Vulnerabilities in todays economy coupled with the instability of the financial markets are causing havoc within the financial services industry. Market turmoil has prompted a massive amount of divestitures, downsizings and mergers and acquisitions. The merger of Lloyds and HBOS, Bank of Americas takeover of Merrill Lynch, and Barclays partial purchase of collapsed Lehmann Brothers are some of the more prominent winners and losers of recent turbulence. Other industry sectors are also experiencing shake-ups, and they are putting new emphasis on strategic planning, cost reduction and organizational restructuring to weather the storm and gain competitive advantage. For some, its simply about business continuity.
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 arent 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 ITs 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 enterprises 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 cant control their costs and dont 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 ITs long-term success.
So how might EAM be used to help enterprises during troubled times? Consider the following common scenarios in which EAM can assist in IT investment planning and reduce costs:
Project Approval Process
The typical project approval process is fraught with risks. Common mistakes that increase these risks include:
- The lack of a correct process in place leads to projects that are approved with no certainty over the financial costs of the project.
- Not having the right architectural governance within the organization increases the risk of project failure.
- The lack of transparency and due process in selecting project portfolios means that decisions are sometimes made based on whether a project is favored rather than whether it is business critical. This is a luxury of the past in the current economic climate.
Given these risks, it is crucial that organizations find a means to prevent them. This requires architecture health and risk checks and setting milestones at which the project receives a no or go. Processes should be put into place to ensure that a project business plan is completed and is comparable. All stakeholders should be involved in the process, and the individual(s) with approval power should be mandated to carry out due diligence. Such due diligence should be transparent to others so that it is clear why one solution was chosen over another. Best practices in other industries, such as in manufacturing, demonstrate that a key success factor is transparency and comparability of the information from suppliers and partners. In IT, this implies comparability not just in terms of deliverables and business benefits but also in terms of its architectural fit with the existing IT landscape. A centralized planning system allows for competing solutions to be proposed and cross-compared on level playing terms in terms of criteria such as their architectural risk and standards compliance.
The biggest issue during project approval processes is that individuals typically underestimate time, costs and effort. Often, they dont look at the impact a new project has on other existing or planned IT implementations. For example, a new solution being reviewed might use a technology that your organization plans to take out of lifecycle in two years. Is that acceptable? Or another project might include technology that conflicts with your existing data warehousing strategy. If so, you might not be able to analyze your information, or it could cost a good deal more money to do so. In fact, the biggest cost incurred is often when project managers have to pay for the development and maintenance of interfaces required for disparate systems to communicate with one another.
By documenting portfolio decisions and the decision process behind them, organizations can better determine which approved projects are priorities in an organizations business strategy. This avoids pet projects getting forced through, because sponsors must defend decisions in a logical manner.
An example of a company that has a good handle on projects is financial service firm VR-Leasing. Its CIO office oversees project costs, architecture conformity, IT security and business case and relevance. Since initiating its enterprise architecture management program, if these factors arent up to standard, projects dont proceed. One of its priorities has been to reduce the number of interfaces between applications and so it has standardized on certain applications. As a result, it has cut costs and implementation time sharply.
Nobody knew how many technical systems and components VR-Leasing had until we captured them all, so the volume was quite surprising, said Dr. Helmut Wissmann, IT architecture manager at VR-Leading. The number of interfaces as well as applications being used was also surprising, not to mention applications that needed to be retired. With our EAM system, we could suddenly predict what would happen if I was to turn an application or a system off.
Risk: Mergers & Acquisitions
While many banks are suffering from the global financial crisis, another bevy of financial institutions is moving in to take advantage of the situation. And they are morphing into new entities.
When a firm embarks upon M&A activity, even if its to gain market share or acquire products, it is seeking synergies that translate into shareholder value. But few if any synergies are possible without IT being tightly involved in the planning and transformation process. Thus, organizations many times are left with the following risks:
- Following organizational change, there will likely be incomplete integration between the systems.
- The lack of integration will likely cause business frustration, loss of critical staff and increased integration costs.
Without a well-thought-out and effectively managed roadmap, the IT department risks an incomplete integration, business frustration with its capabilities, loss of critical staff, higher costs and an unnecessarily complex environment. If CIOs needed another reason to invest in EAM, an imminent or post M&A provides one. During, or, after the M&A due diligence phase, it is imperative for IT to gather detailed inventory of the IT assets systems, processes and people - of the target company to understand how they support the business model and to develop accurate estimates for schedule and costs necessary for planning. A transparent overview of both companies IT baseline is imperative to be able to understand where synergies, cost saving consolidation and operational risk lies. Shortly after the M&A deal has been complete, experience shows it is highly valuable to introduce a collaborative and integrative IT planning solution into the process. This not only drives short-term results and the ability to provide reliable answers fast, but also lays the foundation for ongoing strategic planning and IT information capabilities that will be critical in steering the enterprise forward.
According to Gartner Inc., CIOs who fail to do premerger planning add 20 to 50 percent more time to the period given for achieving business goals. They also hike the cost of a merger by at least 25 percent of the combined IT budgets. Organizations that already have an established EAM are better positioned to be successful at M&A integration simply because the integration work, while substantial, can be folded into existing strategic planning, governance and execution processes. Key decisions around which applications, infrastructure and IT processes are needed and what transformations are required to create the new IT organization can be quickly taken with minimal disruption. While IT management focuses on completion of integration projects and on achieving operational stability, business management looks for revenue and profitability synergies. These different criteria can cause impatience and frustration. Implementing EAM processes provides IT and the business with a common vision of the combined company end state and a collaborative planned process for getting to it.
Managing costs is always important, but in troubled economic times, it becomes imperative. In understanding costs, CIOs and IT managers can use EAM to make the overall economics of IT clear to their business counterparts - what it costs to support applications on an ongoing basis, total cost of ownership and the costs of decentralized versus centralized IT structures and make them a partner in investment decisions. They can show value and legitimize costs and stem the doubts of business colleagues in ITs ability to understand business factors. In doing so, they can support their businesses in a way not possible before, while carrying both their companies and themselves safely through troubled waters.
Erik Masing is CEO of alfabet, Inc., a leading software provider in strategic IT planning and management.
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