by Olof Söderblom, Chairman, Compass Management

CIOs must embrace smart metering in era of cuts

May 26, 2010
IT LeadershipIT StrategyMobile Apps

As CIOs find themselves under pressure to cut costs, Olof Söderblom of Compass Management Consulting argues that they are not the cause of a rising IT bill but heroes of efficiency in need of a new approach to communicate IT costs with senior business managers.

In the last past 20 years, CIOs have led the only business function which has cut unit costs many hundredfold.  In storage, processing and other elements of service delivery, costs have tumbled as managers have taken advantage of improved technology and refined their processes.

In a single five year period, unit costs in client/server decreased by an average of more than 35 per cent and storage costs shrunk by an average of 80 per cent.  Yet instead of overall IT costs going down, they have risen by 20-45 per cent (depending on technology) to cope with an explosion of around 200 per cent in volumes generated by the business.

It is a rare CIO who questions the expensive growth in volume and challenges senior managers in ways that link IT consumption to business processes and business decisions.  Instead, business leaders expect the CIO to accommodate the volume growth, yet continue to question the CIO over ever increasing IT costs.

One recurring reason for the lack of dialogue is a lack of understanding by the business of the IT cost implications of the decisions they take. While business processes are initially rarely designed around the balance between IT costs and business benefit, the initial justification is seldom verified and volume increases not evaluated from a business benefit perspective.   The IT costs of delivering statements within 24 hours rather than 48 hours, for example, may be significant, but of little business value in terms of customer satisfaction.

Moreover, it is not the role of the CIO alone to justify the increases in IT volumes (and costs) which result from business decisions. Nor is the CIO in a position to validate whether expansion represents a good investment that will deliver a return for shareholders or taxpayers.  This strategic allocation of resources is the role of the CEO and the board, not the CIO.

As part of efforts to cut carbon emissions, governments are exploring smart metering for domestic electricity in order to which would replace traditional invoicing in KWh with provide consumers with a real time flow of information on a break down of how much different appliances are costing to run and how their own behaviour (such as leaving fridge doors open) adds to costs.  Invoicing electricity in terms which are for the consumer meaningful terms for the consumer,  The type of linkage between linking behaviour, usage and costs has the potential to change consumption habits dramatically.

This approach could be used for invoicing IT in business measures rather than in IT jargon terms would similarly change behaviour in organisations but too many cost allocation models for IT consumption remain meaningless. For example, IT costs per revenue dollar can lead to CIOs being congratulated in the years revenues rise and chastised when the numbers go down, yet neither movement is under their control.  Similarly, IT costs per insurance policy, per barrel of oil or per pack of chocolate may seem interesting discussion points, but tell us very little about what is driving costs, and nothing about that which really matters which is the total cost of supplying these products and services.

Truly smart metering in IT means undertaking accurate cost-allocation at a sufficiently detailed level to understand the business cost drivers and invoice IT services in these terms, as a necessary first step towards understanding the business drivers of IT costs. This means acknowledging that many so called IT projects and processes such as enterprise resource planning, IT transformation and so on, are in fact business projects supported by IT.

Costing IT usagein this way requires models of business processes which describe customer engagement, production, finance and other functions.  IT costs can then be meaningfully allocated to those processes.

Smart metering of IT consumption will not in itself lower costs but it gives senior managers clarity on the consequences for IT costs of their business decisions. It also provides options on how to change behaviour and reap savings as a result.  With that detail on IT expenditure and a willingnessInvoicing IT services in business terms puts the onus for ensuring that volume growth is justified from a business perspective on business managers  to confront a growth in volumes,so that the CIO can be seen once again as a hero of efficiency, rather than a source of ever increasing costs.