The IT Improvement Zone
The fundamental goal of The Beta Group when working with a client is to move the client into the IT Improvement Zone. We move into the IT Improvement Zone by making the Right Decisions to get the Right Results:
Right Results: The “right results” we want are controlled IT costs and at the same time improved bottom-line impact.
Right Decisions: The “right decisions” lead to the management actions needed to produce the right results. These right decisions lead to:
Our Right Results goals of controlled IT costs and improved bottom-line impact work together. As new projects enable the business to improve its products, services, or quality, and at the same time reduce operating costs, higher impact on the company’s bottom line will result. As management focuses on controlling on-going operational costs, overall costs may decline. The combination allows moving from today’s cost and bottom-line position to a future controlled-cost and improved bottom-line impact position.
To accomplish this, business executives and IT managers balance new IT investments with re-assessment of existing investments. Money saved in one area can be applied to the other. From senior management’s perspective, it all adds up to the “IT spend”. From IT management’s perspective, it all represents the resources that must be managed effectively. Working together, the goals of controlled IT costs and improved bottom-line impact can be realized. Companies can work towards goals in the “IT Improvement Zone” by examining and improving both new project impact and on-going costs.
Companies spend as little as 2% and much as 10-15% of revenue on IT, including the on-going cost of keeping the existing IT operational activities going, and new investment in development and enhancement projects. As a shorthand, we’ll call the first the “lights on” budget, and the second the “projects” budget.
We are interested in the entire IT spend, the sum of lights-on and project budgets. Most of what is spent is in the on-going operational costs, often 70 or 80 percent of the total. To be serious about controlling cost and increase IT’s impact on the bottom line, we have to address the entire spend.
However, with IT as in many other parts of the business, simply reducing IT costs does not by itself improve the bottom line. But with the right management frameworks and management practices, companies can successfully control the growth of IT costs and at the same time improve the business bottom-line impact of those costs and investments.
Historically, company executives spend most time evaluating and prioritizing new IT projects and investments. Considerable management energy is spent in prioritization and dealing with the politics of project selection. As a result, this effort applies to perhaps 20 or 30 percent of the overall IT spend. The other 70 or 80%, the lights-on budget, is larger but attracts almost no attention for management.
An “entitlement” mentality tends to apply to the lights-on budget, where each business manager expects that the information systems now in place will continue with current or improved levels of support, and the CIO tends to expect that the base budget for current applications support, including infrastructure, will continue at current or increased levels. The “entitlement” mentality affects not only project prioritization (managers fight for “their” projects to be done by “their” project people), but also the on-going costs of supporting each manager’s applications. It can be very difficult to reduce support to existing individual applications making it very difficult to control and possibly reduce the lights on budget over time.
As a result, rather than pursuing both the goal of reduced cost and improved bottom-line impact, managers focus on one or the other. This leads to one of several unfortunate scenarios.
a) Lower lights-on cost and reduced bottom-line impact, where companies focus solely on cost reduction, without considering the specific impact the cost reduction has on IT’s contribution to the bottom line.. A typical outsourcing arrangement fits this scenario.
b) Higher lights-on cost combined with no improvement in bottom-line impact. This is the “entitlement” situation, where manager’s assume that lights-on budgets will regularly increase and new projects are chosen that do not produce enough bottom-line impact to overcome increased costs. Companies that rely on traditional budget methods and traditional business-case and prioritization methodologies often end up here.
c) Higher lights-on cost and higher bottom-line impact. This scenario is very common where business conditions are improving, or the business is rapidly growing. Business growth obscures the fact that better management scrutiny of both projects and the lights-on budgets can make the result even better, and perhaps even move the scenario into the sweet-spot of both lower costs and higher bottom-line impact. In times of rapid growth, higher cost may be unavoidable, but it does not have to be uncontrolled or unreasonable growth.
We want to be very clear on this: getting the right actions and right results means dealing both with IT’s cost and with IT’s impact on the bottom line. Of course, if we reduce IT’s cost then some of that cost reduction filters down to the bottom line. But that isn’t what we mean when we talk about IT’s impact on the bottom line. Bottom-Line impact, both short- and long-term, comes from the cost reductions, quality improvements, etc., that IT enables in the rest of the company and making sure these IT business impacts flow to the bottom line. Over time, we want management teams to be able to dramatically improve both cost and bottom-line impact.
To accomplish this we propose three possible objectives, depending on the current circumstances, that a company may pursue.
a) A Reduced Cost Objective By applying the frameworks and five management practices, company management can reduce IT costs and retain the contribution IT makes to bottom line. IT can perform just as well, but at reduced cost.
b) A Stable Cost Objective. Company management can continue to grow IT use, and keep up with the growth of the business, and yet control the overall IT spend. IT can increase its support of the business and its impact on the bottom line, but at current cost levels.
c) A “Sweet Spot” Objective, that combines cost reductions with better bottom-line impact. IT can both lower its cost and also improve its performance in terms of bottom-line impact.
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