Cost transparency

Those that pay us typically have very little understanding of what we do. This creates a degree of anxiety because it is not clear to them whether they are paying you too much or allocating too much budget to the IT function.

In a world where ‘adequate’ apps can cost less than a pound and user devices cost just a few hundred pounds, your monthly charges will firstly trigger margin-envy in the boardroom swiftly followed by deep consternation.

Couple this with the perception that you have a somewhat secretive disposition (‘technology speak’ over plain English, reluctance to leave the IT compound during daylight hours) and you have the perfect conditions for your imminent departure.

So I encourage you to cultivate some transparency in what you do, in particular cost transparency.

The first question is whether you yourself have visibility of the costs your IT function incurs. If not then that is job number one.

Costs can of course be broken down into materials, labour and expenses:

  • Materials include servers, user devices and networking equipment.
  • Labour includes both permanent and contractor staff.
  • Expenses includes property, software licences, Wan, utility bills (electricity and cloud services).

This is not an exhaustive list. You need to identify the elements that have an associated cost.

That is the easy part. Now you need to allocate these costs to the consumers of the services and do so in a manner that avoids argument. Also you need to both allocate and smooth purchase spikes, for example the annual renewal of your enterprise apps licences.

My recommendation is that if you want to provide cost transparency and you want somebody senior to understand it, you would be better to allocate costs against the strategic KPIs of the organisation. That way you can show that your IT function is focused on what is strategically important rather than the demands of fickle asset-hording users.

But alongside the costs listed by KPI you need to assign risk. Specifically I would detail the impact of such a risk if it was to happen, for example, against a KPI related to top line growth you might add ‘failure of the CRM system’ and its business impact. Next to that you detail the likelihood of that happening based on the choices you have made. You can then explain that while choosing the ‘Mickey-Mouse CRM’ app retailing at 69p per user is both functionally rich and very cheap, it comes with a very different risk profile. If your CEO and CFO are comfortable with the higher risk then on their heads be it (wearable Mickey Mouse Ears come to mind).

The missing part of the table is the associated business value. As I have detailed in the past it is not possible in reality to isolate the IT function’s contribution to business value because it is only when the users use the tools we provide does the IT spend get converted into business value.

Ultimately it’s the IT function’s role to provide the tools that enable the users to do their work. This includes email provision or the provision of the ecommerce website that the marketing department will use to generate online sales.

So at best one can list the related tools/services that have been provided with perhaps some anecdotal description of how repeat business has increased as a result or how online sales have tripled. In either case the reality is that these outcomes are the responsibility of the head of the appropriate departments, but they need our tools and services to support their departmental magic.

I think it is very important to do this as it creates a clear demarcation as to where your service ends and where the users’ exploitation of the service commences.

I am to some extent glossing over the challenges of cost transparency. As CIOs I would encourage you to push as much as you can out of the door to your partners and off the balance sheet. Let them worry about the capital investment and associated apportionment of the associated service costs. In fact I would encourage you to be invoiced by strategic KPI, with perhaps infrastructure costs being allocated in proportion to individual usage.

Increasingly you have to consider the reality that much of the IT spend is taking place outside of your department, but ‘they’ are nonetheless using ‘your’ infrastructure. So how do you allocate costs in these circumstances? Perhaps taking this KPI oriented approach will enable you to reclaim control of this shadow spend.

A nice touch would be to provide a user app to show how each individual is consuming IT services. Users could then see what they are using along with the cumulative costs.

This would help you establish who are the ‘20%’ that are consuming 80% of the service. They might represent your most important customers or possibly a growing group of people who regularly enjoy Netflix whilst at work.

Similarly the leadership team would get a real sense of who is doing what in respect of the strategic KPIs. That is the kind of transparency that would go down very well in the boardroom.

Copyright © 2013 IDG Communications, Inc.

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