IT Costs – Everybody’s Favorite Topic

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.).