By Alex Kozlov
Marketing Director, Compass America
Internal IT organizations have a mandate to deliver quality products and services to their companies at a reasonable cost. However, relatively few internal organizations adopt the business-oriented viewpoint of an outsourcer. As a result, in-house IT shops are often perceived, rightly or wrongly, as less competitive and less focused on customer needs than outsourcers.
In response, many CIOs have launched initiatives to “think like a business” when running their internal IT organizations. But what exactly does this mean? What specific strategies can the internal IT organization deploy to provide products and services to its customers in a more competitive and efficient manner?
The basic tenet of running the IT operation as a competitive business is to treat users as customers. Specifically, this means recognizing that they can leave — that they have alternatives and aren’t obliged to purchase products and services from you. A related notion is that products and services must be competitive, efficient, and innovative compared to alternatives.
A services “catalogue” allows an IT organization to clearly communicate to customers what infrastructure products are being provided, at what cost, and at what level of service. Elements of such a pricing model define costs, on a per user basis, for a variety of services, including network voice and data, desktop support and help desk, groupware, application hosting and support, and training and consulting.
In developing a services catalogue, benchmarks based on industry pricing allow apples-to-apples comparisons to what an outsourcer would deliver, and demonstrate how the IT organization compares to alternatives from the outside world. Without such contextual comparisons, customers will invariably wonder if the grass is greener elsewhere.
A pricing model must also accurately and consistently reflect the cost of delivery. Skewing prices for one product to subsidize another can de-legitimize the entire model.
Implementation of best practices, meanwhile, ensures that the internal IT organization does in fact compare favorably to outside alternatives.
Another key for internal IT management is to quantify and demonstrate the added value and business knowledge that the in-house shop brings to the organization each day.
Customer relationship management (CRM) techniques are also essential. One basic CRM mechanism is meaningful invoices, which allow customers to know what theyre paying for and how the cost compares to alternatives. Another is providing the customer with trend information regarding rising or declining costs to enable them to plan and manage their business over the long term. Finally, service level agreements track performance against established goals.
Unit Pricing Defines Success
“Why are we spending more for IT, and what are we getting for our investment?”
Almost every CIO confronts this question, either directly or implicitly, on a regular basis, and myriad models have been developed to calculate the ROI of IT spending. Leaving aside the debate over the relative merits of these models, consider this perspective: it’s not the total of IT spending that the CIO should be accountable for (and that should be meaningful to the business), but rather the unit cost of IT. Framing the question this way allows IT management to demonstrate that it’s delivering more bang for the buck.
In other words, a unit-cost approach allows the CIO to say to the board: “Yes, IT spending is up by 7 percent, but the business’ use of IT resources is up 13 percent. So were ahead of the game.”
This perspective makes the business units — the users of IT services — responsible for the volume growth of IT usage, while the IT department ensures the efficiency of IT on a unit cost basis. In this scenario, the pricing model becomes equally valuable to the business unit, for if the business unit is to be accountable for consumption, then it needs accurate pricing to make sound decisions on IT planning.
Bringing Business Discipline to a Chaotic Process
Effective measures and tools for managing the application development process have been notoriously elusive.
One problem is the conventional wisdom that software development is a creative “art” that doesn’t lend itself to measurement or the implementation of repeatable processes. Taught to think of themselves as unique artisans, developers view process discipline as anathema.
The people-intensive nature of development work — 80 percent of development costs are staff-related — makes it difficult to implement, sustain, and measure the impact of process improvements. As a result, few organizations invest the time and effort to quantify and communicate the benefits of improvement initiatives.
Another challenge is the misconception that measurement programs represent a huge overhead cost. In fact, Compass America studies show that such initiatives represent only 2 percent to 4 percent of development budgets.
Due to these various factors, most application development environments are characterized by a dearth of accurate and effective mechanisms for project planning and tracking, time reporting, or application size measurement. As a result, development schedules are often based on out-of-the-hat conjecture rather than on knowledge of past experience, and software is delivered to users without adequate testing. In short, the entire process is shrouded in mystery.
A chargeback system can be an effective way to introduce business discipline and accountability to application development and maintenance services. The most obvious benefit of chargebacks is to provide the development organization and its business customers an understanding of where and how development and maintenance dollars are being spent, by project, by application, and by user organization.
More specifically, chargebacks reflect a fundamental business principle: a customer who pays for a service is much more interested in its quality than a customer who gets the service for free. Hence, chargebacks give development organizations a powerful incentive to improve their project management, if for no other reason than to protect themselves from potentially irate customers who question charges for services.
Compass America data show that organizations implementing chargeback programs for application development demonstrate significant superiority in project planning, estimating, and tracking procedures. Specifically, chargebacks tend to drive best practices such as estimating tools and techniques, two-phase estimates, milestone tracking, earned value analysis, and project close-out reviews.
In terms of project delivery, organizations that charge back development costs tend to have better on-time delivery.
As information technology becomes increasingly integrated into business processes and essential to competitive performance, and as many industries face an economic downturn, CIOs face growing pressure to demonstrate accountability and discipline in IT management. That said, running a “lean and mean” organization is not enough in today’s demanding environment; rather, executives must understand and quantify how IT spending addresses specific business needs, and thereby justify spending increases if necessary.
Alex Kozlov is marketing director of Compass America, a management consulting firm specializing in IT and business performance improvement, based in Oak Park, Ill. For more information, contact email@example.com.