Make Financial Transparency Your Cost Optimization Foundation

May 16, 2016

Contributor: Heather Pemberton Levy

Six principles can help the business and IT make better budget decisions.

The CIO at a large university in the United States faced a budget cut of nearly 10%. She could have focused her energy on securing additional funds for the following year. Instead, her strategy was to create a more transparent view of IT, which helped the university’s key stakeholders understand their IT expenses and how IT business services affect the organization’s performance.

In a digital business economy, IT financial transparency is the foundation of an effective cost optimization strategy. “Many of our clients have delayed making the necessary investments to fund digital business; the economic uncertainty further threatens their ability to make these investments,” said John Roberts, vice president and distinguished analyst at Gartner.

His recommendation to CIOs: “Increase IT financial cost transparency to make better joint business and IT decisions.”

Assess your IT financial management transparency

When it comes to your IT operating budget, do your stakeholders understand exactly how that spending affects the business? When they don’t, poor decisions result — such as “sweating” IT assets beyond their useful life span or cutting back on service levels to the point where employee productivity suffers.

Mr. Roberts recommended that IT leaders ask six key questions to determine if they are providing stakeholders with the information they need to make strategic decisions.

  1. IT budgeting: Are you reporting multiple views of the IT budget — including a business services view that shows the value provided to business units? Stakeholders don’t care if the CRM system runs on physical or virtual servers; they care about how the customer data translates into sales force effectiveness.
  2. Investment planning: Is your approach to prioritizing project business cases and realizing benefits transparent? For each business case, life cycle costs should be included, and post-implementation, you should review the full scope of benefits that were achieved.
  3. Chargeback: Do you define charges for IT services for each business unit — and do the charges balance costs, service levels and demand management? Service-level agreements (SLAs) should be defined in business terms.
  4. Benchmarking: Do you regularly compare IT business service metrics to those of your peers? Are price and performance trends regularly communicated to business leaders? Reasons for differences between price and performance should be regularly reported to stakeholders.
  5. Cost optimization: Is IT cost optimization an ongoing discipline? Cost optimization is often a one-off effort in response to a crisis. Cost optimization initiatives should be a collaboration between the business and IT, under the CIO’s centralized management.
  6. Performance metrics: Are key IT performance metrics directly related to business metrics rather than operational metrics? The business value of each IT service should be regularly reviewed with stakeholders and communicated through dashboards and scorecards.

Gartner surveys indicate that 62% of CIOS don’t believe that there is adequate transparency of IT costs, contributions and performance. The six principles of financial transparency “drive priorities, decisions and resource allocation to what is most important,” said Mr. Roberts.

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