There was an interesting article recently in the Forbes magazine titled “Attention All CIOs: The 2022 Budgeting Season Is Already Under Way” 1 authored by Mark Settle that got me to write this article about the Dos and Don’ts on how to communicate the value of IT.
Much like the saying “Beauty is in the eyes of the beholder”, “IT’s Value” is also in the eyes of the customer. In this context, “the customer” is the CEO, the CFO, the COO & the Heads of Business Units. However, I believe that commercially-minded CIOs proactively communicate IT’s value well.
As much as I would like to cover the Dos, I’d firstly like to start with the Don’ts.
- Don’t communicate IT’s value in terms of cost avoidance:
The typical maths is to quantify savings derived from cost avoidance is by NOT choosing a higher cost alternative in favour of a lower-cost alternative, assuming all other factors such as scope, quality, etc are similar. Justifying the value of IT in these terms is generally viewed with deep suspicion amongst the C-level as it is difficult to rationalise why one would select the higher cost alternative.
- Don’t develop a business case for IT:
While business cases are a sensible framework for justifying the returns of individual projects or programmes, trying to aggregate ROI calculations for the entire technology department requires a lot of work and the result is treated with deep scepticism.
For the reasons outlined, I would not recommend either of the above approaches.
- Demonstrate Year-on-Year cost reduction in the cost of IT:
- While it is tempting to compare the IT costbase at an aggregate cost-centre level for each year, as any IT Business Partner knows this is not a true like-for-like comparison due to cost uplifts of new initiatives. What then does an IT Business Partner need to do to be able to undertake this approach? The solution is to break down IT spend in terms of IT systems i.e. Total Cost of Ownership (TCO basis) and assign the cost of these systems to the internal Business Units (BU) / Departments based on their consumption. Once you have this mechanism in place, you can demonstrate a true like-for-like cost comparison of IT applications on a year-on-year basis. This mechanism also clearly strips out the cost of any new IT applications deployed to support business growth.
- Demonstrate year-on-year cost reduction in the IT functions:
- As above, this approach requires a similar pre-requisite – in that it cannot be calculated from a rudimentary cost-centre level. Instead, this approach requires breaking down of IT spend by TCO of IT Capabilities. These capabilities can be aligned to industry standards such as Databases, Datacentres, etc. The benefit of aligning to industry standards is that the terminology is relatable and well understood by the intended audience, and expressing the cost of IT in such terms allows a CIO to clearly communicate movements such as investments in emerging technologies while improving efficiencies in more traditional capability areas.
- Segregate Buisness-led cost increases vs IT-led ones:
- Although CIOs ultimately own the IT budget, a number of decisions taken by the customer (eg: BU Heads) can increase the IT costbase. A constant increase in IT costs without clear justification of the movements can sometimes result in the “messenger being shot”. To avoid such scenarios, CIOs need to work with their IT Business Partners to clearly categorise the year-on-year cost uplifts into IT-led vs Business-led increases. For example: If the unit cost of employee productivity software remains the same (or is marginally lower), however, the overall IT cost increases due to an increase in headcount in the company, the IT Business Partner needs to be able to breakdown such cost uplifts in the year-on-year cost bridge movement chart.
A special note on “External benchmarking”. While external benchmarking is a useful technique for IT Cost Optimisation, I’m hesitant to propose it as a method for demonstrating the ‘Value of IT’. This is because “historical benchmarking” i.e. year-on-year comparison is more relevant to an organisation than “external benchmarking” while communicating the ‘Value of IT’.
CIOs that communicate the value of IT during the budgeting process stand a better chance of convincing the CFO & CEO with an increased budget 2
About Amalytics Software:
Our product, CostLens, helps enterprise customers automate the modelling and reporting for all the above views.
2 Based on anecdotal evidence. Needs further exhaustive surveys to quantify.