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(jgimeno@grefusa.com).
Align IT Costs and Strategies With Business
Goals to Remain Relevant Beyond 2020
16 October 2013 | ID:G00256403
Robert Naegle | Jim McGittigan
IT leaders, often operating in "firefighting mode," fail to look beyond the next task to
understand IT service costs or the impact IT has on the business. IT organizations
need to develop a service provider mindset to align IT goals with those of the business
and to be relevant into the next decade.
Overview
Key Challenges
Many IT leaders don't know the cost of delivering their services and make short-
term decisions based on limited cost data and objectives that are unconnected
with desired business outcomes.
External service providers pose immediate and growing threats to in-house IT
operations.
Recommendations
Identify the total costs to provide goods and services and demonstrate value to
the business and make informed strategic decisions based on solid financial
data.
Think more like an ESP from a services, cost model and service-pricing
standpoint.
Provide cost transparency via electronic IT scorecards or business value
dashboards to showcase how IT is aligning with the business.
Introduction
Many IT leaders run their organizations as cost centers and focus on enabling the
latest technologies within their IT service domains. This narrow technology focus will
put IT organizations at risk of being made irrelevant in the wake of increasing demands
for business-valued services and greater cost transparency.
Gartner ITScore research indicates that fewer than 1% (only 0.3%) of all survey
respondents have achieved an infrastructure and operations (I&O) maturity score of
Level 4 or higher. Level 4 represents the Gartner assessment at which business
alignment is demonstrated throughout the IT organization. Of 1,033 Gartner clients
surveyed, only 8.7% have achieved a Level 3 or higher maturity level. In short, IT
leaders as a group fail to connect the work they do to the overarching goals of the
organization (see "Survey Analysis: ITScore for I&O Survey Results Show No
Improvement" ). Those goals may include generating revenue, increasing shareholder
value and boosting customer satisfaction.
Technology-centric IT organizations are focused on optimizing assets, because they
tend to be aligned around functions, skills or technology platforms. Service-centric IT
organizations adapt the ESP delivery mindset to internal operations. They are
competitive, process-oriented and able to negotiate with clients to ensure that demand
is actually funded. IT leaders must adopt an ESP-like approach to IT management.
Table 1 shows how IT leaders can adopt that ESP approach and move from being
traditional IT order takers to true business partners or IT service providers. To stay
relevant in 2020, IT leaders must shift to a customer-focused, financially savvy entity
that runs more like an independent business or service partner.
Table 1. The Transition From IT Order Taker to IT ESP
Source: Gartner (October 2013)
Analysis
Run IT Like an ESP
A typical shared-service IT organization offers many of the same services that an ESP
does, but not at a profit. To be successful in 2020, IT leaders must be able to think of IT
as a valued service provider. Running IT as a service provider, in which customers value
the goods and services provided, offers IT leaders opportunities to become strategic
partners and to drive corporate value. To do this effectively, we recommend that IT
leaders:
Identify and fulfill the customer's needs by building solutions at a competitive
cost that the business customer is willing to pay for.
Approach service definition, cost modeling and service pricing as if you were an
ESP.
Transform the vision of IT and show the customer that it is making a wise
financial investment when paying for IT services.
Grow relationships with the business operations teams and nurture the image of
IT leaders and staff as that of a strategic partner.
Identify IT Costs and Optimize IT Spending
To remain relevant through 2020, IT leaders must know the costs to provide the
required services either internally sourced or via a third-party provider. Most IT
leaders must implement service pricing models and to set the price. IT leaders must
know the total cost to provide IT goods and services to the business (both technical
and business). This cost management approach encompasses the integration of IT
capabilities, processes, resources and partnerships to optimize the delivery of the right
services at the right price.
More than 30% of IT spending is typically earmarked for investments captured in the
project portfolio. According to Gartner surveys, as well other industry surveys (including
that of the Project Management Institute), data suggests that many projects fail to
deliver value or deliver less than expected value. As much as 20% of the average IT
project budget is wasted.
The key to a strong financial management discipline is the development of an
investment planning process that focuses on the life cycle of the investment (from the
beginning to the end of life). The need for process is essential, because repeatability
and consistency in solution delivery will result in a reasonable expectation of accuracy
and timeliness. Such production cycles result in consistent costs. IT leaders can provide
such a process to the customer. To do so, we recommend that IT leaders:
Budget and forecast
Provide what the customer wants and needs
Team with the CFO/CEO and the business to drive benefits realization
Assess the true IT costs inclusive of assets, labor (direct and indirect), service
fees, allocations and overhead, while keeping service life cycle costs for
maintenance and upgrades in mind
Table 1. The Transition From IT Order Taker to IT ESP
Traditional Service IT
Optimizes Assets Service outcomes
Attributes
Supply-driven
Technology-centric
Functionally and technically siloed
Insulated and monopolistic
Cost-obsessed
Demand-driven
Customer-centric
Process-based
Competitive and engaged
Service-obsessed
Benchmarking
Brokering
Role Steward Service partner
Behaves as A cost center An ESP
Define the business service provided and allocate all costs and values to the
product and/or service
Provide IT Financial Transparency
IT leaders tasked with maintaining or improving the strategic relevance of IT through
2020 must provide improved levels of IT cost transparency.
Financial transparency is the process of providing more-detailed views of IT costs.
Levels of transparency will vary by organization and business need, as IT leaders
should demonstrate a level of costing detail appropriate for the stakeholder involved.
Some organizations choose to charge back IT services. In some cases, charging back
services does not always equate to transparency. Chargeback can simply be a function
of dividing IT spending by head count and allocating expenses to business units based
on the number of people on staff. However, this process lacks any meaningful level of
transparency.
Gartner defines IT cost transparency as an aggregation of cost information into a
definition of goods or services that is valued by the target audience. In addition, IT
leaders must provide data views that provide the appropriate level of detail for the
target audience (see "IT Cost Optimization Should Be an Ongoing Discipline" ).
Most business leaders want to understand the impact of IT on their operations, rather
than focus on the technical metrics of performance, utilization and availability. Thus,
allocating IT costs to service or product definitions that are meaningful to the business
(or alternative audience) is critical.
Many IT leaders understand that transparency will not benefit the enterprise unless it
is the right level for the audience and communicated properly. IT leaders can adopt
electronic IT scorecards or business value dashboards to help showcase how IT is
aligning with the business (see "First Steps in Building an I&O Business Value
Dashboard" ).
The ultimate success of providing IT financial transparency and the larger picture of
reconditioning IT to run as a business will be tied to strong and ongoing
communications within IT and to the larger enterprise. Demonstrate the IT operation's
value in a way that is cost-competitive to garner mind share and market share.
Gartner Recommended Reading
Some documents may not be available as part of your current Gartner subscription.
"Use Five Techniques to Defend the IT Budget and Demonstrate the Value of IT"
"IT Financial Management Vendor Landscape"
"How to Use IT Financial Management to Validate I&O's Relevance to Business"
"How to Improve I&O Maturity by Using the ITScore"
"Run IT as a Business Using Six Pillars of Effective IT Financial Transparency"
"Accelerate IT Transformation With Cloud Computing Best Practices"
"Manage Four Views of the IT Budget"
Strategic Planning Assumption
By 2020, 75% of IT organizations will see 40% of their services move outside their
control to external service providers (ESPs), due to a lack of IT cost management.
Evidence
This research is based on numerous client interactions with IT leaders and CIOs
regarding how the IT side of the business must work in tandem with the business to find
common ground. This client interaction is underscored by findings gleaned from our
annual Gartner CEO survey. According to the 10th annual Gartner CEO and business
executive survey, results showed that by more than a 4-to-1 ratio, IT investment
increases outnumber cuts among business leaders across all industries. CEOs still
believe that 14% of IT investment is wasted. The survey was conducted between
October 2012 and December 2012. The Gartner CIO survey has been conducted since
1999. Results for the 2013 survey were taken from September 2012 to December 2012,
and included more than 2,000 responses from 36 industries in more than 41 countries.
This research is based on surveys of IT leaders at 2012 and 2013 Gartner Data Center
conferences in locations worldwide, as well as numerous analyst interactions with clients
on a daily basis. In addition, the research is based on 2012 Gartner I&O survey results
(see "Survey Analysis: ITScore for I&O Survey Results Show No Improvement" ).
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