CUTTING COSTS...OR CUTTING BUSINESS?

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1 Little Book of Business Impact: Costs SQUEEZING BUDGETS: CUTTING COSTS...OR CUTTING BUSINESS? A must-read for IT decision-makers and IT finance controllers LITTLE BOOK

2 Contents Why read this guide?... 3 The cost of cutting IT... 4 Perceptions of IT decision-makers... 5 Perception 1: Scattered information... 6 Perception 2: Ad-hoc data collections... 8 Perception 3: Unreliable predictions... 9 Perception 4: Unclear value...10 Perception 5: Unconscious decisions...11 Understanding the business story behind each IT investment

3 Why read this guide? This guide covers five perceptions that influence IT costcutting behavior and a solution to reduce costs without hurting business. It s written for CFOs, CIOs and IT decisionmakers who are responsible for ensuring business success through effective IT investments. By reading the guide, you will understand how IT portfolio management can support decision-makers in IT when they have to squeeze budgets. Please contact us to discuss any of the issues covered here. 3

4 Squeezing IT Budgets: Cutting Cost or Cutting Business? The cost of cutting IT In many organizations the CFO is the top decision-maker when it comes to IT investments as Gartner highlights in one of its recent studies 1. Yet, neither the existing IT portfolio nor the value it provides is top of mind for most CFOs. It is rather the cost side of IT that matters to them. In fact, the IT department is often under pressure to reduce its costs either by cutting its budget or by delivering more services for the same amount. And there are only two ways to make this happen: Shut down applications, at the risk of damaging business operations Reduce planned investment, at the risk of damaging the future of the business This renders a simple question: Can you really cut IT without cutting your business? The answer depends on the insight decision-makers have into their IT portfolio and its interdependencies with business, finance as well as risk. Only with a common and timely understanding of the organization s business priorities, its projects both running and planned as well as its application landscape can IT investments be adjusted without unpredictable side effects. 1 The CFO s Role in Technology Investment: 2011 Gartner FEI Study by John E. Decker, Gartner

5 Perceptions of IT decision-makers What decision-makers need is reliable information. Sound simple? Obviously, it is not. Previous research 2 showed that most organizations are struggling to keep track of the ongoing changes in their IT portfolio: enterprise IT decision-makers have to rely on information that is, on average, 14 months old and only 55 percent accurate. What does that mean for IT finance management? A recent study 3 by IDG among financial IT investment decisionmakers in the role of CFO, head of IT finance and senior IT controller reveals five perceptions these executives have when dealing with information from their IT. The perspectives show there is a significant gap between demand and supply of IT portfolio information that is perceived as being reliable and predictable. This gap slows down decisions while putting their effectiveness at risk. On the other hand, CIOs and their teams often suffer from a pure cost focus of their financial departments and as a result make budget decisions that do not always reflect the organization s strategy. 2 The Risk of Inaccurate Data on IT Applications, Nucleus Research, April The CFO-CIO Information Gap, IDG Business Research 5

6 Squeezing IT Budgets: Cutting Cost or Cutting Business? Perception 1: Scattered information Finance executives are used to having a single system of reference for their finance portfolio, something that is not the case for their IT portfolio. Over 50 percent of respondents in IDG s surveys said that they have no single system of reference to analyze, forecast, and measure IT portfolio changes. And even those who claim, they have, need to be very patient to get reliable information on the impact of these changes: over 40 percent have to wait up to two weeks and one in five even longer than a month. No 53.9% Yes 46.1% Does your company have a single system of reference to analyze, forecast and measure IT portfolio changes and their impact on the business? 6

7 Automatically available 15.4% Up to two weeks 41.7% Two to four weeks Longer than a month 21.0% 21.8% 0% 25% 50% How much time does it typically take to get precise information on the impact an IT budget cut has on business performance or risk exposure? More than 50 percent of respondents in IDG s surveys said that they have no single system of reference to analyze, forecast and measure IT portfolio changes. Even among those who claim they have to be very patient to get reliable information on the impact of these changes, more than 40 percent have to wait up to two weeks and one in five even longer than a month. Perception 2: Ad-hoc data collections Valuable time is spent on collecting the relevant data on an ad-hoc basis; it is a tedious exercise since often requirements, and responsibilities have to be discovered on the fly. 7

8 Squeezing IT Budgets: Cutting Cost or Cutting Business? 32.5% 32.2% 27.5% We run standard reports IT creates ad-hoc analyses as needed Business creates ad-hoc analyses as needed What best describes your process for measuring the alignment of your IT portfolio with current business needs? Another 5.3 percent refer to another process description (see next chart); 2.5 percent make no statement. Yet, almost two-thirds of respondents rely purely on ad-hoc analysis, either by business (27.5 percent) or by IT (32.2 percent). As a result, only one-third of the respondents have a standardized reporting process in place that allows them to retrieve information on demand. Ultimately, this slows down the decision process and affects corporate agility. Perception 3: Unreliable predictions Forecasts are one of the main instruments for finance executives; IT departments do forecasts, too, though with little success it seems. 8

9 Reliability up to 25% 25 to 50% 5.4% 4.1% 50% 38.4% 50 to 75% 14.3% more than 75% 31.6% 0% 10% 20% 30% 40% How much time does it typically take to get precise information on the impact an IT budget cut has on business performance or risk exposure? When asked how reliable the IT department s forecast of planned activities was on a year-on-year basis, one out of two had experienced that their forecast was reliable in a mere 50 percent of the cases or less. Most forecasts, therefore, are made obsolete by reality since they are not adjusted to changing requirements and budgetary constraints once they have been submitted. 9

10 Squeezing IT Budgets: Cutting Cost or Cutting Business? Perception 4: Unclear value IT is not a goal in itself and most investments 4 in IT should have a clear payback for the business. But there is often a lack of traceability between business demands and the project portfolios. Less than 25% 14.7% 25 to 50% 30.1% 50 to 75% 21.4% 75 to 100% 9.3% Do not know / no statement 24.5% ø share: 46.1% 0% 10% 20% 30% Roughly what percentage of your IT projects actually has a clearly defined payback? When asked about the rough percentage of IT projects with a clearly defined payback, almost one-quarter did not know. Another 45 percent said up to half of the projects have a defined payback. On average only 46 percent of the projects are perceived to have a traceable payback for the business. 4 Of course there are investments like in infrastructure or service that are not expected to have a direct payback. 10

11 Without the ability to show and track the value of a project for the business, it is hard to make the right investment decisions. Perception 5: Unconscious decisions Decisions on the IT budget can directly impact an organization s business performance and its risk exposure; yet, the impact is often unknown when the decision is made. 61.3% 28.3% 3.9% Budget is set based on an industry-standard % of revenue. Budget is set based on last year s number plus or minus a %. Budget is set based on business strategy and IT portfolio analysis. What describes your company s process for setting the budget for your IT department? 11

12 Squeezing IT Budgets: Cutting Cost or Cutting Business? Do not know 2.3% No 57.4% Yes 40.3% Do you believe that financial decision-makers have a clear understanding of where and how IT budget cuts could impact business performance or risk exposure? According to the study, most IT budgets (89 percent) are not directly linked to the business strategy. They are rather based on benchmarks (61 percent) or on tradition (28 percent). The consequence of this pure cost focus is that almost 60 percent of financial decision-makers cannot oversee the impact of IT budget cuts on business performance and risk exposure. Without transparency of the dependencies between IT and business, finance and risk, organizations can only decide about IT costs instead of deciding about strategic business priorities. 12

13 Understanding the business story behind each IT investment Organizations that want to cut IT costs without hurting their business need to understand the business story behind each IT investment to make smart decisions on where to spend and where to divest. The ability to reduce costs for maintenance of existing applications (today anywhere from percent of IT costs according to market studies) and shift budgeting to new application development has significant influence on determining the market competitiveness of the enterprise. But capturing IT costs merely as general overhead keeps the enterprise from truly understanding IT s contribution to the business, hindering identification of savings potential that could free up financial resources for innovation. Decisionmakers both in finance and IT need differentiated methods for viewing, measuring and planning. IT portfolio management helps businesses to get the very best value from their IT budget and still have enough money to make new business ideas happen. 13

14 Squeezing IT Budgets: Cutting Cost or Cutting Business? In mapping costs to architectural elements and then aggregating them in various combinations that are relevant to the business, both finance and IT can achieve a clear understanding of costs and the IT organization a defendable position against the perceptions that it cannot control its costs and does not understand financial planning issues. This is where an integrated IT portfolio helps. It brings together the perspectives of business, architectures, projects, finance, risk and compliance. It enables decisionmakers to identify overlaps and redundancies, true running costs as well as the business criticality of their applications. With this insight, smart decisions about which applications to cut and in what order of priority can be made much more easily. Best practices in managing the IT portfolio, therefore, include planning the future state of the architecture and the incremental steps in getting there. These steps or maps are supplemented with cost information in such a way that IT can measure the financial impact of investments now and into the future. After all, break-even and ROI analysis and especially capital planning for large investments require a long cost-planning horizon. 14

15 An integrated IT portfolio also links the business demand to projects either in flight or planned, helping organizations to identify the critical ones and delay or stop ones that are no longer aligned with their strategy. The reduction of fixed costs frees up budget for a modernization of the application landscape to better support business objectives. The result is a road map that prioritizes the most costeffective cuts and promotes the most valuable investments. IT portfolio management helps businesses to get the very best value from their IT budget and still have enough money to make new business ideas happen. 15

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