Why IT Costs Must Come Out of the Black Box--Now

CIO — For decades, the innerworkings of IT departments everywhere have been referred to as a Black Box, since non-tech executives typically had little insight into or appreciation for IT's dark arts.

The Black Box moniker correlated mostly to IT "stuff"—coding, networking, servers, storage and such. But IT's accounting and budgeting processes have also been a mystery at many companies—which, in turn, led to unyielding questions of IT's value over the years.

A new Forrester Research report, From Black Box to Glass Box: Case Studies in IT Financial Transparency, urges CIOs and IT shops to shift from being technology asset managers to internal service providers—who can demonstrate that value.

"IT organizations that successfully make the transition from being technology asset managers to being internal service providers do so by translating assets into business services, exposing these services through a service catalog and delivering their customers a bill of IT," writes Forrester principal analyst Craig Symons.

Non-IT execs' fiscal frustration starts with the IT budget: In 2009, Symons notes, average IT spending as a percent of revenue ranged from 1 percent for wholesale trade firms to as much as 7 percent for financial services firms. However, he adds, usually there is "little to no visibility into how this spending is linked to strategy and value."

[ See The New New CIO Role: Big Changes Ahead for more on the pressures facing today's IT leaders ]

IT spending is most often "categorized by broad categories or asset classes, which often reflect how the assets are acquired and paid for but almost never how they are eventually used," Symons writes. So while IT may purchase servers, storage arrays, software licenses and network bandwidth, he adds, the users consume services such as e-mail, desktop support, Internet access, Web hosting and so forth.

In the case of when an IT shop charges back its costs, "it is often through some form of allocation based on a prorata share of the total IT budget," Symons notes. "While this may help IT recover its costs, it does little to nothing for the business manager trying to figure out how to link the cost of IT with any value, not to mention that it is difficult if not impossible to predict or control the amount. In such cases, IT is a black box."

And that box, he contends, is a "competitive disabler."

The Importance of Being Transparent

CIOs who don't accurately allocate IT costs back to the business can create two problems for the company, according to the report:

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