Oscar Wilde once defined a cynic as being ‘A man who knows the price of everything - and the value of nothing’. This definition may also be applied to some accountants when the annual budget for service delivery is being assessed, especially when dealing with operations management who may be bad at expressing the value of their department.

However, techniques are available that can be used by astute managers to help both themselves and their financial colleagues understand the value of what they do for a living, and Peter Wheatcroft describes what some of these are.

You want how much?

The following situation is one that many of us will have come across in recent years - the rejection of the budget bid and a request to resubmit it at least 20 per cent lower. But gone are the days when managers used to be able to inflate their bids in anticipation of this annual budget ritual, since many companies now have a zero-based-budget (ZBB) or RPI capped approach to setting the level of next year’s spend and so padding the bid is no longer practical.

The ’20 per cent less’ scenario is even worse when it has to be applied in the middle of the current financial year, since commitments to staffing levels and external expenditure will already have been made. So why do accountants believe that operations departments can arbitrarily cut their costs by 20 per cent and still deliver everything they are expected to? There are a number of reasons for this, with the one exposed in this article being that the linkage between costs and output is rarely understood by either party and is certainly not ‘sold’ by the IT side.

So how can IT ‘sell’ an operating budget in a way that makes the accountants accept it? The start point for this exercise is to be able to articulate the value that the service delivery function actually provides. Unlike our development counterparts, techniques like function point analysis or ROI on a new product system are difficult to apply; however, infrastructure projects such as server consolidation can use an ROI approach since cost reduction is usually the aim. But many infrastructure projects are not usually subject to formal financial appraisal, so less rigorous, but equally persuasive arguments need to be devised.

You can’t control what you don’t measure

Infrastructure assets offer a big advantage in terms of financial justification - each year they get smaller, lighter, cheaper and use less electricity. Riding the price/performance curve is an effective way to reduce operating expense, especially if lower power costs and space consumption are factored into the justification. However, a far more potent way of showing the value of capital investment is for the depreciation budget for hardware to be allocated to IT through the chart of accounts.

Many companies account for depreciation in a central cost code which does not allocate the benefit of new capital acquisitions back to the originator - in this case, IT. But changing a £1m mainframe for a £0.3m server cluster will show a significant annual benefit - and IT should be credited with this in its operating budget, which is where depreciation needs to be accrued.

Another key technique is to measure asset utilisation, whether this be of disc arrays, network bandwidth or software license pools. This used to be common practice when processing was centralised, but the advent of client/server architectures and the attendant explosion of networking seems to have taken many IT departments unawares and infrastructure services are not as tightly controlled as they used to be.

For example, many companies do not reclaim workstations from employees when they leave, yet most new starters get a PC requisitioned for them - thus inflating both the hardware and software budgets as well as allowing user departments to retain the older kit. PC’s should be treated like company cars, which get repossessed when an employee leaves - especially if IT owns the budget.

Similarly, network throughput is rarely monitored until something goes wrong; whereas effective IT departments will set threshold levels and manage application demands within tight tolerances to maximise utilisation levels, thus avoiding the need to upgrade on the back of a resolvable conflict.

Know your competition

The most often used selling pitch of an outsourcing company is one of reduced operating costs, followed by more predictable costs in the long term. Apart from the obvious economy of scale arising from the use of shared infrastructure, outsourcers can make cost savings when taking on managed service provision for a single company by tight control of assets, infrastructure utilisation and staff effectiveness. But these techniques are possible without waiting for a third party organisation to provide such benefits - by adoption of not only ‘best practice’ service levels, but the same managerial approach to infrastructure management.

An objective way to determine the appropriate level of spend on service delivery is to find out how your organisation compares to either sector norms or your IT peer group. This can be done by benchmarking the IT function and finding out what parameters are used to calculate the cost of ownership.

This is always an instructive exercise and will provide valuable information about which areas of your IT are adrift from the industry - and which are not. Although don’t fix what isn’t broken: benchmarking can be an invaluable tool to justify current levels of spend. Once the results are known, you can commit to a plan to bring delivery costs into line with whichever peer group or sector is most relevant, knowing what the target should be.

If this is the same as finance’s 20 per cent, then at least you know where to look - and if it isn’t then you have a means of justifying a lower (or higher!) target. However, benchmarks do change over time and there is no such thing as a static target. As you improve, so will your peer group and you will need to set targets based on not just an end point but on a trend that the agency can provide.

Sell it rather than give it away

But you still need to justify what you need to spend at some point, especially in relation to historic commitments or non-variable costs such as staff. This is an area where few service delivery people are comfortable with explaining the value of what they deliver day after day and business people make this worse by treating operations as a ‘necessary’ evil that becomes visible only when needed to explain certain outages. This situation needs to be reversed, because infrastructure service delivery in the ‘always on’ world will become increasingly significant and those who manage IT deserve more than a ritual beating at every management forum.

The aim here is to produce an agenda that shows what IT has delivered to the organisation this month/ quarter/ year, or whatever the reporting period is. This can be by means of a balanced scorecard at one level or something as powerful as an annual earned value chart.

Whatever mechanism is used needs to reach the people that criticise IT when something goes wrong, and it doesn’t hurt to hold open days where such managers can come and see operations in action. If you aren’t happy about letting them see how you work, there’s something wrong with your organisation anyway but when you do open the doors, it can be surprising how many business managers walk away with a more positive impression of your efforts than they had previously held.

The bottom line

This is what this article has been about - running service delivery as a commercial operation with its own accounting priorities. Once this position has been reached, it is much easier to defend your budget position even if the response is still to cut back by 20 per cent. Like any business, this sometimes has to happen because of factors outside your control, but at least your department will be able to quantify the impact such a corporate decision has on your outputs.

So to summarise the key points of how to develop a value proposition for your IT service delivery activity:

  • Understand your own cost base and why you spend what you do.
  • Get control of the financial accounts as they relate to your operation.
  • Manage the infrastructure as if you were spending your own money.
  • Drive for ‘best practice’ to eliminate overheads and demonstrate skill.
  • Use benchmarking as a way of discovering the scope for improvement.
  • Market infrastructure services as value-adding, not just a cost overhead.

And as a real value proposition test, why not explain to the business what benefits they have achieved as a result of that new internet-based home working initiative just launched. It may have increased your costs by 5 per cent but reduced theirs by 25 per cent - and that’s where the real benefit of a 20 per cent reduction in expenditure comes from.