Running IT like a business means giving customers choices wherever possible, while requiring them to pay for those choices. But how effective is the practice of running IT as business?
“Increased demand for IT projects and services, coupled with the challenges that arise as organizations move to digital business models, has heightened the need for CIOs to do more than simply manage the IT budget,” says Jim McGittigan, research vice president at Gartner. “CIOs serious about making long-term changes on the financial side of their IT organization need a framework to plan for these changes.”
Gartner’s Six Pillars of IT Financial Transparency framework is intended to help CIOs design multiyear programs that balance optimization with business change and innovation.
Pillar 1: IT Budgeting
The ability to manage the IT budget effectively is a prerequisite for extending the focus beyond budgeting. The ability to manage and articulate the IT budget in multiple ways enables the CIO both to defend the budget and work with the CFO to derive business value from IT.
“CIOs need multiple views of the IT budget to support their efforts to run IT like a business,” says McGittigan. There are four views to consider:
- The traditional view, which is an asset-based view of the enterprise (its hardware, software, personnel and external services).
- The technical view (of servers, storage and networks, for example), which enables the CIO to analyze and benchmark technology spending on a per-unit cost basis.
- The business services view, where the CIO creates a service portfolio to communicate the cost of the services that the IT department provides in terms that business people and other nontechnical observers can understand.
- The investment view, which distinguishes the amount of money spent as investments in new capabilities (and their potential value) from the amount spent simply on running the business.
Pillar 2: Investment Planning — Effective Project Financial Management
Running IT as a business means having an investment-planning process that focuses on the entire life cycle of an IT investment in order to manage costs effectively and maximize value. After a project has been approved, the CIO should track both the actual and the forecast project cost through to completion.
Pillar 3: Chargeback, Allocation and Showback
Just because a chargeback method meets business needs in a sophisticated manner does not mean that it will reduce complaints from users and business unit leaders. The IT organization must understand all the chargeback options that might apply and help the business units understand the options. Sometimes this means choosing which weaknesses the IT organization is willing to accept and ensuring that business unit leaders understand the trade-offs.
Pillar 4: Benchmarking IT Costs
Benchmarking is crucial to demonstrate that the IT organization is cost-effective and spending the right amounts in the right areas. Incorporating effective benchmarking into the annual planning process will not only provide additional financial transparency, but also a mechanism to identify areas of opportunity that need to be addressed.
Pillar 5: IT Cost Optimization
Cost optimization activities often occur organically within different areas of the IT organization, and are not managed centrally unless a cost reduction target is mandated. When budget cuts happen, IT leaders often scramble to meet the target and, once it has been met and the “fire drill” is over, they typically return to “business as usual.” CIOs should formulate a program for cost optimization by establishing a baseline of IT spending, identifying opportunities relative to peer-group benchmarks, developing a strategy to optimize and execute that strategy, and finally tracking the benefits realized.
Pillar 6: Demonstrate the Business Value of IT
For some CIOs, performance metrics serve to indicate that the IT organization is ensuring that the “trains are running on time” and lack anything that demonstrates the business value of IT. Others understand that cost transparency will not aid the enterprise unless value and transparency are communicated properly and through a constant feedback loop. This could be electronic IT scorecards, as they enable CIOs to monitor performance throughout the fiscal year or planning horizon.