Failure to align IT finance budgets with business objectives can kill a company’s ability to properly value its technology investment. IT financial management (ITFM) tools that bridge the gap between IT finance and the C-suite offer a universal language to tell a data-driven story of technology and business value. But, knowing the tools to use and the habits to adopt can be a tricky path. This article provides a detailed roadmap for IT finance leaders to get started and begin communicating IT business value today.
Our guest blogger today is Peter Grydgaard, Senior Manager at Deloitte Consulting. Peter has 10+ years of experience building financial management models, specializing within technology business management in all industries.
Are you ready to open the black box of IT?
Why IT spend can no longer fly under the radar
Broad forces are shaping IT today. Technology has become integral to all businesses across sectors, with a vast array of digital business models, platforms, and solutions available to solve everyday challenges and enable new opportunities. As IT has become a central part of businesses, it becomes ever more relevant to dive into the cost of IT to ensure the most efficient use of and value gained from the resources spent on IT. IT finance is wrestling with historically high levels of spend. Nothing indicates to us that the trend will level off any time soon.*
Within companies, this trend triggers many important questions about IT cost versus value. Corporate finance and the business not only want more for less, they want fact-based discussions and certainty that they gain value from their IT spend.
Answers to these questions are more relevant than ever to justify IT investments. In some cases, the answers are critical for regulators and other stakeholders demanding more transparency into IT finance organizations.
Inability to align IT spend with business strategy hurts a company’s ability to properly value its technology investment. IT financial management (ITFM) tools that connect the dots between IT finance and the C-suite offer a universal language to tell a data-driven story of technology and business value.
Case: Public entity opens the black box
Issue: Spend on IT had historically been a black box, and the IT department had not had the means to communicate or identify prices and increasing costs. Budget negotiations had focused purely on IT costs instead of value delivered. This led to recurring heavy resource-consumption, frustration, and miscommunication.
Solution: After adopting the principles of TBM and implementing Apptio as the primary tool to support TBM-related activities, much has improved. Challenges with data quality and availability have been identified, and sprint efforts are being executed to make improvements. Vendors now provide accurate information in a standardized format tailored to the needs of the organization. Furthermore, IT finance now possess a tool that generates dashboards to keep decision-makers updated on cost development.
A gap exists between IT finance and the C-suite
The complication is that too often the business views increasing IT costs as an unexplainable and hard-to-define overhead. Without transparency, they may take the position that the charges from IT finance are unfair, outside of their control, not fulfilling their need, and not representative of actual consumption.
Moreover, the IT function feels continuously squeezed to deliver more for less, and struggles to reconcile cost reduction targets with ever-increasing business demand. Organizations experience an accountability gap, where neither IT, corporate finance, nor the business feels able to take decisive action to manage IT cost.
If companies do not change the vantage point, the chances are IT value will remain unclear to business units and costs will remain high. Because while IT delivers technology outcomes, the link between IT activities and business value/priorities are complex and indirect.
Mapping a universal language to tell IT’s value story
To get from black box to full transparency, IT finance, corporate finance, and the business need a common language. The Technology Business Management (TBM) Taxonomy is a well-defined and widely recognized language that enables different functions to understand and discuss IT costs on a relevant level.
Instead of functions referring to their own definitions of type of costs, activities and services, this taxonomy lays out a set of standards across industries and geographies—standards IT functions across the globe have agreed on. Not only does this framework make internal discussions clearer, it also enables easier external benchmarks that help justify investments.
Why use a standardised taxonomy?
Businesses rely on Generally Accepted Accounting Principles (GAAP) and public entities follow the guidelines provided by central government (e.g. the Ministry of Finance) to ensure consistent and comparable financial statements. But these systems don’t provide the activity view that IT needs to manage spend in a way that is meaningful to the business. CIOs need operational data about IT assets, applications, labor, projects, vendors, etc. merged with corporate financial data to demonstrate true cost of ownership. The TBM taxonomy provides a generally accepted way of categorizing and reporting IT costs that allows CIOs and IT finance leaders to communicate value.
Implementing and working with the TBM taxonomy to create transparency into IT cost allocations helps bridge that gap between the business, CFO, and IT leaders. This helps the business achieve greater clarity into their role in managing IT costs, and it helps the CFO lead more collaborative, business-orientated discussions about IT investments. IT finance understands exactly how and where every dollar is being spent and is better able to plan, manage, and track investments to key business initiatives.
Use cases showing value gain
Why this is important
Technology is a central part of any business and, in order to gain the most success, IT must help the business drive value, not generate cost. Shifting from cost center to value driver requires a change in behavior and a new understanding that is easier to adopt when functional leaders have a common language for describing IT value.
TBM is all about aligning the CIO, CFO, and CEO around shared expectations and desired capabilities. There needs to be an agreement between what IT delivers and what the business thinks IT delivers. For example when the business says, “We need 10 PCs for office A”, the CIO and the business need to know that each PC includes multiple systems and applications, a minimum level of support, and a number of hardware accessories. When the CEO says, “We want to be the cost leader,” the CIO and the business need to work together to make sure run-the-business costs and grow-the-business investments align with this strategy.
When services are well defined, it becomes possible to show the cost of the service. However, to show this cost and communicate it in an understandable and credible way, the CIO needs to have defensible data to back his/her arguments, as well as a way to share this information. Ways to achieve this are often in place, but the solutions are often cumbersome to use, lack cross-system integration, and require a lot of manual effort. Using a dedicated tool can improve the chance of success by giving means to consolidate, manage, and convey IT cost data to support cost transparency, IT planning, benchmarking, showback and chargeback, and other insights key to proving IT value.
Existing solutions are often not suitable
Businesses use a variety of management tools, e.g. spreadsheets, ERP systems, and CPM systems. There are a number of challenges when using these tools:
- Spreadsheets are excellent for handling smaller amounts and simpler data. Spreadsheets, however, are not a great solution, when working with larger datasets in a more complex costing model needed for IT finance. They tend to be very labor intensive to use and maintain, prone to error, and have performance issues with large amounts of data and calculations.
- ERP systems are great for working at the lowest levels of finance, i.e. invoices and the GL accounts, but they are not able to combine this data with the IT operational input such as asset management, service desk, third party cloud providers, or systems management applications. This deficiency leaves them unable to create the view of IT spend that the business needs to make well-informed decisions.
- CPM systems are usually fine-tuned to handle the core business areas of organizations, reflecting the products and services delivered directly to external clients. The issue is that these systems are generally not suitable for handling the IT-specific logic needed to provide accurate information about IT-related projects and services and resource consumption.
There are multiple solutions in the marketplace supporting cost transparency models, all of which have pros and cons in price, functionality, and quality. One way of enabling the TBM taxonomy is with Apptio, developed specifically for this purpose. The suite of applications is configured with the TBM model and the functionality to pull and transform data from a variety of sources and present the data in easy to access and interactive reports.
How to get started
Inception starts with recognizing the need for cost transparency, getting buy-in from both the CFO and CEO, as well as overcoming resistance from internal IT resources. This can be done in multiple ways, though highlighting unfruitful discussions with the business around next year’s IT spending, a lack of qualified review input from corporate finance, and the painful coordination of IT investments within IT itself usually resonates with everyone.
Case: A company’s ignition of TBM
Issue: An energy company facing a cost reduction initiative in IT saw a requirement to redesign their financial management model, as it did not support any of the required analysis.
Solution: Using the TBM Taxonomy as their guideline, the company aligned their registration framework, leveraged their CMDB, and built a business-oriented service catalogue. To enable the solution, financial and operational data was combined in a TBM application (Apptio), helping to reframe the business conversation. As a result, IT was able to turn the conversations from resistance and distrust to a partnering relationship driving efficiency and value.
Getting the funding to implement the TBM taxonomy does require an investment—depending on the current maturity level of the organization regarding resources and management capabilities, as well as commitment and buy-in from relevant parts of the organization’s management team.
How to get started on your path to TBM maturity
Actual cost transparency starts with preparation work—applying the TBM taxonomy to your current data structures, acquiring new data sources, evaluating, and selecting an appropriate tool for the job.
The technical implementation work begins shortly hereafter, and this is where the bulk of the work lies, designing allocation logic, defining and mapping cost data to cost pools and IT towers, designing a service catalogue, establishing data integration and extracts from various sources, cleansing and transforming data—basically building, testing, and deploying operational processes.
However, after the technical implementation or even in parallel, it is key to establish new ways of working and utilize the new model to drive value:
- First, you start by building a solid TBM office that will govern the solution and take the operational responsibility to update the model with new data and interact with data owners.
- The second part is to drive value from the model either from use cases or by introducing data, facts, and reporting of consumption-based services as part of your discussions with the business.
- Third, the model is never complete. Maturity is something you develop over time, driving more and more value and precision in your model.
Overall, the CIO, CFO, and CEO share an important role in the management of technology. If IT costs remain a black box, it remains extremely difficult to engage in value conversations. By introducing and leveraging IT cost transparency, this team can make better, more informed decisions that improve current operations and prepare the business for the future.
Deloitte’s engagement with TBM and partnership with Apptio
Created by senior leaders of IT and Finance from some of the top performing businesses in the world and built on vast, solid experience, TBM has become the global standard and is kept updated by a well-established community. Deloitte’s engagement with TBM ensures that clients get support, based on the most up-to-date best practises.
Deloitte has established a global partnership with Apptio to drive effective client advisory and implementation of the best possible solutions to address the specific client needs. The partnership ensures that clients receive support in all aspects of IT cost advisory and TBM implementation.
If you are interested in hearing more about how TBM and/or Apptio could be introduced to your organisation, please don’t hesitate to contact Peter Grydgaard, either by phone +45 30935576 or e-mail [email protected], or visit our web site. Deloitte has a strong network across countries, so don't let location deter you from making contact.
To hear how McDonald's Tom Dillon (Finance) and Phil LeBrun (IT) partnered to unlock new business value from technology investments, listen to Apptio's webinar "How McDonald’s Finance & IT partner to supersize IT value & minimize spend."
*Gartner (July 2017): Forecast Alert: IT Spending, Worldwide, 2Q17 and Gartner (August 2017): Forecast Analysis: IT Spending, Worldwide, 2Q17