Value models for IT
Manage IT effectively, select the right projects with appropriate cost and value models
Joachim Treyer
Partner
Director of IT branch
Introduction
With the financial crisis and fear of a deeper recession in the coming months, IT departments are expected to reduce costs. Difficult times, however, provide a great opportunity to stand out and outperform the competition. In this respect, IT organizations should now be looking at value as much as costs.
IT processes and services contribute directly to the company’s core activities, and it is key to measure IT’s impact on sold goods/services’costs and value.
Make sure IT’s service catalog is customer oriented
IT has never been so fast paced. Promising technologies appear everyday, new hardware, protocols and environments are released constantly. If even we typical geeks and engineers have a hard time keeping track, what makes us think our client is interested in servers, virtualization, border gateway protocol? Yet most of IT managers still sell servers, routers, Mbps and man-hours.
What if, instead, we could tell our clients and the end user the price of keeping their laptop up and running, the price of the application which allows to bill customers at the end of the month, the price of their mailbox? Believe it or not, experience shows they love it!
Does your accounting system allow you to accurately distribute costs to products and services?
There is no point in making your offer more client centered if you can not allocate your costs accordingly. I must admit that it is much easier to find the price of a server than to share its cost between the applications running on it. Yet there are tools and techniques to help you accomplish just that. Activity Based Costing, for instance, can be a powerful tool when it comes to accurately assigning costs to products and services.
The ABC approach is based on 3 distinct levels:
- resources, such as people, servers, broadband connections …
- activities which describe the basic operations of an IT department
- and products delivered to clients (applications, projects, desktop, laptop)
Costs are assigned from one level to the next with the appropriate drivers which make sense for those in charge of measuring them.
Measure value
No matter how efficient IT departments are, clients and users will always find it too expensive. A good reason for that reaction is the ignorance of the value IT can add or destroy in their work. IT managers’ responsibility is to assess IT’s value in the company’s processes and core activities and measure their performance accordingly.
Various models have been proposed to measure IT value. Most of them, however, focus on dynamic value – the value created by new projects - and tend to forget the static value – existing assets.
Value is a complex, multi-dimensional concept. We usually assess IT's value for its contribution to the following:
- Knowledge management: understanding of a company’s products, processes, organization
- Agility: being able to adapt to react more quickly and at a lower cost to external changes, without reducing quality
- Costs: ability to reduce recurring and investment costs
- Quality: reduction of errors and malfunctions, which increase costs and reduce customer satisfaction
- Synergies, mergers and acquisitions: capability to share and streamline resources across organizations
- Extended enterprise: ability to interact with external resources, in particular with suppliers
Some companies also find it extremely interesting to model losses when IT underperforms (dropped orders, lower customer satisfaction, increased time to market, …).
Compare value and cost for best use of your resources
With a clear understanding of costs and a good appreciation of services’ value for the client, services and products can be compared in terms of cost/value ratio. This ratio becomes a very powerful tool to quickly identify areas of improvement, build action plans, prioritize actions, re-assign your resources. This approach allows to review the entire catalog of services and to clean it up, resulting in leaner operations.
Be proud!
This hard work is the best guarantee to manage efficiently. It also provides a great opportunity to communicate to the rest of the company. Now that end users and clients understand the services and products you sell, show them the value you bring and how you keep track of it. It is time IT be recognized in companies!