Many IT professionals are not as commercially savvy as they could be - we don’t treat IT spend as though it were our own, there is a lack of governance, transparency, commercial challenge, focus is on new and not re-use, and decommissioning rarely happens so new applications are added into the funnel but very little is removed.
CEOs are looking to CIOs to help with cost reduction to support the current pressures of falling revenues and increasing costs, so the CIO needs IT professionals who are commercially savvy. Organisations need people who ask, ‘do you really need to consume that?’, ‘do we already have one to re-use?’, ‘can we deal with lower level service, reduced volumes or just take the risk?’ ‘is the supplier offering value for money?’.
CEO’s are quick to bring together a short term transformation function if revenues are falling, given many organisations IT costs are the largest spend, by creating a team to perform a short sharp controls process change to lower costs. But sustainability comes from the creation of an IT commercial/performance management function.
Once the culture has improved to become more cost conscious the delegation of powers move back to cost centre owners/consumers. Then this needs to be sustainable at an IT leadership level - all senior IT professionals need to think in both dimensions: keeping service for customers whilst delivering value for money.
Cost optimisation
Tech-only senior resources lack commercial skills and this causes conflict at a leadership level. There is a balance between getting the job done and getting it done in a value for money way. CIOs are often reactive about cost optimisation, waiting for cost reduction targets to be handed down before organising cost optimisation activities.
IT leaders typically fail to maximise the benefit of their cost optimisation activities by not managing these efforts collectively as an ongoing program and can be too focused on the next ‘quick win’ rather than what will enable them to reduce costs effectively.
‘Good’ is often the enemy of ‘best’. IT cost optimisation often stops when an organisation hits its targets, rather than creating a culture of continuous improvement - this needs to be an ongoing discipline, embedded in the IT organisation’s DNA.
An IT commercial director
Strong commercially savvy CIO’s will appoint someone in the IT organisation responsible for IT commercial and performance management. This is often someone from the IT leadership ranks who can lead a cross-functional team to drive accountability for commercialisation of IT costs.
This IT commercial director will set targets and choose initiatives for cost optimisation activities using frameworks, such as Gartner’s ‘Four Levels of Cost Optimisation and Decision Framework for Prioritising Cost Optimisation Initiatives.’
This needs to involve operational leaders and key staff to look at IT costs in the context of end-to-end business processes. Also the business must be involved, as effective IT commercialisation requires making value-based trade-offs about which projects, services and service levels the enterprise can afford. The IT commercial/performance management director will be responsible for the following tools to drive value and reduce costs for the CIO/CEO:
1. Treat the IT commercial challenge as an ongoing discipline
The ‘reactive’ IT commercial model fails to maximise commercial challenge activities and leaves money on the table. It lacks the involvement of other key IT staff and the business. However, the expectation of CIOs and IT leaders is to continue to reduce costs while providing additional innovative business solutions.
Having a commercial savvy IT organisation will free funds to enable the business to have innovation to support business growth while IT costs either remain constant or reduce.
These increased demands require a renewed focus on how to manage IT commercials. A proactive approach is centrally planned and managed at the CIO level. Embedding commercial challenge within the IT organisation’s DNA requires leadership and planning by CIOs and IT leaders.
Whilst IT cost management should never be a number one priority - delivering and maintaining IT solutions that add business value should be - effective cost management often needs to have a higher priority in most IT organisations. This requires increased focus, visibility and - most importantly - accountability.
The IT organisations we have seen optimise costs most successfully did not discover new ideas before their peers did. They chose to organise their cost optimisation activities centrally, focusing on identifying the best ideas, making their objectives clear throughout the organisation and then holding people accountable for proper execution.
In order to have everyone in IT thinking about cost optimisation and innovation, idea generation should involve all IT staff via crowdsourcing online tools and should employ a measurement system to evaluate and prioritise all ideas.
A key element of success will be to incorporate the commercial challenge practices into a larger IT strategy. The success of the strategy will partly depend on the success of the commercial initiatives. These initiatives should ideally be managed as part of a program of work. Via a performance management framework you can report progress against key milestones and targets needed to achieve the desired results, report on any risks / opportunities against delivery of the initiatives, and schedule monthly meetings to discuss performance.
All these elements further instil the discipline needed to continuously manage cost optimisation at all levels within the IT community and assists with cultural change to a cost conscious environment.
2. Commercial challenge and supplier management
Supplier contracts, if not managed well, can very quickly become out of date. Contracts needs to have sufficient flexibility built in when first let to enable business change. For example, fixed price contracts are not good in a declining business, whereas capped time and material contracts are good when the business are not specific on their requirements because this puts the onus on the supplier to take some risk.
Certain clauses need to be mandated in contracts, such as termination for convenience, continuous improvement cost and performance, benchmarking and so on. Measureable outcomes need to be agreed and measured against during the life of contracts.
All IT techies who are responsible for working with the supplier need to be fully conversant with the contract, performance measures and commercials. This should include the business analyst level, as they will be responsible for the day to day management of the supplier against the contract. Addition supplier management governance is key, monthly operational and quarter senior strategic reviews, utilising actual factual data and KPI measures.
Suppliers should also be asked to invest in your company for strategic reasons, to share innovation specifically for your company to show that they are real value add partners to your organisation. All contracts should be reviewed regularly and via the IT commercial function challenged with the supplier when they are not fit for purpose or no longer add value to your organisation.
Your techies should be empowered to challenge suppliers. All too often IT techies feel uncomfortable with this, but working with and watching the IT commercial function undertake this can build confidence over time and it becomes a way of working.
3. IT budgeting - managing multiple views
An inability to manage the traditional asset or general-ledger-based view of IT spend will mire the CIO in continuous dialogue with the CFO and undermine IT’s credibility, thereby impeding the ability to demonstrate value, so successful CIOs and IT commercial directors typically manage multiple views of IT spend.
Sometimes this is driven by the complexity of the enterprise requiring views by business unit, region, product, and so on. More often, the need for multiple views is driven by the complexity of IT itself. The fact that IT delivers projects and services often requires views of both.
The project or portfolio view is needed to enable organisations to prioritise investments, understand associated cost (typically capital-intensive) and communicate how IT enables change. The services view should be focused on presenting the operating expense (opex) budget by IT services.
The value of ongoing costs of IT services is typically demonstrated through price / performance - this gives financial transparency in a language the business understands.
