by Howard Rubin

Real Value – The Elusive Value of Infrastructure

Jun 01, 20046 mins
IT Leadership

The I.T. infrastructure is essentially the cosmic boiler room of your IT plant. When looked at this way, most business executives understand its importance?they consider IT infrastructure a necessary evil?but they also see it as an expensive one. In fact, during the past three years of IT cost pressure and real cost reduction, corporate executives around the world were heard to say: “I am spending $XX millions (or perhaps billions in the case of the Fortune 100) on my IT infrastructure this year?but just what am I getting for all that money?”

Explaining just what the business is getting is one of your most important jobs as CIO. IT infrastructure can comprise many things, including the data center, printers, network cabling or servers. These things are the IT backbone of any company. And here are some quick facts that you can use to benchmark your infrastructure spending. On average, 41 percent of IT spending is associated with the infrastructure and the personnel needed to operate it. And with the average company now spending about 3.8 percent of its revenue on IT in 2004, this means that a typical company spends 1.6 percent of its revenue on IT infrastructure. This is not a small amount of money. Read on for ways to break down infrastructure value so that you can more easily make your business case for it.

Value in the Eye of the Beholder

Some companies differentiate themselves on cost, others on service and service quality, still others on the ability to handle a wide range of conditions and rapid growth. And obviously, most businesses have a combination of differentiators. A discussion of the value of infrastructure?and even its measurement?can be done only in the context of business goals, strategies and outcomes. But there are some common threads for categorizing the kinds of value infrastructure provides.

Economic value. First, economic value is the contribution of the infrastructure to the profitability of the business. This category is derived from the underlying cost structure of the infrastructure in support of the revenue, profitability, financial performance, service level and other requirements of the business. Lots of attention is paid to this area today, especially with the focus on the balance between fixed and variable costs, and driving unit costs down through outsourcing or utility computing. An infrastructure with a cost structure that allows a business to quickly shed IT costs during a downturn and allows for economies of scale when business volumes rise is a major asset. Conversely, an infrastructure that has a high, fixed cost structure and whose costs are independent of demand in a downside is a liability. For example, imagine your company has 50,000 employees, and as a result of bad economic conditions, it decides to eliminate 5,000 middle managers. If the IT organization procured its desktop and laptop resources based on a fixed value for a fixed number of years, then the organization will continue carrying the cost burden of the equipment and related services long after the people have left.

Architectural value. Architectural value is derived from the capabilities of the infrastructure to meet business needs today and in the future. It depends on infrastructure characteristics such as operational performance, interoperability, portability, currency, scalability, resiliency, recoverability, security, and future change and compatibility. This aspect of value is very evident today in the areas of security and privacy. Investing in the architecture of the infrastructure to reduce the risk of virus attacks or theft of data provides tremendous value to an organization.

Operational value. While architectural value is associated with infrastructure capabilities, operational value is all about delivery. It is the actual performance provided by the infrastructure to meet business processing requirements such as the ability to meet service-level agreements and the security, integrity and resiliency needs of the operating environment.

Regulatory and compliance value. Does the infrastructure meet the requirements for control, security and integrity as required by a governing body or a key customer? Without this kind of value, a business might find itself out of business.

Measuring Infrastructure Value

Economic value is perhaps the most tangible to assess. First look at your business and how it measures itself. For example, an airline might use revenue per passenger mile (the total number of passengers multiplied by the total number of miles flown by the airline in a year) and income per passenger mile as key metrics in addition to the year-to-year change of both metrics. The next step is to use these same business measurements as a framework for considering infrastructure economics. In the case of the airline, what is the infrastructure cost per passenger mile? How does a change in the infrastructure cost have an impact on profitability? Once you can express your infrastructure cost in terms of real business output measures, you can benchmark and compare your company to competitors.

In addition, compare the ratio of change in revenue to the change in infrastructure cost, year over year. That’s your infrastructure’s economic agility. Let’s take an example. Suppose your company’s revenue went up 40 percent since last year, and the infrastructure cost over the same period increased 20 percent. The ratio is 2-to-1?your company’s infrastructure cost is moving at only half the rate of revenue growth. Conversely, if revenue dropped 20 percent and IT costs went down only 10 percent, the business apparently cannot shed IT infrastructure spending as quickly as revenue declines, which would result in IT costs appearing as a higher percentage of revenue to the business?not a good thing in such bad economic times.

For architectural value, we use a subjective assessment method. For each area of your business, list the business requirements in terms of cost structure, scalability, availability and so on. Now rate (on a scale of one to 10) how well the infrastructure currently meets those needs as well as your strategic needs.

In the area of operational value, measure the cost to the business of outages or the “unavailability” of the systems it needs to function. What is the cost of a major data center or network outage in terms of lost staff productivity, lost business and even the potential customer desertions many companies experience when e-commerce sites go offline? Also, consider circumstances that are not as catastrophic as outages?what is the impact of, say, noncompliance with service-level agreements and other processing failures? As with the economic value, compare this number with external benchmarks.

When it comes to regulatory and compliance value, ask yourself what percentage of required regulatory guidelines and standards your infrastructure meets. What would be the cost to the business if those were not met?

Foundations and frameworks often can’t be seen, and this invisibility may be the reason business management is often befuddled about the cost and value of infrastructure. Create your infrastructure value scorecard, and use it as the cornerstone for IT and business communication.