Know your IT cost of goods sold

Although my passion is value, that certainly should not imply that I don’t think about costs – costs are an integral part of the value equation, as are risks. The definition of value used in Val IT™ is the total life-cycle benefits net of related costs, adjusted for risk and (in the case of financial value) for the time value of money. Costs are incurred in two main ways – the cost of executing investments in IT-enabled change, and the on-going costs of operating the new/changed assets that result from those investments, often new/improved business services which increasingly have a significant IT component. These on-going costs often represent somewhere between 65 – 85% of the total IT budget. This article by Craig Symons from Forrester focuses primarily on these costs, and in doing so, makes a strong case for IT financial transparency.

Craig points out that, as IT has become increasingly pervasive in enterprises, IT costs represent a growing and often significant part of their total cost of products and services. Yet, although these costs are associated with a number of different activities, including enterprise-wide and business unit administrative activities, sales and marketing support activities, and direct product and service activities, many enterprises lump them all into the general and administrative costs “bucket”, where they all too often become a very visible target for cost-cutting. Without more specific information around the activities these costs are supporting, there is a significant risk that the wrong things will be cut, and value may well be eroded or destroyed as a result of the “law of unintended consequences”.

With complete financial transparency, IT costs are identified by activity and charged back at the service level based on consumption. This allows IT to have a fact-based discussion with the other parts of the business, showing where IT contributes value to the business activities, and thereby enabling smarter decision-making. It changes the focus of the conversation from the cost of technology, to the value contributed by IT to business activities.

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