Last year, I attended a conference focused on IT spend that certainly challenged the status quo. The topics and supporting arguments put into question how traditional IT OPEX costs should be looked at and reported on. It provided an alternative approach to the yearly IT budget review, and the subsequent value for money debate that routinely follows. This conference showed me a new way of looking at operational spend as well as highlighting a new way of demonstrating the value of IT to the other business leaders.
The seminar was directed towards a particular cost analysis software, and provided examples of the benefits that could be achieved by using the software. However, I have experienced that the underlying philosophy and cost optimisation that this software focuses on, can change the entire ethos of how the value of IT is determined when implemented correctly. This alternative way of viewing the budget can significantly reduce the IT time to market and completely transform a business leader’s views on retiring legacy systems from that of reluctance and risk aversion, to one of a sponsor that drives and challenges.
The solution I was shown re-allocated the IT costs into buckets that aligned to business initiatives, departments and products. The resulting financial reports changed the way in which an IT budget was viewed, it evolved from a substantial total cost to one that directly aligned the expenses to the individual business initiatives and departments. This viewpoint could be used to highlight excessive spend associated to departments or initiatives that should be investigated further, especially when the expenses aligned to programmes considered either in run off or having been retired previously. For example, because operational costs are not normally viewed in this way, an antiquated application that no longer has maintenance fees normally falls under the radar of the senior IT and finance department management, and moves to a risk register to be dealt with at a later stage. These costs, such as the ones specific to supporting the legacy system, and any additional effort necessary to delivering new solutions to ensure that they will work with the legacy systems, are normally rolled up at an IT department level or contained within the design costs of new projects.
This adjustment to the IT cost allocation model and ensuing modified reports significantly change the focus of the leadership team and Board, from “the IT department is expensive and slow” to “we are unnecessarily spending over 30% of the IT budget on application X which no longer meets our needs and must be replaced as soon as possible”. Notice that the emphasis and focus of attention has rightly moved from the general view of an ageing IT environment to the specific problem item at hand. Had this not been clarified, the business would have more than likely kept application X for years to come as a safety mechanism. They would not have clearly understood the consequences of keeping this system running. The IT department would have been resented for costing too much and providing very little new solutions to account for it. I believe that this solution would help on several fronts associated to the substantial operating costs in IT:
- IT departments must ensure compatibility with the existing environment.
- If a large proportion of the legacy environment is retired, this requirement is significantly simplified and may allow additional cost effective solutions previously ruled out.
- Businesses have IT assets on their books which can be considered legacy systems.
- Running costs of legacy systems would greatly reduce and the costs associated to implementing new solutions in the simplified environment would be reduced.
- To ensure new solutions work with existing solutions, IT departments require funds for research and development.
- The funds would still be justified. However as the environment to test the equipment is simplified, the time to test is also reduced and the wastage in testing would equally reduce, enabling the funds to go further.
- The individual departments within a business are competing for budgets.
- Due to the landscape simplification, redundant effort is minimised and the likelihood of long term plans succeeding are greatly increased, providing more reliable budgeting and increased project delivery speeds which could transform the future IT delivery capabilities. The new reporting structure would directly associate future IT spend to the individual departments, removing the competition altogether.
Through modifying how Finance and IT work together, and adjusting the ways in which the IT department communicates with its peers, the business is able to greatly reduce its spend on legacy systems that reflect the past and focus those resources on true value add solutions and technologies to help the business grow in the future.
These are my thoughts, do you agree? I, as well as many of the other readers, would be interested in understanding your thoughts on this matter. Helping you understand and/or improve your IT costs structure to enhance your delivery capabilities and help you achieve the best outcome for your business are some of the things that Willard Enterprises specialise in. If there is something I can do to help your business or someone you know achieve their next challenge, please contact me for more information. If you would like to stay up to date with news from Willard Enterprises including new blogs, service changes and availability, please subscribe to the newsletter.