Despite having one of the lowest payrolls in Major League Baseball, Oakland A’s General Manager Billy Beane built a winning team employing something called “sabermetrics” (Society for American Baseball Research + Metrics). In his bestseller Moneyball, author Michael Lewis chronicles how Beane was able to field a consistently winning team using advanced analytics to gain insights into players that other richer teams had overlooked.
So what could Moneyball and CIOs possibly have in common? Quite a bit, actually. Sabermetrics is the “the application of statistical analysis to baseball records, especially in order to evaluate and compare the performance of individual players.” While baseball decision makers have long applied statistical analysis to measure and manage their teams, the arrival of sabermetrics has fundamentally changed the way baseball executives make decisions. For budget-strapped CIOs looking to change the rules of their own game, there are several parallels to be drawn.
As any baseball fan will tell you, statistics are a currency of sorts for baseball decision makers. But the most popular statistics can often be misleading. For more than a century, baseball general managers relied on many of the same statistics to objectively evaluate talent. In short, baseball had long valued one set of metrics (such as Runs Batted In) over other more mundane, yet equally, revealing statistics (i.e., walks).
Like Billy Beane, today’s CIO needs to think differently about their own IT metrics. As budgets remain flat and CIOs are asked to do more with less, it’s become essential that they can articulate the tradeoffs between cost, quality, and valueof the products and services they offer the business – and do so in a language the business understands. As with baseball, cost is foundational in understanding the dynamic between quality and value. Yet only a small minority of CIOs can answer with a high-degree of confidence the cost/value trade-offs of offering five 9’s of availability versus three 9’s. Without the ability to break costs out in a granular fashion – and allocate them fairly across the business – the CIO is unable to make defensible choices about their IT investment and consequently, will lose credibility with the business.
This is why many CIOs are looking for a new way forward. Take Cisco CIO Rebecca Jacoby. Four years ago she spearheaded a sweeping services transformation initiative at the networking giant. By re-organizing their entire IT portfolio into a clearly defined service, she is now able to reframe the conversation that IT has with the business. But before this vision could be realized, she recognized the need to deconstruct the raw costs of their services and report that detailed cost-information back to the business. As Rebecca says, “cost and value are two different things. You have to compare them but they’re not the same conversation.”
To glean these insights and make decisions based on facts rather than assumptions, CIOs need to arm themselves with the next generation of advanced IT metrics. What follows are four metrics that every CIO should be able to calculate and communicate:
- TCO of IT Products and Services: Service costs are comprised of your unit costs plus the costs of the activities and products that constitute the value of the service to the business. For example, a desktop service includes more than just a PC, but also the setup, maintenance, technical support, power, network and software as well. Without those additional components, a desktop is of little value to the business consumer. Once the TCO – total cost of ownership – of products and services are understood, then IT is in a better position to make decisions about how to optimize delivery of those services and offer visibility and choice directly to the business consumers. You should also include showing quality and utilization here so that trade-offs can be made,
- Fixed v. Variable Cost Ratio: The fixed to variable cost ratio helps you understand your cost structure relative to your strategy. With nearly two-thirds of most IT budgets being fixed cost, you may be seeking a more variable cost structure that favors agility and flexibility (i.e., lower fixed-to-variable cost ratio). By maintaining a high proportion of your costs as variable, you can more easily scale up or down based on your demand.
- Opex v. Capex Ratios: Opex, or operating expense, is an expenditure that immediately flows through your income statement. Capex, or capital expense, is an expenditure that gets capitalized, or booked as an asset, and flows through your income statement as depreciation over a period of time (generally equal to the useful life of the asset). Capex not only includes hardware and software, but also the costs to deploy them and certain application development costs. The accounting rules governing the capitalization of costs are complex and vary from company to company, but every CIO and IT executive should understand how the rules apply to them. Once these rules are fully internalized, they are in a far better position to run powerful ‘What-If’ scenarios (i.e., how on-premise vs. SaaS software might affect the business).
- Run-the-Business (RtB) vs. Change-the-Business (CtB) Spend: Most CIOs who engage in IT portfolio management stratify their IT investment portfolio according to four investment categories: infrastructure, transactional, informational and strategic. These categories are aligned to the type of benefit conferred by the investment. However, as CIOs rethink their portfolio strategy, many are evolving from “type-oriented” to benefit oriented. Run-the-Business (RtB) and Change-the-Business (CtB) are two of the most strategic metrics a CIO can leverage to become more fully aligned with the business. The more one can optimize their RtB spend, the more future innovation can be funded – making IT increasingly relevant and strategic to the business.
These represent just a few of the more notable metrics that forward-thinking CIOs are employing to better align IT with the business. It’s important to point out that while such metrics hold intrinsic value on their own, they grow exponentially in value as they are shared and benchmarked across an organization. Only until business users are educated on how their behavior impacts the bottom line will they be motivated to change it.
Poor Billy Beane. He recognized the power of advanced analytics before many of his peers, but it was only a matter of time before the genie escaped the bottle and other GMs jumped on the sabermetrics bandwagon. But for CIOs, the data is there and ready to be transformed into insights. Like the best hitters, they will require a little patience, experienced coaching, and a disciplined approach to transform their IT organization.