For many companies, IT is a mysterious black box. It’s easier to quantify what goes in than what comes out, and as far as tracing IT costs back to individual business units–the struggle just continues.

A New Answer to an Old Question

by George Blanck, Sr. Architect, Banking Practice

For many companies, IT is a mysterious black box. It’s easier to quantify what goes in than what comes out, and as far as tracing IT costs back to individual business units –the struggle just continues. Although achieving effective IT financial management remains elusive for most financial institutions, continued pressure on revenue and margins has made increasingly clear the need for effective management of one of the business’ largest areas of non-interest expense. But as the old quotation goes, “The questions don’t change, but the answers do.” By combining two independent cost frameworks to the challenge of understanding and tracing IT costs, a new answer is available through an approach that can transform the much-maligned relationship between IT and the business units a mutually-beneficial partnership.

First, let’s be clear about what we mean by “IT Cost Transparency”. In short, IT Cost Transparency (ICT) is a way for IT to better understand their costs and to provide the business units the visibility to understand the impact of their actions on their IT costs and, in partnership with IT, maximize the value of their IT investments. ICT allows IT and the business units to answer questions such as:

  • “What are the IT costs for my day-to-day operation?”
  • “How will those costs be affected by introducing a new product?”
  • “What can as a department head do to help reduce IT costs while maintaining or even improving the level of service?”

Within IT, the right approach can also help identify opportunities for improvement that can benefit all users.

What enables an organization to achieve effective IT financial management? Within IT, the maturation of Information Technology Infrastructure Library (ITIL) family of frameworks: Information Technology Asset Management (ITAM), Information Technology Service Management (ITSM) and Project and Portfolio Management (PPM), provides a proven framework for a disciplined approach to IT Financial Management. Concurrently, the maturation of Activity-based Costing (ABC) provides the framework for assigning costs to discreet, meaningful business activities that comprise products/functions. The linkage of these business activities to their IT costs through a “Service Blueprint” provides the ability to view IT investments through the lens of business activities and to understand and predict the effect of business behavior on these costs. The pyramid in Figure 1 illustrates how the base of comprehensive IT costs and metrics are refined into a chargeback strategy that assigns costs to meaningful business activities/functions.

One could view this as a top-down-bottom-up process where business products/functions are driven down to the appropriate level and IT costs are consolidated into appropriate services and linked through the Service Blueprint. But despite the power the frameworks provide, achieving this ability to manage IT costs still requires a concerted and sometimes challenging effort, as anyone who has pioneered this path can attest. Experienced oversight is required to balance the level of detail within IT services and the business activities to avoid creating a monster that is unmanageable and provides an unpractical, “over-optimization”.

In the opening, we spoke of “transformation” – achieving IT cost transparency is truly transformative. Achieving true IT cost transparency demystifies the “black box” and provides both IT and the Business Units with the information, processes and tools they need to form a partnership for effective IT financial management.