By Guest Contributors on June 29, 2010
Technology costs represent a significant portion of a company’s annual expenditures. As a business leader, not having a solid understanding of these costs can put your business at a competitive disadvantage. Here are the three technology numbers every business leader needs to know.
1. What is the cost of the technology required to keep the company open for business?
The non-discretionary part of the technology budget is what your technology team might refer as your “lights on” cost. It includes the cost of operating the systems and services you need to have in place to do business, but excludes projects, and enhancements. It is your minimum technology spend, and changing business strategies and decisions can drive this number up or down.
As business leaders, it is important for us to work with our technology team to develop a roadmap for the orderly evolution of technology. Without a roadmap, we might be surprised to discover that we are paying for multiple systems with similar functionality or for legacy systems that need extensive technical support. These are just two of the many scenarios that can increase our costs. If you believe your non-discretionary number is high, work collaboratively with the technology team to determine if there are options to reduce these costs. Then develop a plan and take action. Results may not be realized overnight, but once identified these savings will carry on year over year, so it is definitely worth the effort.
Another component of your non-discretionary budget to be mindful of is the technology cost associated with regulatory compliance. These costs will vary depending on the request for compliance at any given time.
2. How much time is IT spending on tactical versus strategic activities?
To be successful you need to find the right balance between work that is tactical i.e. business as usual, and strategic activities that will advance your business plans. The following steps can help ensure the right balance for your organization.
- Ask your technology team for a high-level breakdown of the year-to-date effort spent on enhancements and projects.
- Classify each item as tactical or strategic in nature.
- If the tactical and strategic balance does not align with your expectations, take corrective action. For example, if too much effort is being spent on tactical activities, implement a work initiation and approval process within the business to validate work requests at an individual and consolidated level.
- Reinforce the message on the desired split with both business and IT.
- Resist the temptation to load up on heavy process. Be creative and look for a solution that best fits your organization’s style and culture.
3. What is the technology cost for one or two critical business products, services, or functions?
Knowing the cost of opening an account, sending a client statement, or supporting a specific product can be useful in helping you shape your business. Using an IT Funding Model to classify technology costs and their allocation across different services, products, or user groups will provide information that can help you make more informed business decisions. It will also illustrate gaps between perceived and actual costs. Once you have established what the technology costs are, add the business component to achieve the full cost of a product, service, or function.
IT Funding Models range from simple to complex. Ideally, your model will be developed by an IT professional who understands your business, appreciates the full range of technology costs, and is knowledgeable about specific industry approaches to cost allocation. Most importantly, find someone who demonstrates the skill and experience necessary to size your model to fit your business needs. This work can be done in stages, so don’t try to boil the ocean. Pick one or two key items, and drill down on those costs.
With these three numbers as your foundation, you will be more informed about the cost of the technology supporting your business. In addition, the transparency provided by an IT Funding Model helps get everyone on the same page and fosters open communication between the business and technology teams.