Cost Transparency: Openness, Innovation, and Value
Today’s CIOs are at a crossroads. On one hand, technology has infused all aspects of business -- powering everything from product development to marketing, from operations to finance, from idea inception to customer satisfaction. On the other hand, organizations seek to optimize (and rationalize) the value of every resource expenditure, looking for “proof” that IT spending aligns with the business goals of growth, profit, globalization, and innovation. The issue is that CIOs are often not able to provide that proof. For the simple reason that there is no alignment between what accounting processes measure and actual IT services cost.
There is, in other words, no real cost transparency.
While most organizations feel that they already do some form of cost transparency, that notion is a bit of a misnomer. The majority of cost transparency efforts today occur in Excel spreadsheets or departmental cost pool reporting in ERP. What they don’t do – and this is a crucial point for CIOs at a crossroads – is provide a combined finance, IT and business perspective and orientation.
Because Excel spreadsheets or departmental cost pool reporting provide a “snapshot in time” look at costing and spend, there are no actionable insights that can be derived from these exercises.
IT Cost Transparency
There is another way. Organizational data can be made actionable by taking away assumptions and inserting real consumption and activity based data, implemented in a codified, standards-based approach. CIOs then have the ability to drive the organization and the overall business in a well-defined, measurable, and scientific fashion.
Even if we can dispel mythology and relegate shop-worn perceptions to the dustbin, how do we overcome the real issues that exist with alignment? It would be wise to start with some basic facts and analysis.
In 2013, world-wide spending on IT exceeded $3.7 trillion. Despite this monumental spend, many organizations have a hard time accounting for these resources as CIOs are unable to easily and quickly articulate where the spend went, how the investments are “performing” and how to continue to invest in business-driving projects and quickly disinvest in non-performing projects. This is not the product of malfeasance or lack of scrutiny; instead CIOs are finding that home-grown accounting methods and offline spreadsheets are imperfect tools in a fast-changing, complex, and demanding environment. No company can afford to think of this as a “CIO” problem; instead it’s a fundamental business problem which if unsolved will hamper growth and destroy competitive advantage.
Larry Godec, Senior Vice President and CIO at First American Financial, needed a way to understand consumption and its related costs. Further, he needed data to inform the choices his business partners had to make to balance cost, performance, risk and other attributes. Godec was able to uncover more than 100 legacy applications, eliminate almost 10 percent of his firm’s infrastructure costs, and achieve total IT transparency – findings he has been able to translate to business leaders, with innovative outcomes:
"Our plan is to take those dollars and move them towards change-the-business initiatives. So now when we meet with business leaders, we can have the great conversations around not only how much are we spending in the areas, but how we may want to shift priorities on projects or potentially even shut projects down for higher priority initiatives."
Bridging the Trust Gap
The solution to the problem is bridging the “trust gap” between IT and the business through a common language. Once CIOs come to this understanding, they then turn to cost transparency.
In the words of Lance Warner, Senior Architect & Director of IT Operations at First American:
"We had a concept of what we thought the landscape was and what it turned out to be was quite a bit different. …What our top 50 applications cost – what portion is development, infrastructure, IT service costs -- we couldn’t answer any of those questions before."
"Do you know your finances? Absolutely. Is it completely different when you load GL and operational data? Absolutely. By incorporating financial and Apptio data, what do you get? We call them the ‘ah ha moments.’ We look at data now and say, ‘do we really care that application X has three times the development costs, and infrastructure costs three times that of production?’ Does it matter to us? Yeah it matters. It really puts a dollar amount to these things."
The challenge with cost transparency is driving insights and actions with the resulting information. That’s when transparency becomes valuable. True cost transparency offers a management system for the CIO to effectively track investments, connect them to business outcomes, and share the results visually and on-the-fly with other parts of the organization. In addition, since the IT department is in a mode of constant decision making, it needs a system that helps separate the facts from the guesses and direct the right resources at the right time in the right context into innovation. Cost transparency solutions allow for this; IT emerges as one of the most nimble decision makers in the organization, dispelling perceptions of IT being a “black box”.
The Answer? TBM
Technology Business Management is predicated on a very simple (but often elusive) notion: that cost transparency and a common language can bridge the divide between IT and the business.
Communicating costs in terms that business leaders understand is easier said than done. In many organizations, IT speaks only in technical terms like incidents, utilization, and performance. Business requests are denied with no real explanation of what an IT service request would cost, the ripple effect it might have on the IT organization and, potentially, the organization as a whole. Taken to an extreme, IT is seen as a drag or constraint on the business. While perceptions are not typically created out of whole cloth, they take on a life of their own and persist far beyond their expiration date. So it seems is the case with the IT-business divide. The way to bridge this “value gap” between IT and the business? Provide business partners with a clear understanding of costs, implications and insights.
Cisco began to operationalize TBM in a highly structured fashion to address this very problem. This led to activity-based costing that enabled the organization’s 25 service owners to present a quarterly balance scorecard that includes current total cost of ownership and cost per use of each service. They also meet periodically to ensure they are operating with a coordinated roadmap and to evaluate performance collaboratively.
According to Cisco Systems Senior Vice President and CIO Rebecca Jacoby, operationalizing TBM in this way has changed the value conversations regarding technology at Cisco. Her team can now articulate the specific services IT delivers at every level -- at the component level, at the product level and at the actual capability level -- and all in terms the business understands:
“This is a very high value to IT because there was a lot of ambiguity around this in the past. By applying the cost model, it gave us a foundation for the service owners –and really for everyone in the organization --to understand how to clearly define a service," says Rebecca.
"Once we understand the services we deliver in that kind of detail, we can bring those services to the table for what we are doing to run the business today and for what we need to do to grow the business in future.”
What is more, TBM solutions are of minimal cost when compared to the ROI they drive. This is perhaps the most important part of the story - that a small spend can change the conversation from “cost” to the “value gap” and IT can emerge as first among equals in the company’s priorities.
In this series, we’ll be discussing how transparency and innovation can drive value and the tools that today’s CIOs need to bring about the conversation that leads to change. Next up in this conversation we’ll be taking a closer look at how the role of the CIO is changing and tactics for closing the trust gap between IT and the business.