The economic fallout from the credit crunch forced businesses and public sector organisations alike to put expenditure of all kinds under close scrutiny. Reducing IT costs, which make up a considerable proportion of most organisations’ cost bases, was therefore catapulted to the top of the IT department’s strategic priorities, if it was not there already.

At Information Age’s Managing IT Cost Effectively seminar, which took place in London in February 2010, experts discussed numerous approaches to reducing the IT department’s bills, from open source software to output-based outsourcing.

The event began with an attack on the current model of IT cost management from two professional advisers, both of whom called for the strategic focus of IT executives to shift from technology and efficiency to value and change.
For Chris Tiernan, managing partner of Grosvenor Consultancy Services and an author of the Val IT framework for maximising value from IT investments, the way that organisations typically justify IT investments fails to prioritise what he describes as ‘primary value’ – in the case of commercial organisations, that is value to the shareholders, and in the public sector, value to citizens.

Business cases also often fail to account for the change management cost associated with any significant IT project, he added, which recent MIT research estimated at three to five times that of the cost of the technology. This is especially ironic as it is business change that is the real driver of IT investment: “We are no longer investing in IT, we are investing in business change,” Tiernan explained. “Any statements about the return on investment for IT are meaningless.”

Treating IT cost as a discrete expenditure item fails to acknowledge the pivotal role that it plays in all facets of the business, Tiernan argued. “IT is held accountable for everything it spends, just like business activity is held accountable. But the money that IT spends, it spends on creating value for other parts of the organisation.”
Indeed, viewed in isolation, it is little wonder that IT is often seen as a financial burden, says Tiernan, because, “IT doesn’t create value, it actually destroys it.”

What it does do, however, is enable change that in turn can create value. Both the IT department and the organisation around it are guilty of this view of IT in isolation, he says, but the focus should instead be value, and IT’s contribution to value.

However, this is a more complex task that justifying technology investments, Tiernan adds. “This is about managing the finances associated with organisational structures and processes. Those assets are intangible, and that needs to be sorted out in dialogue.

Tangible benefits

Chris Potts, an IT strategy consultant for advisory firm Dominic Barrow, echoed many of Tiernan’s sentiments. “Executives like to have conversations about things that they think are tangible,” he explained. “It’s hard to have a tangible conversation about the value of information, for example, but things like IT costs, these numbers are tangible.”

Unfortunately, he added, those numbers are also effectively meaningless. “The reason why we cannot figure out the value we’re getting from our IT spending is the very simple fact that IT on its own delivers no value.”

It would be more meaningful to manage investments in change, some of which may go towards IT, rather than IT expenditure in isolation. “Focusing on how much you are investing in change to create value, in which IT plays some part, moves the conversation on from IT cost figures, which are meaningless, to something that has meaning.”

Indeed, Tiernan argues that the role of the chief information officer should evolve into ‘executive with responsibility for managing investments in change’. The reason for this is that IT departments have become very sophisticated at managing investments and process changes, but only in the context of IT itself. People with skills such as IT portfolio management should be rebriefed to manage investments at a business-wide level.

“In the end, the idea of managing IT costs will disappear altogether,” he said. “This is the next generation of IT strategy, in which the IT component is lost.”

Also from the Managing IT Cost Effectively seminar

How the recession has changed IT buying behaviour

The economic downturn put the breaks on decision making, said Stephen Martin of Dynamic Markets

Keeping down the energy overhead

The energy costs of IT represent a growing financial burden, said Camco’s Chris Miller

Deriving value from offshore engagements

The offshore outsourcing industry has made some attempts to create value for customers but it not yet a strategic priority, said Stephen Bullas of the European Centre for Offshore Development

The case for open source

Cost and flexibility make open source software a compelling proposition, said Talend’s Martin James