Cost vs. Value

By George Spafford

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One of the challenges with business executives, and senior IT management for that matter, is a constant fixation on the costs of the IT function. In senior management circles “IT sure is expensive” is a constant refrain followed all to quickly with attempts to downsize, outsource, cut budgets and so on.

The problem is that IT and the business are often fixated only on costs, but what about value?

The IT Infrastructure Library (ITIL) has a good chapter on IT Financial Management (ITFM) in its Service Delivery volume. To its credit, it covers budgeting, IT costing and, if applicable, how to charge back for IT services.

All of these concepts are useful and need to be considered but what about the value added by IT? What about proving that there are benefits associated with the investments made by the business?

Wouldn’t the world be different if IT and the business understood cause and effect and, even better, understood that judicious investments in IT can generate promised returns?

If something is viewed as a commodity then the focus will naturally be on costs. When we go and buy gas for our cars, we often use price as a deciding factor because for most of us we view gasoline as the same product from one vendor to another.

In other words, we view the gas we put in our cars as a commodity that is relatively the same from one station to the next. If we allow this same reasoning, even if inferred, to exist both within IT and the management level then IT becomes a commodity and the focus becomes entirely on costs.

IT is not a utility even though parts of it may look like one. We must transcend costs and forevermore focus on both costs and value—not one or the other. Our objective must be to enable the firm to attain its goals and nothing less.

It was once said that, “firms do not exist to cut costs, they exist to maximize profits.” That is a profoundly true statement on many levels. If we get specific and identify that the goal of capitalist organizations is to maximize profits for shareholders then there is far more at play than cutting costs.

Excessive cost cutting causes death spirals wherein there aren’t sufficient resources to even maintain productivity and the firm begins to slide backwards. IT must be sufficiently resourced to enable the functional areas of the firm to attain their objectives while also helping to mitigate risks.

To achieve this, IT must undertake projects that enable the business and then deliver those services to the business in a reliable manner over time such that the functional areas can maximize their utilization of the services designed based on their requirements.

Granted this can not happen regardless of cost but, the point is, that cost, value and associated risks must be properly managed and communicated. One of the problems in the past has been that IT people tried to develop financial models without understanding what management was looking for (not to mention limited accounting knowledge or support). As a result, senior management would look at a given analysis and immediately question the report’s credibility by challenging the logic employed.

It shouldn’t have come as a surprise that the business person would have a very different perspective than IT. How many 40 page IT reports to management have wound up unread in the trash because what senior management needed wasn’t understood by the group creating the report? Let me assure you that we have wasted a lot of paper over the years!

My call-to-arms would be for groups to leverage their ITFM teams to not only perform their traditional role but to also help IT work with the business and develop valuation models that management can relate to and agree with.

These financial specialists must help us evolve from a focus on costs to one of value. Perhaps just importantly, we need the ITFM specialists to help IT to learn how to speak in the language of the business, e.g. dollars and cents. Furthermore, we need to leverage their skills to make business decisions and ask ourselves hard questions that we answer before others ask.

George Spafford is a Principal Consultant with Pepperweed Consulting and a long-time IT professional. He focuses on compliance, security, management and overall process improvement.