Business Imperative
Representative goal statement -  “I thought that (what) we needed IT to do started off as (IT) cost savings, but that quickly changed to support for competitive business requirements.”

The way in which the Representative Goal Statement was put leads me to believe that the business executive who authored it had made some initial assumptions about the IT value proposition. These assumptions were changed as IT began the engagement process with the business to reduce costs.

In my experience, there are a few conditions than can cause an initial mistaken assumption about IT costs being the main focus from the business:

•    IT costs are allocated back to the business units.
•    IT has few or no business-friendly performance indicators.
•    IT business engagement (the Business Value Discovery function) is underdeveloped.

I’ll focus this post on those conditions and what needs to be done about them for IT to be better aligned with the business.

IT costs are allocated back to the business units
This is a good thing – certainly better than IT being “free” to the business. It was likely the primary reason for the business executive thinking that the most valuable role that IT could play was to cut its own costs.

No doubt that the most consistent feedback that s/he received from the business unit leaders was that IT costs too much. After all, if it was a significant and largely uncontrollable part of their P&L, then it stands to reason that whatever IT cost – it was probably too much. Therefore, to make IT successful in the eyes of the business units, it needed to be focused on cost reduction efforts.

This dynamic ties back to my first post (BES-1) where the actions taken to fix the situation need to include better transparency and reporting mechanisms for IT costs.
This unmet need was beneficial, as it was the cause of business dissatisfaction that led to uncovering a broader value proposition for IT services.

IT has few or no business-friendly performance indicators
All businesses have some sort of performance metrics. IT performance metrics usually begin as availability-based measures for specific technologies (e.g. “servers” “network” “mainframe”). Unfortunately, these don’t mean much to a business executive trying to manage a budget.

Absent performance metrics that are meaningful to the business from IT, the only metric for them becomes cost, which as we saw earlier is a very narrow discussion.

Development of a Balanced Scorecard for IT performance is important to connecting with the business. Although I’ve discussed scorecards in other posts, these were purpose-built for uses other than reporting overall IT performance. The important common theme with those other scorecards is fitness for use.

I’ve been a part of several multi-million dollar consulting engagements at various companies to develop IT Balanced Scorecards (probably averaging $1.7M). None of these projects resulted in a product that was completely satisfactory to IT or the business.

These experiences have taught me to be cautious about consultants that force-fit the company into their performance framework (Balanced Scorecard + Key Performance Indicators), which is almost always based on the original Kaplan & Norton model and some standard KPI categories.

My suggestion is to work with an internal team to develop a practical scorecard based on your business. The most successful balanced scorecard effort that I’ve been a part of was initiated as a part of implementing an IT Managed Services Strategy. The end scorecard measured four areas:

•    IT Service Delivery (metrics for service delivery failures and service level agreement performance)
•    IT Solution Delivery (metrics for responsiveness and delivery of new solutions)
•    IT People (metrics for IT staff satisfaction)
•    IT Financials (metrics for IT budget performance)

Each category had KPI’s that were built by IT and the business (for Service & Solution Delivery) or were extended from standard enterprise metrics (for People & Financials). It was simple, objective, understandable, and able to be implemented. It also cost far less (staff time vs. out-of-pocket) compared to the consulting engagements and had the added benefit of total buy-in from both the business units and IT.

A Balanced Scorecard implementation doesn’t have to be expensive, complex, or part of a larger program of work, like the Managed Services Strategy. It simply has to be aligned with your customers, services, and corporate measures (where applicable).

On Day 1, all the measures won’t be there (some automation/instrumentation will need to be put into place), but IT will have engaged with the business on meaningful level and be able to checkpoint progress against the full implementation plan.

IT business engagement (Business Value Discovery function) is underdeveloped
It’s arguable that this specific “Aha” moment for the business executive would never have occurred if this IT function were fully capable and engaging the business units at an appropriate level. Because this was not happening, the business units could only engage at the most superficial discussion level of IT performance – cost.

Of all the IT functions, this one is arguably the most strategic to both the business and IT – and the one that is generally least invested in terms of both budget and organizational mind share (Architecture runs a close second). In most companies, it is still a part of the Application Development or Solution Delivery group and needs to be split off so that it can be focused upon and developed as an IT competency.

Why is this important?

The definition of the function that you find in the Library “IT Functions & Definitions” points directly to the strategic nature of the function. It is the part of IT that is specifically accountable for partnering with the business to find where IT can create competitive advantage. Because of where it sits in relation to the business, this function is largely responsible for enabling the CIO to be successful in optimizing the value of IT to the business. IT has no hope of being accepted as a business partner if this function is unsuccessful.

So now you know that the function is not performing in a satisfactory manner. What can be done about it in the short-term? Short of an interim stop-gap measure, presenting an improvement plan may be the limit of what can be done in less than a few months.

Normalizing the group and the AD or SD groups is not a trivial program of work. It needs strong HR support and a supporting Organizational Change Management program to be successful. In terms of what will need to happen, there are elements of Process and Organization that need attention.

From a Process standpoint, the role of the new organization in Portfolio Management (Solutions Delivery investments), Solutions Delivery, Enterprise Architecture, and Service Delivery will need to be defined.

Organizationally, each dimension will need to be addressed to stand up the new group:

•    Structure: Definition of a separate “Business Engagement” group (which requires the existing AD or SD group to be adjusted).
•    Skills: Development of new job descriptions (levels, comp, career path) that articulate the new roles and responsibilities.
•    Staffing: The plan that says who is going where and when (what transition and training look like)
•    Sourcing: Where you are going to find all these talented folks (strongly suggest that these are sourced internally, with a hiring plan developed to close the gaps)

In an organization of any size, this will be several months of work, perhaps longer.

Given the shift as stated earlier in the Representative Goal Statement, the success of the IT organization will now be judged on its ability to support “competitive business requirements”. The first step in doing that is being able to engage with the business to determine what those requirements are and manage the ideation, portfolio and delivery processes going forward.

Operational Stability, Access to New Capabilities, Variable Cost for Services

Representative goal statement – “I need IT to stabilize (IT) Operations and be able to introduce leading edge IT capabilities on a pay-as-you-go basis.”

If there was one theme that was submitted for discussion in the BES that screamed out for the implementation of ITIL-based Service Management, it was this one. It would be ideally suited to solve for both the stability issues and enable a multi-sourced capacity for access to new IT capabilities with variable cost.

But just leaving it at that probably doesn’t help too much in the short-term.

Let’s say that you are the new guy in charge of IT and are given this task by the CEO. It would be logical to assume that the priority would be to fix things first and then get to the enabling piece, but don’t be too leisurely about it.

Some basic triage of the situation is Job #1.

First, you’ll need to see where the arterial bleeding is coming from. If there is some sort of Incident Management process in place, look at the Severity 0/1 Incidents and validate the sources of pain with your senior staff and executive peers. If there is no IM process, or if the data does not exist, look for the folks in IT Operations that are the most sleep-deprived and ask them what’s going on (then validate as per previous).

Once you have determined the most urgent issues affecting stability (a.k.a. Service Delivery Failures), you can set about performing Root Cause Analysis. It is imperative that you lead – or at the very least actively participate – in these sessions. Chances are that they will need to have priority assigned to them so that the right folks attend them. If you are not familiar with RCA tools and process, by all means bring in someone who does to drive the meetings. 

Please remember that this is a problem-solving process that needs to have direct participation from all the component technology/engineering groups (short list: apps, middleware, database, os admin, network, end user – plus vendors, as appropriate). If at all possible, make sure that the IT customer or interface team is there as to add that perspective as well.

At this time, isolate the RCA teams. Chances are that Mr. Murphy will try and influence your ability to do this, but at least try and have a backup for each skill set that can handle incidents for the primary RCA resources until the process is completed.

At the end of the sessions, you will have a list of “true” root causes (I use 5 Why’s as limited by ability to act) from different dimensions (e.g. 4 M’s, P’s or S’s). Discuss the root causes and frame the work in the context of a program that provides permanent corrective action to the discrete failures. The results of this step should be summarized and validated at the executive level, with time frames for resolution and ongoing communications on status set as well.

Most of this work can be queued and prioritized by the program manager as regular course of IT work orders. A wrinkle may occur when a capital investment is required as one of the permanent corrective actions and will need to be managed through whatever process is appropriate for IT investment funding.

Now that the bleeding is staunched, take this opportunity to make whatever improvements are necessary to the Incident and Problem Management processes to provide some assurance that you are effectively managing incidents and problems in the future.

Creating access to leading-edge capabilities on a variable (pay-as-you go) cost basis has a less well-defined path. Because you’ve already been given a hard economic constraint of “pay as you go,” let’s confine our discussion to externally provisioned options.

First, you’ll need to be able to identify the capabilities that the business will likely have demand for, because that may drive how you need to create the capability, as well as a time frame. Because these were loosely defined as “cutting edge” they could be as simple as BlackBerry services in a week to the forefront of machine learning in the next few years.

The best method to accomplish this is dialogue with the business through the IT Business Value Discovery function. That should lead to a more concrete definition of what capabilities are expected and when. Also, build a weighted scorecard from this information that will enable you to compare the ability of different alternatives to meet the business need.

Depending on the precision of the articulated business need, you can then begin to survey the market options for these capabilities (generally in conjunction with the Procurement function). Because different alternatives may require varying degrees of service support, delivery and vendor management, it makes sense to do this market diligence before undertaking the task of setting up these processes.

Once the market options are known, use your scorecard to determine which are most likely to meet or exceed your business objectives. Simply rank them by score and determine a cut-off so that you have a short list of three potential providers.

If the services and delivery models are similar enough (and the providers of roughly equal competence), the decision may boil down to cost. Make certain, however, that the economic comparison includes the internal management cost for each alternative.

If the services or delivery models are substantially dissimilar, you may wish to take this opportunity to discuss elements of each service solution with the potential vendors to arrive at a more common/comparable set of alternatives.

Once you have selected the provider, you’ll need to build your own ability to integrate these new capabilities into the service delivery environment and manage them on an ongoing basis.  During the selection process, allow for time to understand what level of service support and vendor management you will need for the selected alternative and build to those requirements. Using an ITIL framework (v3 supports multi-sourcing more explicitly) will help. 

This process will work in the short-term and will become less suitable (and complex) as more capabilities are needed to be integrated into your delivery model. Before this occurs, it would be wise to develop an enhanced Managed Services capability for multi-sourced services. 

Cost for Commodity IT Services

Representative goal statement – “I need to make sure that we have the lowest cost alternative for commodity services.”

As I wrote previously, the popularity of this theme somewhat surprised me. The support statement leads me to believe that the authoring business exec consumes a great deal of commodity IT services in their business, has IT cost information at a summary level (end user, data center/platform, network) only and little information from IT on the industry benchmark for that service (and what IT is doing on a continuous improvement basis).

Providing cost information at a meaningful level requires the services that IT provides be broken down in a fashion that allows IT services to be recognizable by the business. For example, assuming that the “Telecom” team provides all communication services, they would be tasked with defining their services from a business customer perspective.

Examples of the services offered by this group might look like:

• Video Conferencing Services
• Voice Communication Services
• Network Connectivity Services
• Call Center Services

Each of these would have a Service Description, Inclusions & Exclusions, and Options. An example for Video Conferencing is in the Library. It has additional information, but for the purpose of this discussion, that information is not needed.

Once this information is ready, the Finance organization is needed to help IT assemble the components of cost for each service. This includes depreciation on equipment, external service support contracts, cost for the staff supporting the service – whatever all the elements necessary to provide the service might be. Once this data is put together, unit costs may be calculated and cost reports generated for each discrete service.

Industry benchmark information for IT Services is generally available from several sources. I generally advise spending a few dollars with a consulting firm to get data specific to your industry and competitors. This will establish a relevant cost benchmark for your IT services.

Inevitably, there is a huge difference between your calculated service cost and the industry benchmark cost. IT generally explains this as a difference in the quality of the service and/or that there are more things “included” in your service. Both may be true and are irrelevant. Remember that by definition, these are commodity services. Therefore, any deviation from the service norm must raise the question of what the business value of a differentiated commodity is. Generally, this quickly leads to the realization that the primary dimension of value for the commodity service is cost and that the differentiated service should be brought in line with the norm to position the business to realize the cost benefit.

Now that the service has been adapted to the norm (same service quality and features), we can make a more accurate comparison of our cost vs. the industry benchmark and set our goal to deliver “Benchmark service at benchmark cost” for our commodity services to the business.

This then raises the question of who is going to deliver on that goal. Organizational questions around accountability and whether or not it is currently in anyone’s current job description will need to be raised. Unless some dimensions of a Managed Services model is already in place, all the elements of cost for the delivery of service will probably not be under a particular technology/manager and that the role of a Service Delivery Manager (the logical choice under Managed Services) may not exist in the organization. This will make assignment of accountability and subsequent ability to succeed more problematic.

In the short-term, it may be practical to make the group manager for each technology responsible for the goal. Chances are that they will have most of the factors of cost for each service somewhere within their domain and will have some ability to delegate the supporting work within their groups. This overlay technique is not the long-term solution because there is more work for each technology group to sustain it over time than in either their current operating model or a Managed Services model.

Part of the role of the person accountable would be to develop continuous improvement plans and offer options and tradeoffs for services to the business. The continuous improvement plans would initially be focused on what is being done to achieve the benchmark cost and service quality goals. The service options and tradeoffs may be in the context of cheaper technology to meet the demand of the customer (e.g. thin clients vs. standard desktops).

So far we have discussed a primarily supply-side approach to cost improvement (IT working to reduce unit cost for services). However, one of the most underused, yet high-value initiatives that can be undertaken by IT is working with the business on demand for commodity IT services. Once consumption information is available at a business unit/function level, IT can initiate conversations with business partners on how much of what they use and what cost reduction opportunities may exist via standardization of equipment and provisioning policies (i.e. “who gets what”).

Implementation of a full Managed Services model for IT will also enable an effective IT response to this business goal. It will provide the information necessary to for the cost information framework, benchmarking and accountability for results. Finally, it will also enable subsequent multi-sourcing efforts to further reduce unit cost.

And that is a longer story…

Blog Queries: Why are my IT costs seemingly so difficult to capture and explain, especially in the context of business drivers and consumption?

 This is what I’ve heard a number of executives refer to as the “black hole” phenomenon. IT seems to be a great hole of expense where little or nothing quantifiable in terms of information as to what is produced for it comes out. The Managed Services model for IT is neatly addresses this issue.

 Simply put, in this model instead of managing itself by technology, IT manages itself by services, recognizable and purchasable by the customer. These services may be sourced internally, externally or in some combination that helps to optimize its value proposition (check FAQ’s for Value Proposition).

 Once the Managed Services model has been operationalized, IT is running like a business, where customers buy services at a certain service level and cost. Whether or not the company chooses to institutionalize a chargeback mechanism for services used by each business unit or not, the information will be available for a business unit leader to see how much of what services their business is using and respond appropriately to manage the cost.

 Related follow-on question: What about new solutions – like projects? How does that work in a Managed Services model?

 In the Managed Services model, delivery of projects (delivery of business solutions) is a service, like the delivery of a desktop computer. There are different processes for the creation of requirements, estimation of cost, business case development and delivery, but it is an IT service nonetheless (including performance metrics and measures).

 Please refer to the diagram on “Basics” for a high-level visual.

CEO Query: Every year, my IT costs rise. Why is that – especially considering that implementing technology is supposed to cut costs?

There are probably several reasons for IT cost going up each year. The first is internal demand. If your company is growing, IT supports more employees each year and although the unit cost of IT services is probably declining, it cannot decline at a rate sufficient to overcome the additional demand. One effective approach to reducing this type of growth is to have – and enforce – uniform demand policies for commodity IT services.

The second reason is a function of the company being in business over time. As you acquire more customers, even if new IT-based business capabilities are not added, data grows by the number of new customers and the ongoing transactions from existing ones.  One approach to reducing this type of organic growth is to have – and enforce – data and information retention policies.

The third reason is a function of investments in IT made by the business (a.k.a. “projects” or “new services”) as they become operational. Unless the solution delivery cost is shed, the service delivery cost will grow each year as these investments are delivered and the solutions delivery cost will remain the same, thus causing overall IT cost to grow and/or a greater percentage of it dedicated to the “run the engine” costs of service delivery.

The solution to this reason is fairly complex and can be addressed in the context of a managed services model where solution delivery cost is made fully variable and the service delivery cost unit cost has a guaranteed yearly decrease for commodity services and the new service cost is considered in the upfront business case. Both IT and the business must be diligent in ensuring that if this new investment replaces an existing one, that the work to retire the old service is completed to avoid ongoing redundant cost.

Also, be aware that projects having a large IT investment component tend to focus on that and neglect to track the post-implementation benefits side of the business case (e.g. If the IT investment enables the call center to cut 40% of its headcount and save $50M, did that actually occur? You might be surprised at the answer unless you ensure that the project has a mechanism in place for showing the benefit in next year’s budget for the call centers or customer service function.).