Running IT Like a Business with IT Financial ManagementJune 29 , 2017
You might have heard the phrase “running IT as a business” many times before, but I want to start this blog with a small – but very important – distinction. IT shouldn’t talk of being “run as a business,” as this can only accentuate the “IT is separate to the business” suboptimality that has long been associated with the talk of, and decisions around, IT-business alignment. It might be a cliché to state it, but “IT is part of the business” – unless of course it’s a partially or fully outsourced IT operation.
Instead a more appropriate phrase is “running IT like a business.” And this blog talks to the importance of IT financial management, as espouse by ITIL, the popular IT service management (ITSM) best practice framework, in doing this.
What makes a business a “business”?
Unless it’s a non-profit, a business is a legal entity designed to make money for its stakeholders, usually shareholders. It’s not a great starting point for “running IT like a business,” until we go down a level to understand how it does this. This is where corporate IT departments need to be seeking business-world inspiration in providing better IT services, and greater value, to their parent organization.
Think about how successful businesses “do business,” they:
- See a market opportunity (or create a new market)
- Conduct market research to understand customer wants and needs
- Envision, design, test, refine, and deliver a market-beating product or service
- Might offer a portfolio of products and services, rather than relying on a potentially-risky single-product revenue stream
- Invest in marketing and sales activities as appropriate
- Create market differentiators and leverage any competitive advantage they can
- Operate as efficiently as possible, minimizing costs while maintaining quality (and adhering to appropriate legislation and industry regulations)
- Understand how they make money at a granular level – from fixed and variable costs, cost drivers and unit costs, to the margins by product type.
There’s lots of other things too, but hopefully you get my point – running a business involves so much more than just creating and then delivering a product or service to market (and to customers who want to buy it). With a number of key financial activities, or capabilities, needed for a business to operate as a “going concern.” Yes, I just threw some accountancy ninja at you.
Comparing this to an average corporate IT department
I appreciate that it’s dangerous to talk, or to write, in generalizations – but how much of the above does an average IT department do? And do properly? Not enough in my opinion.
Do IT departments need to do all of the above? Well, no. But there are certain things that they should be doing. And “doing” even if they aren’t thinking about “running IT like a business.” It’s just good commercial sense – as part of a larger, parent business – whether you’re part of IT, human resources (HR), facilities, or another business function or department.
Thankfully some of the earlier bullets are now being covered off by business relationship management (BRM). However, the needs of the last bullet are not so well met (still), despite the available IT financial management best practice in ITIL, COBIT, and other IT management approaches.
It’s almost as though IT departments are allergic to finance. Or, like a young child being allowed to eat chocolate rather than vegetables, the IT department has been allowed to grow and mature without needing to do more than the financial basics of high-level budget creation, forecasts (and reforecasts), and the financial accounting for monies spent. They have been allowed to operate without granular insight into costs and value.
It’s time to start thinking of IT expenditure as a business investment not cost line items
We commonly talk of “IT spend,” which sadly just adds to the industry’s IT financial management woes. It allows IT departments to focus on cost, and at such a high level, that they wouldn’t know if:
- A “home-grown” IT service costs way more than an equivalent-quality third-party-provided solution
- Investments are made in the “wrong” IT services – where decisions are made based on user volumes rather than the delivered business value
- Money is wasted on over-provision of hardware, software, and cloud services
- Redundant or low-value IT services continue to eat into scarce financial resources because there’s too little understanding of where costs are incurred and the business value the costs ultimately create
- Ill-informed decisions are made on which IT services are cut back or ceased – again probably based on low volumes rather than the level of business value.
Why does this happen? It’s because, on the one hand, there’s insufficient granularity of costs, and the associated cost drivers, to understand anything other than what’s being spent on a particular technology type or an overall business service. One could argue that cloud helps, but the monthly cloud-service-provider bill is still not the all-in cost of delivering an IT service, nor is it necessarily able to define a unit cost.
Then, on the other hand, there’s too little appreciation of how individual IT services, and the resources they consume, provide a positive “return on investment” to the parent business. Or how they create business value, not IT value.
The value versus cost equation
In life, we usually have a very simple purchasing decision mechanism – is what we want to buy worth at least as much as we have to pay for it. This might be extended to: Is the value I’ll get from the purchase in excess of what it will cost me? But how many IT departments use this thinking when investing the business’ money on IT?
To quote ITSM.tools’ Stephen Mann:
So ask yourself, “what value does IT deliver to the business?” Not in generic terms like business process-enablement and technology-supported efficiencies. What does the money we invest in IT each year actually deliver to the business in terms of value? More importantly, which IT services deliver the most value and which deliver little or no value?
Hold on a minute though. Do you actually know what “value” is from a business perspective? I’m not talking about the value I&O believes its IT services deliver; I’m talking about what the business thinks.
IT financial management is the starting point for rectifying these issues
As an industry we are, quite rightly, becoming increasingly obsessed with the concept of value, and the business value IT delivers. But to truly understand how much business value is delivered, IT departments first need to understand what their internal customers need and deem to be valuable. And then to understand if the value of what’s delivered is larger than the resources consumed in creating it, i.e. the costs incurred.
Importantly, just understanding costs at a high level is not enough for this. As mentioned earlier, greater granularity is needed to understand cost drivers and unit costs for discrete IT services, i.e. what it costs to deliver a single email account such that it can be compared to alternative delivery options such as Gmail for Business. Or, where a business stakeholder can quantify the value of an IT service in financial terms, i.e. what they would pay for it, an assessment can be made as to whether the costs incurred in delivering the service are disproportionate. Which might lead to service quality being lowered or the service being ceased in favor of a better option.
Ultimately IT financial management, i.e. better financial stewardship, and an appreciation of business value allow IT departments to make better decisions about where to invest available funds, to deliver the right services in an optimal way. It’s no different to any other type of business decision making: the quality of the decision is strongly influenced by the quality of the available data and insight.