This ISG white paper discusses the benefits of linking IT costs to business activity, and of analyzing the potential impact of IT investment on performance improvement

1. GETTING SMART WITH IT INVESTMENT
IT Cost Analyses Should Link to Business Activity
By Nigel Hughes, Partner
www.isg-one.com

2. INTRODUCTION
Smart meters itemize the electrical consumption and cost of specific
appliances to give homeowners transparency into how their electric usage
affects monthly bills. This lets homeowners define their priorities and make
better decisions about how they spend their energy dollars.
Can that model work for IT spending? The smart meter concept is integral to
utility computing, or “pay-by-the-drink” consumption of IT resources.
Moreover, a metering perspective makes it possible to measure other
variable costs such as personnel and facilities. From this, it becomes possible
to view IT costs not in isolation, but in the context of overall operational
performance.
This ISG white paper discusses the benefits of linking IT costs to business
activity, and of analyzing the potential impact of IT investment on
performance improvement.
GETTING SMART WITH IT INVESTMENT
■
NIGEL HUGHES
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3. A SMART METER PERSPECTIVE
Rather than representing IT costs in terms of MIPS and
gigabytes, a smart-meter perspective quantifies the IT
costs required to process a payment, review a loan
application, update an account, etc. The next step is to
relate the IT cost to the total cost of the activity, which
includes personnel, premises and third-party support, in
addition to IT systems.
In this instance, by reducing the personnel effort
required to correct errors in international payments, this
functionality greatly increases productivity. An
assessment of personnel productivity provides further
insight into the effectiveness of ACME’s IT investment.
Top-performing organizations are increasingly using IT
cost-allocation analyses to link IT costs to business
activity, and to understand and improve the impact of IT
on business performance. More specifically, they are
showing how increased investment in IT can reduce
overall costs.
Chart 1 shows ACME bank’s “IT Cost per Transaction” of
international payments, as compared with a reference
group (RFG) average of industry peers. This view suggests
that ACME’s IT performance falls well below industry
standards and requires significant improvement. But
when considering ACME’s IT spend in terms of the
business context, the picture changes dramatically.
Chart 2
Chart 3, “Payment Transactions per Month per FTE (fulltime employee),” shows the bank’s personnel
productivity relative to industry averages. We see that
ACME’s staff is almost three times more productive than
the industry average—providing further evidence that
the bank’s IT investment is yielding significant benefits.
Chart 1
Chart 2 shows ACME’s “Total Cost per Transaction”—a
figure that includes personnel, third-party and premises
costs, in addition to IT. Here, although ACME’s IT costs
(shown in blue) are higher than industry averages, it has
significantly outperformed its peers in terms of business
efficiency, as measured by the total cost per payment.
GETTING SMART WITH IT INVESTMENT
■
NIGEL HUGHES
Chart 3
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4. THE CIO’S ROLE
Focusing on the links between IT systems and broader
business activity requires CIOs to take on new challenges.
For one thing, they have to elevate the discussion from a
narrow focus on IT unit costs to a broader view of IT
consumption, business demand for IT resources and
business results in terms that the users of IT can
understand. The challenge is the longstanding one of
being a business person as well as a technology
professional.
In many organizations, commercially minded CIOs are
being given broader responsibility for back-office and
shared-services operations, with a view toward utilizing
IT to improve business performance. The increasing focus
on minimizing the total cost of a business activity—
whether to process an insurance claim, manufacture a
car or deliver a package—reflects that trend.
The shift to a broader business perspective can
undermine the CIO’s traditional base of authority. For
example, many CIOs have authority over a multimillion
dollar ERP implementation. But when this initiative fails
to deliver expected results, the CIO may suffer for poorly
managing the massive IT project. The fact is, though, that
the ERP implementation is a business project, one that
the CIO should not be expected to implement in
isolation.
GETTING SMART WITH IT INVESTMENT
■
NIGEL HUGHES
The lesson? Innovation is driven by business, not by
technology. Although every organization has a different
functional requirement, most have a 90-plus percent
commonality in terms of the need for IT services, which
requires viewing IT as a utility.
Specific steps that a CIO can take to facilitate a businessminded approach to technology investment include:
1. Implement a chargeback model based on a costallocation perspective that quantifies the IT spend
involved in each business activity.
2. Introduce transparency into IT costs by showing the
relationship between invoiced costs, unit costs and
volume changes.
3. Expand the analysis of IT costs beyond
infrastructure by applying functional models that
quantify the cost components of business activities
in terms of IT, personnel, premises, etc. This will
enable a clearer understanding of IT’s contribution
to business performance, thereby managing IT more
effectively.
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5. LOOKING FOR A STRATEGIC PARTNER?
For further information, please contact Alex Kozlov, Director of Marketing, Americas, at alex.kozlov@isg-one.com
or +1 617 558 3377
Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services
company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and
public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting
and managed services, with a focus on information technology, business process transformation, program management services
and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the
deepest data source in the industry, and more than five decades of experience of global leadership in information and advisory
services. Based in Stamford, Conn., the company has more than 800 employees and operates in 21 countries. For additional
information, visit www.isg-one.com.
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