Financials are a topic on the mind of every CIO, whether they are getting pressure to justify or reduce spend or simply make a decision between sourcing options. Of late, I am hearing the age old argument that IT is too expensive. With greater analysis the fundamental issue is that organizations, although doing a great job of financial accounting with new projects, lose visibility once IT enabled business change is migrated into production.

Many organizations today cannot give an accounting of where the money is going in terms of business capability and value. This leads to an inability for IT to explain the value of IT to the lines of business. The outcome is that this lack of visibility leads to the perception that IT can be delivered cheaper and certainly faster.

In short, CIO's must prove they can plan, budget, manage, and control the total IT budget

Recently speaking with the CIO of a global financial organization, he told me that the IT budget increase he was given this year has already been eroded by a demand for a 10 percent cut. Even with all the efficiencies gained with automation, rationalization of systems and the application rationalization exercise currently underway, there is little low hanging fruit to cut. The decision for the CIO was simple he needed to implement transparency of consumed services back to the business to allow the business to determine either where the additional cost savings should be made, or, where the business should provide additional funding to IT.

Attending a conference recently in the UK, I heard a speaker from the UK government who identified that they had saved 24 million pounds in the first year of implementing a process of "showback" of service costs, simply by making costs visible.

Demonstration of effective cost management is one phase of the process and provides a baseline and communicates that consumption equates to cost.  Phase 2 must be transparency in sourcing allowing for cost effective sourcing decisions.  The challenge here is that the demand of IT capability is never linear and the industry trend will be to outsource infrastructure while IT focuses of value-add.

In order to drive pro-active value, the enterprise of tomorrow must provide additional capability for the consumer of IT-enabled business capability to determine what they will consume, at what service level and at what price. To deliver this capability, the IT organization will need to provide transparency to the business in the sourcing choices. In the future the business may indeed make its own choices, fundamental change and challenge the IT organization. 

In summary, step one is to identify the cost of IT services and communicate it to allow the business to determine the value of the services. After these costs are have been communicated, IT needs to focus on vendor and supplier management and the associated capabilities. An regime of effective sourcing decisions will allow effective financial decisions to be made, which is a critical component as IT migrates to the role of a service broker.

Balance Sheet image used under Creative Commons License courtesy of s_falkow.