If you owned an airline company would you accept that when you asked how many passengers that had been transported, which distances where the most profitable, how many tickets sold and at what price and if time tables and destination where kept as promised and the amount of gas consumed the reply that the planes had been kept in the air and that any constraints would hamper creativity (innovation).
This is however the case for most businesses where the IT department on the premise that they “keep the lights on” should not be held accountable neither for cost nor delivery and IT Financial management is a bean counting mentality (when I spoke to a friend in a top 3 audit firm in regards of this phenomena he told me that whenever a client told him the to keep records of his business was a bean counting mentality he would by definition look closer and 10 times out of 10 would find the records to be revised and basic rules broken) and that to have clear accountability would hamper creativity (innovation).
The bottom line is that most outsourcing is performed not to optimise cost but to get a minimum level of service delivered (and at least the illusion of service level agreements to be met).
When you sign up as a student in business administration you learn how to assign cost, read and build a balance sheet, calculate and optimise cost in production (later as a business controller in the production chain you would project budgets based on ongoing business cost that is clearly spelled out). The question of IT budgets and IT controlling never came on the table and had it I believe that most students would have found it difficult to understand that cost, consumption and chargeback of a service (product) would not be defined and that business entities and subcontractors (tier outsourcing parties) would not define the cost of execution (manufacturing) and the validity of the information used for the billing (chargeback).
In the same way would you sign up to run a retail business operation where you do not know what clients consume which product / service at a specified quantity and subsequently be billed for their consumption (nor how you will finance the future run and build)? This is however the reality for most CIO’s! The focus of a servicebased model is to demonstrate how IT Delivers Value to the business, that is delivers services to business needs (cost effectively, or at least at a specified cost rate that permit to take qualified decisions) over time with an effective IT Business Model and Value Proposition.
We see Total Cost of Ownership (TCO) as the corner stone to move further from “IT generates to much cost” where we can demonstrate who consumes what services (and should subsequently pay for what they consume) to obtain the means (investments) and ends (budgets).
To run a cost effective IT Operation that delivers to business expectations and leverages the execution of the set strategy (1) you would need to build a clear IT Service Strategy (what services do we deliver to the business) with Total Cost of Ownership per user with: cost (how much does each service cost), consumption (how much does the individual user consume) and chargeback (consumed services are allocated “charged back” on an effective cost basis to the business units) (2) in order to be able to provide the means (necessary investments) and ends ( budget). With the right support (best in class technology) this can be done in weeks with a top down (General Ledger), Bottom Up (effective cost) (3) analysis and tied to the roll out of an IT Service Strategy (that drives an end to end roll out of ITIL V 2/3 logics).
Most CFO’s understand a well conceived business plan (IT Service Strategy), with a clear Value Proposition (What services do we deliver) and Business Model (how do we deliver the depicted services to our potential clients) and know that to generate productivity improvement you need to invest. Our experience is that where some clients underconsume services due to a non effective cost allocation model other heavy users tend to overconsume services and do so the more willingly as they do no not pay for their consumption (are not charged back). An allocation model based on delivered services will hence accord the CFO to deliver a coherent financial model based on effective consumption and reflect user behaviour. Most IT Financial Management solutions tend to “massage” the general ledger and do not provide an effective integration to the IT Service Strategy over time. As a result they do not provide cost transparency on an ongoing basis, nor do they deliver to the above set objectives.
This is a breakout from Deliver Business Value with IT (the Book) that you can find as well as (Actionable Story Boards) @ https://flevy.com/seller/mpalmgre/ref=mpalmgre that is flick out the slide set on your ipad and start to share with your CIO, Executives and Board.