Smart Meters And IT SpendingBy Nigel Hughes | Posted 2011-01-28 Email Print
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Use cost-allocation analyses to link IT costs to business activity.
Smart meters itemize the electrical consumption and cost of specific appliances to give homeowners transparency into how their electric usage affects monthly bills. This lets homeowners define their priorities and make better decisions about how they spend their energy dollars.
Can that model work for IT spending?
Rather than representing IT costs in terms of mips and gigabytes, a smart-meter perspective quantifies the IT costs required to process a payment, review a loan application, update an account, etc. The next step is to relate the IT cost to the total cost of the activity, which includes personnel, premises and third-party support, in addition to IT systems.
Top-performing organizations are increasingly using IT cost-allocation analyses to link IT costs to business activity, and to understand and improve the impact of IT on business performance. More specifically, they are showing how increased investment in IT can reduce overall costs.
Chart 1 shows ACME bank’s “IT Cost per Transaction” of international payments, as compared with a reference group (RFG) average of industry peers. This view suggests that ACME’s IT performance falls well below industry standards and requires significant improvement. But when considering ACME’s IT spend in terms of the business context, the picture changes dramatically.
Chart 2 shows ACME’s “Total Cost per Transaction”—a figure that includes personnel, third-party and premises costs, in addition to IT. Here, although ACME’s IT costs (shown in green) are higher than industry averages, it has significantly outperformed its peers in terms of business efficiency, as measured by the total cost per payment.
In this instance, by reducing the personnel effort required to correct errors in international payments, this functionality greatly increases productivity. An assessment of personnel productivity provides further insight into the effectiveness of ACME’s IT investment.
Chart 3, “Payment Transactions per Month per FTE (full-time employee),” shows the bank’s personnel productivity relative to industry averages. We see that ACME’s staff is almost three times more productive than the industry average—providing further evidence that the bank’s IT investment is yielding significant benefits.
The CIO’s Role
Focusing on the links between IT systems and broader business activity requires CIOs to take on new challenges. For one thing, they have to elevate the discussion from a narrow focus on IT unit costs to a broader view of IT consumption, business demand for IT resources and business results in terms that the users of IT can understand. The challenge is the longstanding one of being a business person as well as a technology professional.
In many organizations, commercially minded CIOs are being given broader responsibility for back-office and shared-services operations, with a view toward utilizing IT to improve business performance. The increasing focus on minimizing the total cost of a business activity—whether to process an insurance claim, manufacture a car or deliver a package—reflects that trend.
The shift to a broader business perspective can undermine the CIO’s traditional base of authority. For example, many CIOs have authority over a multimillion dollar ERP implementation. But when this initiative fails to deliver expected results, the CIO may suffer for poorly managing the massive IT project. The fact is, though, that the ERP implementation is a business project, one that the CIO should not be expected to implement in isolation.
The lesson? Innovation is driven by business, not by technology. Although every organization has a different functional requirement, most have a 90-plus percent commonality in terms of the need for IT services, which requires viewing IT as a utility.
Specific steps that a CIO can take to facilitate a business-minded approach to technology investment include:
1. Implement a chargeback model based on a cost-allocation perspective that quantifies the IT spend involved in each business activity.
2. Introduce transparency into IT costs by showing the relationship between invoiced costs, unit costs and volume changes.
3. Expand the analysis of IT costs beyond infrastructure by applying functional models that quantify the cost components of business activities in terms of IT, personnel, premises, etc. This will enable a clearer understanding of IT’s contribution to business performance, thereby managing IT more effectively.
Nigel Hughes is director of service development for Compass Management Consulting, a global firm specializing in IT and business-operations improvement.