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IT cost-cutting is in vogue again. When is it not?
This paper questions the use of IT-cost-as-a-percentage-of-revenue (ITCPR) as the primary basis for management decisions.
Enterprise and solution architects work to enable, support and improve core business processes that provide services to employees and customers.
They focus on “digitisable” (Ref. 4) or “information-intensive” (Ref. 5) processes that create and use business data.
The business processes depend on business information systems.
The business information systems depend on technologies.
Not so long ago, they depended on pen, paper, card indexes and typewriters.
And since the “information age” started in the 1970s, information systems have depended on an IT platform.
So, many business system costs now appear under the heading of IT costs.
Note first that EA (being out of business system planning) is more about IS than IT.
And IS and IT are separate divisions or practices in many organisations.
I gather IT costs as a percentage of revenue for FTSE 500 companies are typically around:
If you count IT costs as overheads, then 3.5% of turnover looks high.
But where IT systems perform operational processes (as in banking) surely they ought to be counted as operational costs, among which they may look remarkably small.
Recent figures suggest that IT costs as percentage of revenue ranges from < 1% in construction to > 7% in banks.
I guess the number is higher in IT operation-based business, like an ISP.
And from what IS and IT architects tell me of their business, one third spent on development to two thirds on operations sounds typical.
It is in the interests of technology vendors and business consultants to talk up innovation and enterprise transformation.
A business may do better to focus on managing current operations well and incrementally refining them.
Looked at that way, one development pound to two operation pounds (in IT) sounds high.
Why shouldn't a mature IT operation-based business spend 90% of its IT budget on operations rather than development?
Farhan has drawn a graph plotting ITCPR against IT savings required, showing there is little or no correlation. He notes that:
Ad hoc cost cutting is relatively unsophisticated and easy to implement. Its key features are:
Formal cost-efficiency programmes generate a portfolio of initiatives prioritised on a roadmap against benefit and risk. The key features are:
The strengths of a formal cost-efficiency programme are that it:
However, formal cost-efficiency programmes are not a panacea for a hard-pressed CIO seeking a relatively quick and easy solution, since:
Enterprises can use bench mark figures as a guide to cost cutting.
But how do we measure the effect of cost reduction on the business?
Farhan: IT cost-cutting often goes too far and is damaging in the long run without
· a more thoughtful assessment of what actually drives costs,
· whether those costs are necessary (i.e. supporting critical business requirements), and
· whether those requirements could be satisfied in a more cost effective manner.
How do we measure IT efficiency? Gartner use IT-cost-as-a-percentage-of-revenue (ITCPR).
But does lower ITCPR mean higher IT efficiency?
Surely ITCPR correlates much better with the dependency of the business on IT?
For example, the ITCPR of a bank or government department will, inevitably, be higher than most.
Farhan: You are right, using a single benchmark such as ITCPR doesn’t pick up variations by industry or indeed by region, and doesn’t capture the relative business value of that spend.
Average metrics across sectors and regions, may provide some sense of efficiency.
But as with all averages there is a good spread that probably reflects your point on varying business needs.
Industry analysts presenting benchmark ITCPR numbers for different industry domains (telcos, banks, education, manufacturing etc.).
Some enterprises, local authorities for example, compare themselves against others in their industry domain using ITCPR.
But I am not sure the exercise tells us much.
Farhan: Each organisation is at a different stage in its investment cycle and so the use of benchmarks can be misleading.
Benchmarking is hence not a precise science, and at best gives you a general steer.
The basic notion of measuring IT efficiency as ITCPR is itself dodgy.
The benchmark study at ref. 6 suggests that higher levels of IT spending don't increase the effectiveness or efficiency of the business.
The banks that are said to get the most business value from IT spend up to 40 percent less than the weakest performers.
But what does that mean? Spending less means you get more value?
The ITCPR number is a dodgy statistic, since it means IT efficiency is 100% when IT cost = 0%.
Is the value of IT is infinite if we don’t spend anything on it? That is plainly nonsense!
Farhan Mirza: Great point! In some ways the preoccupation with cost is a symptom of
· poor investment appraisal,
· a poor understanding of technology enablement in senior management, and
· a continued reaction to post-dot com exuberance.
One of the manifestations is the relegation of the CIO role from the board room, under the control of Finance, or the elimination of the role altogether
The missing number is the benefit of IT.
Without that, there is no ROI statement, no cost-benefit case.
Measuring cost alone is just not good enough.
People rarely measure benefits in convincing way.
How much is your enterprise’s email infrastructure worth to your enterprise?
Assuming you don’t know – how would you suggest measuring it?
Needless to say, people struggle to answer the question.
Farhan Mirza: It is challenging to measure IT Value, at least quantitatively.
Have you come across any good measures on this?
I read a Forrester report which surveyed four value measurement techniques.
They looked to me like university research projects, complicated, difficult to apply, and not used in practice outside of some trials.
So I wasn’t convinced.
Farhan Mirza: Does an airline ask "what is the value of our ground maintenance crew?"
Or should it instead ask "what are we doing to get full value from our maintenance activities?".
Maybe the issue is that senior managers regard IT as separate from the Business, where in fact IT is too embedded to be looked at in that way.
I agree. And I don’t have great answers, only what is said http://avancier.website.
Ref. 1: TOGAF 9.1, The Open Group.
Ref. 2: Oxford Dictionary of Proverbs. Cf. 1942 G. Ciano Diary 9 Sept. (1946) II.
Ref. 3: Heylighen F. (1992): "Evolution, Selfishness and Cooperation", Journal of Ideas, Vol 2, # 4, pp 70-76.
Ref. 4: “EA as Strategy” Ross, Weill and Robertson.
Ref. 5: ArchiMate v2 standard, The Open Group.
The papers on the “Enterprise Architecture” page at http://avancier.website contain much advice relating to EA.
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