Do you know the true cost of any IT service being provided to any business unit within an organization? Is this an efficient cost as per industry benchmarks? Why is this technology change so expensive? Should we change a sourcing strategy (in-source vs. out-source) for specific IT services? What is the total cost of ownership (TCO) and return on investment (ROI) for the new IT initiative?
As IT leaders, do you face these questions quite often? Due to diverse IT technology offerings and complex matrix organization structure, it’s difficult to find the true IT cost for any service. This becomes more difficult when there is a federated IT organization with internal IT services in each department (or shadow IT) with elements of outsourcing, captive center, matrix structure of ownership at each tier of services. The next level of complexity comes when finance, IT and business use different cost terminology.
In Los Angeles County government, we also face a similar challenge. The county has a federated IT organization in which all 38 departments have their own IT staff maintaining their own IT systems. These departments leverage another department, the Internal Services Department, for shared IT services including application maintenance, data center operations and shared services. The Los Angeles County Office of the CIO (OCIO) was established to focus on enterprise IT strategic needs aligned with the county’s business priorities, accelerating innovation, cost efficiencies, and enablement of synergies between large distinct departments. To bring cost transparency, OCIO is embarking on a journey to implement the Technology Business Management (TBM) framework.
TBM is a value-management framework for CIOs and their teams that centers on the transparency of cost, consumption, and performance. The framework provides four layers of taxonomy — cost pools, IT towers, products and services, and business capabilities. It helps provide the business, IT and finance view of any cost element.
Understanding a cost model may be very complex. Sometimes, it may be hard to classify cost types as direct vs, indirect, or capital vs. operational. There will not be a perfect situation, so the first step is to start somewhere and capture the existing details. You may never have perfect data, so don’t wait for it. Changing the existing Chart of Accounts in the financial systems may be a very long process, but you can always start with existing cost objects and map into the broader pools. As it matures, further granularity can be achieved. Traditionally, the infrastructure services can be difficult to bring cost granularity, but cloud and full-stack architecture adaption may untangle this layer significantly. As you are going through legacy modernization, we should try to establish service architecture and link spending to it. The business units may not understand the value from cost pools and IT towers. That’s why it’s important to define services and translate cost pools into business views.
TBM helps to shift IT from an “Expense Center” to the “Value Partner” and eventually to the “Business Driver” seat. IT leaders can understand business cost dynamics and monitor both tech and non-tech costs. The cost of the technology can be baked into a firm’s product prices, and tech budgets are integral to product-line fiscal plans. The IT may offer unit costing, benchmarking and govern project spending to deliver value for the money to the business. Once the cost transparency is there, there can be value conversations between IT and business to effectively “run the business” and “change the business.”
The key point is that it’s not a project, but a journey, so don’t wait for the perfect IT landscape and perfect granular costing data to start.
References: TBM Council; Forrester.
