The true cost of IT

Thanks to its increasing intertwining with business processes, IT is becoming more complex and costly to manage. The complexity is due in part to the natural evolution of the business’s dependence on IT, and to the piecemeal and sometimes divergent nature of demands on IT. Whatever the cause, complexity begets ambiguity and is therefore undesirable.

CIOs are often baffled at the implications of operational and cost-induced ambiguity. They are expected to keep IT costs in check, while maintaining operational excellence and satisfying the need to grow and innovate. It is, from the outset, a task doomed to failure if one doesn’t have a firm handle on costs. Operational complexity is not the only reason it is difficult to establish the true costs of IT. The following analysis highlights some factors that make determining the true cost of running IT difficult:

The great divide

IT manages assets, businesses consume services — and never the twain shall meet. There is a fundamental disconnect between the way IT costs are generated and the way they are recovered. IT costs include those associated with people, plants and the equipment required to produce services such as e-mail or payroll. All business units pay for the consumption of these services, often based on metrics that are proportional to the actual consumption, such as ‘number of users’. The challenge for IT is to charge just the right amount to the business units. It is not easy to cost the increasingly complex IT server farms and application clusters. And charging out these costs equitably to the business units is onerous, to say the least. There is also a moral hazard issue at play here; if applications specific to a business unit are housed on shared infrastructure and are supported by shared FTEs, it is financially detrimental to the other business units that foot the bill for shared expenses. Cost ambiguity is reflected in the diminishing trust of the business on IT, which often wears the blame for passing unmanaged costs to the business.

Resource and cost duplication

In an ideal world, the CIO would control all IT related expenditure centrally, minimising redundant expenditure and enabling accurate IT costs reporting. In reality, however, most organisations have under-the-table applications that are not managed centrally by IT. Quite often, business units have their own supplier relations for the management of such applications, servers or peripheral devices, which do not make it to the IT budgets and fall through the cracks.

Perception is reality

IT budgets, not the total cost if IT, are reported and discussed among the C-level executives and the company board, and are therefore perceived to reflect the total cost of IT. They do not, however, represent the full costs and are therefore misleading.

Budgetary constraints

To meet the budgeted operating expense targets, IT organisations often pull the plug on maintenance activities and divert resources — people and so on — to activities that do not impact profit and loss, which are often separately funded by the business. The practice not only confounds the true cost of IT, it compromises IT’s ‘keep-the-lights-on’ function by neglecting the otherwise essential maintenance activities.

Moral hazard

CIOs often find themselves explaining the value IT creates to justify increasing IT budgets. It is not conducive to revealing the true costs of IT, nor does it provide incentive to determine the cost. As the saying goes: “What cannot be measured, cannot be controlled.” The new-age CIO must take a quantum leap and establish credibility as a leader by determining, owning and controlling the total cost of running IT.

Sukalp Sharma is an Advisory Manager. He can be reached at sukalpsharma@gmail.com

Tags managementIT valueIT costsBudgeting