Another perspective on IT Cost Take out

Reducing the IT cost was on top of the agenda for most of the CIOs even before the current economic melt down. So no one is really surprised with the renewed interest in finding innovative ways to reduce or manage the cost of the IT.

Traditionally IT is always perceived as a cost center and this contributes to the way we try to manage the  cost. This is essentially one sided approach which takes into account the cost but not the value. The dialogue about the IT cost should start with the IT value first. The services and innovation from IT are mostly taken for granted and most of the organization often focus on the cost of the IT. The cost of the IT can only be put in the perspective if we can also quantify the value created by the IT. This will make the choices very clear – reduced IT cost will mean reduced IT value, if I can simplify the equation. However, this equation is not clear and that to some extent complicate the problem.  IT organizations should first do this exercise and complete a value analysis. There are several benchmark data defined in terms of IT spend as %age of revenue for various industries. IT spend may range anywhere for 2% to 20% depending on the industry but essentially it is a factor of revenue and not factor of the value produced  by IT. One can make an argument that value finally contributes to the revenue but I would like to see how much revenue both top line and bottom line will be impacted by controlling the IT spend.

Benchmarks more often generate debate and sometimes turns out as a target given to CIOs – if my competitor can run their IT organization at 5% of the revenue then why am I running at 10%? This type of discussion and dialogue is very understandable. It is a good starting point for introspection  and analysis. However, this approach is too simplistic. This needs to be analyzed in the overall context of the entire business and not just the IT. IT cost may be higher due to the problem somewhere else in the organization. There may be difference in the business processes. Higher IT cost may be offsetting some other cost.

So I would like to  make a case for analyzing and documenting the business value for IT first and then focus on managing the cost. This will give a clear starting point.

This is an interesting topic. More to continue…