Wednesday, July 13, 2011

Money Makes the World Go Round

Like it or not money is a central part of all of our lives. As a consultant typically one of the first questions I'm asked is "How much?". I worked with a great client several years ago building their IT strategy to accommodate aggressive inorganic growth in the laundry room business. They operated laundry rooms at apartment and condo complexes and knew how to do it right. Their focus was on the management of the money and used it to diagnose any problems. First they could tell you how many loads would be washed and dried based on region and the number of units. They knew how much soap, water and electricity would be used. They could predict the required maintenance with amazing accuracy. Most importantly they knew how much money to expect from every washer, every drier, and every soap dispenser every day across their $1B organization. The EBITDA for each washer. The operating profit of each laundry room. Simply amazing!

Contrast this with the norm at Fortune 500 companies. It is a rare day when a client can tell me how much their technology costs per seat. I've been laughed at and asked why anyone would care. I've been told there are too many variables. Yet when I talk with CEO's about building a new business or offering a new capability the first thing they ask is "How much?". As a guide I typically ask "How much does technology cost per seat today and how many people do you estimate being involved?". Applying an average to generate a back-of-the-napkin estimate works pretty well. So the CEO asks the CFO or CIO who invariably don't know (and if not are not happy to be put on the spot) and invariably we end up taking their technology budget and dividing by the number of people. It's a start, but it's not transformative.

******************************** HINT ******************************
For anyone considering a technology rationalization effort, knowing the detailed costs is a fundamental requirement yet derails more projects than any other single cause based on my experience.

Whereas the average number gives you a starting point it doesn't give you anything on which to provide an insightful analysis. If that number were good enough the next thing in line would be the contract, just sign on the bottom line. Yet what ends up happening is an exhaustive research project with consultants and IT finance gurus to get to the bottom of what everything really costs. Some times it becomes a project unto itself. Worst of all return in a couple years when the details have changed and you'll typically find you have to start all over again; nobody picked up the work. And I won't go into all the rocks you overturn exposing contracts being paid that are no longer required, missing maintenance on production servers, software licenses that are oversubscribed, and more that make you ask one question: "Who owns the money responsibility in IT?".

I cannot rationalize this lackadaisical approach by IT to activity based costing. On the one hand CIO's bemoan the increasing responsibility of IT with a shrinking or static budget. To me that means knowing the who, what, where, when, how, and why of every dime. Yet there's no transparency in the 2/3 of IT budgets which are operations focused. That tells me IT wants to deliver the message "we don't care what things cost" but somehow I've missed the legions of CIO's standing before their leadership to make that statement.

IT needs to know what things cost and track those costs for all the things it has. There are some tremendous tools out there to help with this but, and perhaps it's just me, I've seen an amazing lack of use. This underlies the larger issue of collaboration between the business and IT. The business talks in dollars, capital vs operating expense. IT has to use the same terminology to be understood, however that's very difficult when getting answers to simple questions like "What does that cost you per year?" or "What's the cost per seat?" take days, weeks, or even months to calculate.

I've been advocating this approach since I ran the IT department for a small call center outsourcer in the mid 1990's. We calculated the cost of everything at various levels (seat, program, location, company) which fed into our estimation process. As a result we could tell a client within a day or two of knowing their requirements the one-time startup fee and the ongoing fees within +/- 10% accuracy. IT was a big part of our business so we ran IT as a business.

This approach is now considered a best practice according to the MIT CISR researchers Peter Weill and Jeanne W. Ross as outlined in their book IT Savvy. So if you don't believe me, believe them, it will pay dividends and is a fundamental component of the success of IT.

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