Thought Leadership – Cost Transparency Framework Pillars

Cost Transparency framework that delivers true value

Gartner has identified six key pillars upon which effective IT Financial Transparency is built. By taking a closer look at each of these, we can determine how IT can best deliver value to the enterprise.

By team of experts at Magic Orange: Malcolm Stewart, Theshni Naidoo, Tian van der Walt and Blake Davidson

As the world economy shifts away from the more conventional product focus and towards a services-based economy, it becomes increasingly difficult for enterprises to clearly and accurately understand their costs and drivers of cost. After all, in a services-focused world, it is challenging to establish true service costing and a much greater level of granularity is required around costing.

This is where cost transparency comes in – it is designed to enable businesses to understand and attribute costs more accurately. It also enables those people responsible for specific areas of the business to understand which costs they are able to control, as well as which levers they can pull to effect changes in these. This is because it creates both visibility and understanding regarding the costs and volumes of their entire IT product and service portfolio. This enables the organisation to make informed and fact-based strategic and tactical decisions regarding its IT investments.

According to Gartner, effective IT cost transparency is built on a foundation of six framework pillars, each of which plays a key role in creating the kind of transparency regarding costs that makes them significantly easier to understand and, therefore control. To truly understand cost transparency and the enormous value it offers to an organization, it is worth taking a deeper dive into what makes up each of these six pillars, and how they are individually and collectively able to deliver value to the enterprise.

The six pillars are: (1) IT Budgeting; (2) Investment Planning — Effective Project Financial Management; (3) Chargeback, Allocation and Showback; (4) Benchmarking IT Costs;  (5) IT Cost Optimization; and (6) Demonstrating the Business Value of IT.

In the case of the ‘IT Budgeting’ pillar, it is important to understand that budgets are a management tool used to allocate resources in order to achieve the enterprise’s objectives. As companies transform into digital businesses, there is a need to select, implement and manage IT more effectively. To achieve this, a multi-view approach to the IT budget is necessary.

In other words, managing costs in technology stacks requires both a technical view, which offers the ability to analyse and benchmark internal technology spend, as well as the calculation of the chargeback cost of IT business services. At the same time, the business view needs costs organized in a way that clearly displays the cost of IT services in business terms. This enables business executives to easily link IT expenses with business needs.

Multiple budget views enable the holistic management of IT spend, allowing IT to take on a role as a business partner that can help the company in achieving its strategic goals, rather than being seen purely as a cost to the business. Moreover, it enables the IT budget to evolve from a cost tracker to a strategic tool, providing better alignment with the company’s goals.

The second pillar, ‘Investment Planning — Effective Project Financial Management’, can be broken down as follows: Effective Project Financial Management is a process which brings together planning, budgeting, accounting, financial reporting, internal control, auditing, procurement, disbursement and the physical performance of the project. The overall aim is to be able to manage project resources properly and achieve the project’s objectives.

The best way to do this is to begin running IT as a business, by undertaking an investment-planning process that focuses on the entire life cycle of an IT investment, allowing costs to be effectively managed and value to be maximized.

At its core, effective Financial Management is an ongoing process that features a cycle of good management habits, including planning, organizing, directing, and controlling the financial activities – such as procurement – in a consistent, responsible manner. It also means applying general management principles to the financial resources of a project.

A crucial part of any project financial management is post project evaluation. There needs to be proper workshops and documentation on the outcomes of planned objectives. Once these are evaluated, the business will be in a much better position to learn from its mistakes and plan more effectively for future projects.

The third pillar is ‘Chargeback, Allocation and Showback’, in which chargeback occurs when the requesting department receives an internal bill or ‘cross-charge’ – for the costs that are directly associated with the various services that they consume. IT Showback consists of providing IT management, departments, and corporate management with an analysis of the IT costs due to each department, without actually cross-charging those costs. Both rely on an effective resource allocation methodology and tools to accurately assign costs to users of IT services.

When implementing this pillar, it is crucial that the enterprise clarifies its charter and mandate, aligns its objectives with its business goals, and then selects the right approach for the business. In turn, the IT organisation must understand all the chargeback options that might apply and help the business units to understand these options.

When it comes to ‘Benchmarking IT Costs’, it is clear, for starters, that benchmarking is self-explanatory, involving the evaluation of something by comparing it to a standard. Benchmarking should be built into a chargeback or showback cost model in order to continually, and passively, evaluate key metrics and their trends over time, in order to generate critical insights. Benchmarking thus plays a key role in ensuring IT is spending the correct amount in the right areas.

What is vital with benchmarking is that it does not show what you should aim for, but rather serves as an indication of what questions to ask and what insights one should understand about one’s own environment. When done correctly, benchmarking serves as a power tool to drive continued improvement within the business.

When it comes to ‘IT Cost Optimization’, this is something that CIOs have often tried to achieve, though they have seldom been able to articulate how effectively they have done this, nor how effective they have been in helping to optimize business costs.

Ingraining cost optimization within the IT organisation’s DNA requires leadership and planning by CIOs. IT cost optimization needs to be constantly practiced, and CIOs should formulate a programme for cost optimization by establishing a baseline of IT spending, identifying opportunities relative to peer-group benchmarks, developing a strategy to optimize and executing that strategy, before finally tracking the benefits realized.

Lastly, when it comes to ‘Demonstrating the Business Value of IT’, CIO’s must find a means of effectively communicating the understanding of the make-up of their IT costs and drivers, which has been learned through cost transparency.

It is imperative that CIOs establish a common forum where Finance, IT and Business can come together to discuss IT spend, how it adds value to the business and how it aids in attaining the company’s objectives and strategies. This can only be achieved if all stakeholders are speaking the same language. Armed with a cost transparency model and a common language, IT, Business and Finance find that they are more easily able to have productive, meaningful discussions.

It should ultimately be clear from the above that when leveraging the Six Pillars of IT Financial Transparency properly, CIOs are able to extend their reach far beyond the traditional focus of IT budgeting. The Magic Orange Cost Transparency platform has been designed to enable senior IT management to run IT as a business by providing the financial transparency needed to truly optimize cost and increase value of the entire enterprise.

Source: Gartner: Run IT as a Business Using Six Pillars of IT Financial Transparency to Drive Value Published: 31 May 2017 ID: G00301363