Novo's goal was to get off the defensive and shift the discussion from an argument over numbers to an analysis of performance. "It's important to focus on what you are doing - not someone else," he says. "The CEO wants to understand why you're doing what you're doing and what you're doing to improve."
Yet hanging over his discussions with his boss was the suspicion that by offering his own numbers Novo was simply making excuses to avoid having to cut his budget. To allay those suspicions, he divided his numbers into two pots: IT spending on ongoing operations (essentially the infrastructure and the services needed to keep the lights on) and IT spending on new applications, research and services. By slicing the spending this way, Novo could focus cost-cutting scrutiny on those parts of his budget that he can and should be cutting, while preserving the portion of spending that, if cut, could threaten IT's ability to provide competitive differentiation.
"The smart IT people are continually tuning the infrastructure to make it lower cost and more efficient so they can free up more funds for new work and innovation," says Laurie Orlov, vice president and research director for Forrester Research.
On Toward Better Metrics
The same thinking as Novo's guided Drouin to begin giving his COO and CEO data on the cost of providing employees in TRW Automotive's different business units with ERP software. The idea, says Drouin, is to cut the costs of providing important capabilities to the business without endangering the capabilities themselves.
"We want to drill into more granular kinds of metrics so that we not only get a real apples-to-apples comparison but also so that we find areas that are really worth investigating," Drouin says. Like Novo, Drouin also separates out IT operations spending, but his accounting task was much more difficult than Novo's, who runs a highly centralized IT operation in a single, homogenous business. But Drouin says tracking costs on IT operations across all the business units was worth it. "We could show that the old legacy systems and infrastructures were costing us much more in some units than in others," he says. "It helped us drive our business case for buying a single ERP platform to serve all the units. The project caused us to raise our spending, but we could show that it would lower the cost of providing ERP over the longer term."
Another increasingly popular way of slicing up IT spending for CEO consumption is by employee. "I do it that way because it mirrors the way the business consumes my services, so it's something they can relate to," says Novo. Yet this metric also has its drawbacks. For example, in the chemical industry, where capital costs and levels of automation are high, the per-employee cost of IT will be high ($US17,671 per employee, according to Forrester) compared with other, less capital-intensive manufacturing categories like industrial products ($US4302 per employee). The numbers will also be out of whack if the company has a lot of employees who never touch a computer (making the cost artificially low for employees who actually do use a computer) or if the company has outsourced much of its operations (which will raise the per-employee cost to a misleadingly high level because the outsourcer's employees will not be included in total IT spending). However, using the per employee metric in combination with percentage of revenue can help determine whether two companies in the same industry really are comparable - if, for example, both spend the same on IT as a percentage of revenue but have wildly different per-employee spending levels, chances are the business models, size, complexity or geographic spread of the companies are so different as not to be worth comparing, according to Gartner.
The accuracy of the total employees metric can be increased by slicing it up into actual users of IT, as Novo and other CIOs have done, eliminating from their calculations employees who don't consume any of IT's services. Hackett's Holland takes this a step further, taking into account nonhuman "users" in highly automated industries, like banks, where the per-unit spending on ATMs, for example, is every bit as important as the spending on a human teller or bank manager.
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