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One of the major issues IT executives face is how to charge their departmental costs back to each part of the business according to their usage. It’s a touchy issue that can be the source of end-user disenchantment with the performance and contribution of the IT organization. Ultimately, charge-back friction can hobble IT’s ability to make necessary investments in new capabilities and become the primary cause of misallocated IT spending. The two risks are related: Unless an IT department can calculate the real costs of the services it provides to specific parts of the business and charge for them accordingly, it is almost impossible for line-of-business department managers to assign priorities to the “keep the lights on” part of the budget, so even low-priority maintenance or upgrade efforts can crowd out all but the most pressing needs. The issue of allocating IT department costs spills over to Finance, which typically handles the allocations in budgeting and profit calculations. As a first step toward establishing an effective means of funding the IT function, I believe the finance department must establish better methods of allocating IT costs. Eventually the proper allocation of IT costs also becomes an issue for senior corporate executives as well because it has a direct impact on how effectively a company uses information technology.
To illustrate how using inept IT cost allocation methods can lead to bad results, let’s start with a very simple example. A company decides to lump together all IT costs and charge each department a prorated share based on some proxy; for example, headcount or floor space occupied or some combination of proxies. Any such proxy system inevitably will favor one department over another. Human nature being what it is, the inability to draw a straight line between the charge and the benefits delivered will leave everyone thinking they are paying more than their fair share. Moreover, in most companies, because business managers are not charged directly for their consumption of IT services, they have no idea how that impacts IT department costs. In the absence of price signals, unintended overconsumption and misaligned priorities are almost inevitable, and thus IT spending does not support the business as effectively as it should.
Our benchmark research illustrates the fundamental problem that companies have in allocating IT costs. Either they do not have the processes in place to ensure that they connect the right information to the appropriate action (for example, they do not charge costs accurately enough to end users so the users can’t make more rational decisions about what they are willing to spend), or they are not collecting the right information about the costs. Many suffer from some combination of the two. Having greater visibility into what a company actually is spending and on whose behalf and a better process for deciding what to spend money on are likely to increase the value the IT budget buys.
Our research also assessed the effectiveness of companies’ IT spending on a five-point scale from very ineffective (1) to very effective (5). The research finds that participants who said they have accurate systems for identifying and allocating IT costs have higher spending effectiveness scores (averaging 4.0) than those who said theirs were generally accurate (3.6), generally inaccurate (3.0) or very inaccurate (2.6).Tracking actual costs and charging them to specific users who incur them is the best way to be sure funds are spent well. Having visibility into the true costs of those IT resources and a process for controlling them promotes better use of the resources.
The research also finds that for IT departments there is a virtuous cycle in accurately measuring and charging IT costs. Companies that are more effective in using their IT budgets are also likely to have had greater IT budget increases in the preceding years than those that were less effective. In other words, a more accurate costing system gives a company more bang for its IT buck, which results in more bucks for IT. IT departments that give managers better visibility and control over IT costs charged back to them – and can demonstrate to their business clients that they are getting a positive return on their investment – are likely to be rewarded with higher budgets than those that do not or cannot.
Having the right data, the right analytical tools and the right allocation methods are all prerequisites to having an accurate IT charge-back system. As part of their overall responsibility to manage their portfolio of IT assets, CIOs must have the ability to track who and what is driving which IT costs. CFOs should play a larger role in the budgeting and expense allocation processes by ensuring that IT costs and cost drivers are more visible to the organization rather than relying on broad-brush allocations. Done correctly, I think this will improve the alignment of IT spending with the company’s needs. For their part, CEOs must understand the importance of achieving better alignment of IT spending and the strategic requirements of the company. They must ensure there is a formal process for periodically reviewing that alignment and capabilities to measure accurately spending on and use of information technology.
Robert Kugel – SVP Research
At its annual Influencer’s Summit in Boston, SAP offered multiple perspectives on where the company’s strategy and products are heading. Overall, I was struck by the essential similarities to its message on its strategic direction a decade ago. The overarching objective in its roadmap now, as then, is to have information technology increasingly adapt to the needs of individual users and how they choose to execute established/repetitive or ad-hoc processes, rather than forcing them to adapt to the limitations of the technologies they are using. Back then the idea was to create a comprehensive process framework – a closely coupled approach. Today, it’s essentially the opposite, as SAP products run on an architecture that enables flexibility – a loosely coupled approach – both in how the computing infrastructure is organized and how people execute their tasks. It seems to me that this reflects the impact of having choices between cloud-based software as a service (SaaS) and on-premises systems and the need to enable access through a variety of devices (from desktops to mobile handhelds and tablets). Mobility is important both for people whose roles take them beyond the firewall (in sales, service and logistics, for example) and executives and managers who often find themselves managing by walking around. Tablets, smartphones and similar devices are attractive also because people consider them personal items and associate them with fun, whereas desktops and notebooks are corporate and work-related.
Architecture drives product design, and SAP continues to stress HANA and the ability of its in-memory system to expand the scope and capabilities of applications that run on it. That makes sense since any in-memory computing platform can transform how software is used. The challenge then becomes transforming the habits of users. For example, I’ve noted the need for more contingency planning. One reason it’s not used more is that the latency between thought and answer in complex scenario analyses on disk-based systems is often too long to be useful in promoting a collaborative dialogue around possible situations and their potential outcomes. “Too long” is a relative thing, of course, but based on my experience, the outer edge in this case may be 10 seconds to 1 minute. Once the technology foundation is in place, the hard work begins. Companies have to understand what is technologically feasible and that they need to adopt better planning techniques, notably driver-based planning. From my perspective, few technology advances have immediately led to forehead-slapping, “aha!” moments. Thus the spread of adoption of in-memory technology into business processes is never automatic, so one of SAP’s challenges is to create demand for HANA by promoting improved management techniques that are supported by in-memory computing. So the technology is different, but the business issue is much the same.
Since it offers differentiation in an increasingly commodity-like business computing product market, advanced analytics was a key theme at the summit. Analytics are an increasingly important capability for organizations, enabling companies to manage more effectively, not just efficiently. Predictive analytics, for example, should play a role in more than the 13 percent of organizations that our research shows are using them. They have become much more accessible but aren’t well understood. Predictive analytics certainly help in forecasting, but they’re also handy for spotting exceptions from expected results, especially when companies have to work with large data sets. Departures from expected results can provide the basis for management alerts and notifications, as when an order from a regular customer or an invoice payment is not received within the normal period. Both situations can indicate customer issues. A follow-up to the former might uncover that a competitor is offering promotional deals to gain market share, and the company could counter the move sooner. The latter might be the result of some issue that occurred in fulfilling the order, in which case it would be better to have the first communication with the customer be an immediate note of concern rather than a dunning notice weeks later. Analytics is an important theme in business computing, and SAP will need to focus on it in its product efforts.
Risk management is yet another area where real-time data can be an important enabler of capabilities that are not practical without the ability to crunch substantial amounts of data rapidly. Outside of financial services, few industries manage risk comprehensively, and even financial services can put more of their operations into a risk management framework. In part this situation reflects the fact that few industries have developed a framework for measuring risk objectively. Part of this is historical: Financial services have always been about numbers, and it’s straightforward to use these numbers to measure risk. Financial ratio analysis therefore can be applied to assessing many operational risks in that industry. And since it was one of the first to utilize computers to handle operations, these corporations have long experience in using software to manage risk. By contrast, only within the past few decades have other types of companies begun using IT systems to manage operations. Using data to identify and track operational risks is still nascent, so any discussion of how far it has developed strikes me as premature. Yet I believe risk management in consumer, industrial and business services should be on the radar screens of executives, especially because it addresses the agency dilemma. SAP’s risk management software portfolio could expand substantially over the next several years to address the need. (I expect the same from Oracle and IBM, along with many smaller vendors.) But here again businesses must become aware of the need before a market will grow.
SAP Business ByDesign is a topic worthy of its own blog, so I’ll post one on this topic shortly.
It struck me that this Influencer Summit demonstrated SAP’s understanding of what it needs to accomplish over the next few years to be competitive with its substantially larger rivals – IBM, Oracle and, in applications for small and midsize businesses, Microsoft. Strategy is one thing but execution – as ever – is probably more important. Here, SAP must demonstrate that it can operate at faster clock speed than it has in the past to maintain its top-tier position in business computing.
Robert D. Kugel – SVP Research