Financial Transparency: Controlling IT Costs

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Few could argue that the lack of transparency into costs within an organization’s information technology is an issue facing most every CFO in the country. Expenses continue to rise and the absence of clarity has many executives stumped on methods to get expenses under control. However, the problem may not be as much about the IT organization as it is the corporate culture and system it operates. Imagine if your local grocery store changed there business model and offered unlimited groceries for a monthly charge. Furthermore, imagine that the monthly charge was simply the total costs of the groceries divided by the number of customers for the month. It wouldn’t take long for customers to begin maximizing their consumption of the gourmet foods and meats, leaving the generic brands and inexpensive foods going stale on the shelves further rising costs. Few would doubt this radical new business model failing in a short period of time. However, that is exactly the model many companies employ with their information technology expenses. Costs are totaled and then allocated to the various lines of business based on metrics that may have little to do with actual consumption. Furthermore, the consumers of those services cannot predict what those costs are going to be from one period to the next as the allocations vary depending on spending and volume variances. The problem is not the operations within the IT organization—management is simply working within the established system. IT management has customers across the enterprise demanding the latest technologies, faster development, and higher service level agreements. Users have little regard for the costs, as expenses are being subsidized across other organizations. The IT organization is simply responding to the demands and meeting the expectations of the system established, they are rewarded on timely delivery of projects, system up-time, and other non-financial measures. Trivial issues such as financial performance and IT cost reduction are not high priorities for IT management as there is little accountability built in to the system to measure and monitor the costs to provide services within the structure of the organization. With continued margin pressures from the current economic climate, the time has come for IT management to be responsible for more than variances to budget and consumers of IT services should be held accountable for the consumption of information technology services. A successful change in the financial management of these organizations will, on average, yield a 3 – 7% reduction in expenses, and change information technology from a black hole of costs to a valued strategic partner in the company’s infrastructure. The following recommendations can go a long way in accomplishing true IT cost control.

  1. Establish a service catalog and rated recovery system Identify services and consumption for each organization and, creating a cost recovery system where the consumers are responsible for the volumes consumed and the providers are responsible for producing at a reasonable and consistent rate.
  2. Build an IT cost model for expense transparency Understanding the causal relationship of information technology expenses throughout the organization is critical to financial transparency. A clear understanding of operational vs development costs segmented by internal vs customer technology will help prioritize the technology investments and reductions.
  3. Integrate into all finance expense management processes Create an environment where discretionary investment approvals are data driven based on sound business case analysis and hold sponsoring organizations accountable for benefit realization. Transform the planning and forecasting process by using more volume-based predictive analysis. Lastly, assure that general ledger architecture facilitates sustainable modeling and supports aggressive controls on IT expenses.

Leaders within some of the largest organizations are stepping up and moving their teams beyond transparency. No longer is finance simply reporting and modeling IT expenses. Implementing measurable processes that promote accountability, cost control, and corporate stewardship radically reshape information technology costs, and eliminates the mystery of managing strategic and mission critical services. For more information on how your organization can benefit from IT Cost Transformation or for more research on this subject, call Armada at (918) 856-3414 or contact us via email.

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