Ventana Research: Making IT Spending Transparent

Most senior finance executives give little thought to doing a better job of controlling IT spending, probably because they think that they already are doing as much as they should. To be sure, typically they watch the IT capital budget like a hawk, forcing all proposers of outlays to jump through hoops to justify the project. But at the same time (and probably unknowingly), they allow money from the IT operating budget to be wasted because they (and everyone else in the company) don't know why that money is being spent and can't evaluate whether specific outlays are worth the money.

Benchmark research done by Ventana Research shows why a majority of companies do not manage their IT operating budgets well. Companies don't measure IT costs accurately enough in a way that allows them to be tied to those responsible for the costs. Chargebacks almost never reflect real costs and frequently are based on metrics like head count, revenue, or other proxies that do not enable business units to evaluate cost vs. benefit and so eliminate or reduce spending on applications or reports that are no longer valuable. Also, when it comes to third-party maintenance, few organizations analyze whether the bills accurately reflect their contract. Greater visibility into what a company actually is spending on whose behalf and a better process for deciding what to spend money on thus should increase the value delivered by the IT budget.

From the point of view of the business unit manager, the lack of any apparent connection between IT cost allocations and the services consumed results in the IT charge being viewed as a tax. Not surprisingly, his or her reaction, then, is to cut try to reduce the tax bite, which ultimately leads to less effective spending because less useful applications, projects, maintenance, and so on pile up and, Gresham's Law--fashion, drive out more effective use of the IT budget.

Beyond the dollars and cents, having an ongoing process for assessing how much value a business application like ERP or a custom supply chain system delivers also helps to keep IT departments and business users focused on the value of IT outlays. Not only should companies be looking to eliminate unneeded software, but our research shows that a majority also fail to use key capabilities of existing systems that would cut costs and improve customer satisfaction. Only one in four organizations does a regularly scheduled review to determine if it should upgrade important software or eliminate applications that are underused or do not provide value to the business.

Our research shows that companies that can accurately measure their IT operating costs and regularly assess the value of their applications and projects spend their IT operating budgets more effectively than those that do not. For example, those that review IT projects quarterly and change funding accordingly get more out of their IT departments. So do those with a formal process for evaluating their IT budget's strategic alignment, those that consistently identify all users of major applications, or those that actively manage vendor-supplied support and maintenance. Until they take a closer look, many corporations think that they have rigorous measures in place, only to discover that they "sort of" do it. And when it comes to realizing value from IT budget, we find that there is very little difference between "sort of" and "not at all."

Companies that increase the rigor with which they manage their day-to-day IT operations can save money or free up more funds to devote to more strategic and innovative activities, which should satisfy CIOs who feel that too much of their budget is devoted to "keeping the lights on" rather than helping to build the business. It's unlikely that a close examination of the operating budget will identify a single "smoking gun"; nonetheless, the sum of all of the individual savings is likely to be significant. For example, a large health care group was able to cut 12 percent of its IT operating costs after implementing a chargeback system because, when confronted with having to pay for identifiable costs, users quickly weed out the useless and even the nice-to-have from the need-to-have. Managed properly, Ventana Research asserts, this approach can be a win for everyone, promoting management satisfaction with IT and eliminating chores that IT organizations would rather not have to do.

CFOs and controllers should play a larger role in the budgeting process by ensuring that IT costs and cost drivers are more visible to the organization rather than relying on broad-brush allocations. Done correctly, this will improve the alignment of IT spending with the company's needs. For their part, CFOs and controllers must understand the importance of achieving better alignment of IT spending with the strategic requirements of the company. They need software that enables them to track costs and cost drivers more accurately, and they must ensure that there is a formal process for periodically reviewing that alignment and the ability to measure accurately spending on and the usage of information technology.

See a larger version of "Keeping an Eye on Tech Spending."