I still run into enterprises where the IT department continues to be totally focused on "cost reduction," but is that the largest issue facing IT? In my opinion, the greatest issue for IT continues to be the perception that IT is slow, expensive and, more importantly, doesn't really understand the business.

I met with the CIO of a large global manufacturing organization at an industry conference last month who mentioned that his company recently issued an RFI for the cloud sourcing of email. The rationale for the RFI was not primarily the cost of email - it was to focus precious resources on business value adding activities to the business process of manufacturing. There were some great additional advantages in that they could allow the outsourcer to manage SPAM, mail storage and archiving whilst releasing current IT headcount for competitive advantage. My CIO friend mentioned that as they have an excellent understanding of their own internal costs and processes involved, they knew what their internal costs were. Surprisingly, first round of RFI responses all returned with costs that were substantially more than the internal fully loaded costs. After discussion with the business, they determined that the service was to be retained internally.

Also at the same conference, a CIO of a large retail organization whose company felt that IT cost too much. During our discussions she told me that the business identified that quality of service was important, along with managing projects and IT delivery, but these had to be traded based on the financial viability of the service. To drive these decisions, transparency of costs, service levels and the ability to change were all equal partners in decisions as was the business ability to support the costs. Now, with these base data metrics, IT can understand their scope in sourcing the capability at the correct price when there is demand.

When you know the business value of the services that you deliver and understand the actual costs, then you can have meaningful discussions with the business.

Now this sounds simpler than it is. The process of understanding costs requires a good understanding of your environment and the value that you deliver to the business with some definable measurements that make sense, but, lets start with the costs first.

The first phase of the financial management journey is to identify your cost elements to allow you to build the cost model. The cost model will be made up multiple components including assets, people, support, projects and project costs and so on. Now some of these will be costs that can be directly attributable, such as a server that is allocated to the services, while some others need to be allocated based on some predefined metric. Unfortunately many practitioners attempt to skip this stage (of showing value) and go immediately to "charging back" or show back of charges  and then they wonder why they have issues in justifying the charge.

Once you have the cost basis, then the second phase is to agree to the cost basis with the business and then align the costs with the business and start to associate the value metrics with the business. Now immediately, most IT professionals turn to thinking about IT performance metrics. While these may be important, you need to associate business value to the service, allowing the business to determine perceived business value.

The real value is with valid cost data, documented business demand, and agreed business service levels so that IT and the business can partner to make effective investment decisions! The requirement for this decision-making capability will become more important in a cloud era where large projects with heavy Capital Expenditure (CAPEX) are supplemented or being replaced with services that are purchased from third parties as an operating expense (OPEX). At the end of the day, both OPEX and CAPEX cost the business real money and need to be balanced with the business value.

In my experience if you simply cost the business money, without definition of value, it will not be tolerated for long. The secret for practitioners is to identify and communicate value and then link it to the cost.