As a result, c-level executives are increasingly being called upon to make cost reduction decisions using metrics that are objective and measurable. One of the biggest areas under the microscope is IT, since it has traditionally been both an enormous expense area and one not readily understood.
Gone are the days when IT could take advantage of the wonder and awe (at best) or (at worst) the resentful ignorance of nontechnical plebes and fill its budgeting coffers without so much as a business case. Today, the CIO – operating more often than not under the CFO and beholden unto the Damocles sword of outsourcing - must be in control of costs and be able to cost justify investment expenditures. Nevertheless, many IT organizations have not managed to develop reliable measurements and methods that enable proper judgment and control over which contribution IT makes to the enterprise. This is all the more surprising in industry sectors where business and IT have become complexly intertwined, such as in banking, insurance, telecommunications and logistics. The not knowing where and what to cut may have devastating, amputating effects on the business.
In the search for more efficiency and cost control, IT managers are realizing that the exact costs for IT aren’t really known. Most CIOs know how much they spend on hardware, software and personnel but not what their costs are for application development and hosting, business process support or IT lifecycle costs, for example.
How many are aware of the business criticality, architectural interdependencies and risks associated with continuing or discontinuing those processes? Why is this? First, because IT processes are not aligned with the business strategy and, second, because enterprise resource planning-based controlling practices do not reflect the cost management necessities of IT. Alignment between business and IT is critical in order to have the necessary transparency into costs.
In the past, cost-processing and reporting was generally left in the hands of corporate controlling, but more recently, IT managers have been under severe pressure to explain costs, justify new investments and defend decisions. Capturing IT costs merely as general overhead keeps the enterprise from truly understanding IT’s contribution to the business, hindering identification of savings potential that could free up financial resources for innovation or passing back to the business. The need to rationalize misaligned and underperforming IT assets, offload the burden of redundant technologies and seek out synergies in the enterprise architecture is long overdue in struggling organizations. IT managers need differentiated methods for viewing, measuring, planning and managing change.
Using enterprise architecture management (EAM) best practices to obtain insight into IT/business relationships allows IT managers to associate IT costs with the fundamental (architectural) elements of business processes, thus shedding light on where costs occur and enabling decisions as to cost reduction. And in applying refined cost management techniques to IT, the IT finance manager can better understand, analyze and manage IT costs, leading IT to become a more strategic player in managing the business.
The enterprise architecture is the foundation for an enterprise’s business processes. An enterprise architecture first maps costs to architectural elements and then aggregates them into various combinations that are relevant to the business. This way, IT can achieve a clear understanding of costs and a defendable position against the preconceptions that IT organizations can’t control their costs and don’t understand financial planning issues.
Architecture-related definition, benchmarking and budgeting of costs provides a reliable foundation for sound planning that supports IT cost reduction, optimal IT investment planning and more.
Dr. Christoph Gall, head of IT strategy and architecture at the insurance company AXA-Winterthur, recalls successfully implementing an enterprise architecture program: “I had the directive to implement a centralized architecture management for our Swiss-based company. I set out to accomplish three main goals: firstly, obtain a continuous transparency of the IT architecture. Second, to reduce operating and maintenance costs and manage convergence. And third, prioritize and plan new investments more closely aligned with business objectives. Within months we could quickly discover redundancies in our landscape and begin consolidating applications. Our goal of producing an actionable roadmap and migration plan was in sight. Also, from a cost perspective, we gained greater control of current and planned operating costs.”
Good cost management provides benefits in many areas. Consider IT cost reduction and IT investment planning:
IT cost reduction. Obviously, a main benefit of cost management will be cost reduction, which is commonly the first and foremost objective of IT managers and the essential motivation in almost all of the following instances. The ability to reduce costs for maintaining existing applications (today anywhere from 60 to 80 percent of IT costs, according to market studies) and shift budgeting to new application development has significant influence on determining the market competitiveness of the enterprise.
Optimal IT investment planning. As the facilitating factor of business processes and, in most cases, a major cost participant, IT must plan its investments in such a manner that will help the business most efficiently reach its goals. IT investments more often than not target changes in the architecture so that cost assessment at this level will provide the CIO the best basis for project prioritization and sound procurement decisions. Best practices in managing the enterprise architecture include planning of the future state of the architecture and the incremental steps in getting there. Supplement these maps with cost information, and IT has the ability to measure the financial impact of investments now and for subsequent years. Break-even and ROI analyses and especially capital planning for large investments require a long cost-planning horizon. Good investment planning – tactical and strategic - is essential for IT’s long-term success.
