his organization is currently pushing for greater internal accountability. PDX makes pharmacy management software used in retail stores. Smith said one thing he took away from the class was that PDX should be careful about how far it pushes its efforts at financial accounting for technology services because "it's very possible to overdo it -- the killer is the billing process," he said.
To show the value of IT, Custy recommended a variety of approaches including looking at the cost to the organization of a service not being available -- for example, dollars lost for each hour that the checkout function on an e-commerce site is offline. When valuing productivity, it's good to translate hours of labor saved into dollar savings -- good, but not always necessary.
"In a lot of cases, you don't have to go there," Custy said. If you can show that an improvement to company systems is saving the sales team 400 hours per month, the executive overseeing that function can probably translate that into a dollar value more quickly than you could "and will probably give it a much higher dollar value than you would ever equate to that," he said.
In other cases, the business side of the organization may provide the metrics. For example, one university participant mentioned the organization had calculated the cost of losing a student, making it easier to put a value on technology initiatives aimed at boosting retention.
Bill Hrabik of State Farm Insurance said he sat in on the session to learn alternate ways of approaching this sort of analysis, although it's nothing new to him. "Budgeting is something we do every day," he said. However, in his organization Custy's suggestion about valuing IT improvements in terms of hours doesn't work, he said. "Our business partners don't care about hours," he said, but they do care about dollars.
State Farm has experimented off and on with different methods of charging departments back for their access to IT services, but lately has concluded that it's more trouble than it's worth, Hrabik said. The overhead of implementing a comprehensive system of chargebacks defeats the purpose, he said.
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