IT Departments Produce Revenue, But You Have To Be Careful How You Measure It

What would you say is the biggest challenge that CIOs are facing today? There are a lot of possibilities to choose from, but if I had to put my money on just one issue, I’d choose the fact that all that today’s CIOs seem to get a chance to talk about is costs.

What’s missing here is a way for CIOs to communicate in a company-wide manner just how much value the investments that the company is making in IT are returning – the revenue of IT if you will. HP’s CIO Randy Mott has been facing this problem and he’s come up with a solution to it.

Chris Murphy over at InformationWeek had a chance to sit down with Randy and ask some questions about how he’s gone about communicating the value of IT in his company.

At HP, the IT teams attempt to put a measurable value on the work that they do. In short, it’s the sum of the tangible (hard dollar) and intangible benefits that each IT project delivers in the 12 months just after full implementation is complete.

Randy believes that IT has always produced a revenue; however, we’ve been doing a poor job of capturing the value of what we do. The correct way is to report on the value of an IT project  in such a way that it can be presented to the CFO / CEO / executive committee and have the numbers stand up.

How did HP pull this off? Simple – pre-planning. Before any project starts at HP, a complete cost-benefit analysis is performed and agreed to by both business unit leaders and finance. This means that the numbers are finance numbers – not IT numbers – and so they have credibility with the rest of the business.

So there you go – it is possible to measure the “revenue of IT”. It just takes commitment from both inside and outside of the IT department.

Questions For You

Is your IT department just a cost center? Does your IT department try to measure the revenue that they enable? Are the numbers that they report accepted by the rest of the company? Leave me a comment and let me know what you are thinking.

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Coming Up Next Time

The world at large believes that CIOs lack the business skills that are needed in order to have a seat at a company’s strategy steering table. If CIOs are to take the reins of the IT department and turn it into the engine that allows the rest of the company to move faster, then there are 5 things that they need to STOP doing…

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© Dr. Jim Anderson for The Accidental Successful CIO, 2009. | Permalink | One comment | Add to del.icio.us
Post tags: business, business unit, CIO, cost benefit analysis, global data center consolidation, Hewlett-Packard, HP, information technology, IT, IT workforce effectiveness, leadership, portfolio management, Randy Mott, revenue, world class IT organization

Current industry wisdom estimates that companies end up spending 5% – 10% of their gross revenue on all things related to Information Technology. Ouch! That means for every $1M in revenue, the IT cost could reach up to $100,000. You do the math!

In a recent article in Baseline magazine, Cary Westmark who is the VP of Technology for golf course management firm Troon Golf talked about what he’s done to make IT a key part of his company’s success. I liked one of his points about simply changing the vocabulary used withing the IT organization. How many times this week have you heard the phrases “cost savings”, “expense avoidance”, “improving the bottom line” used in your department? If you haven’t, then perhaps it’s time to start using them.

Cary realizes that IT spending is sorta like trying to run up the down escalator: it will get you further ahead for awhile; however, your advantage will dissipate as your competitors adopt the same technology that you are using. However, the steady and continuous application of IT to real business problems can result in reductions in operating costs and can improve efficiencies. Cary goes on to revel his top 6 suggestions for making IT a vital part of the way a company does business:

1. TCO – Live It, Love It, Learn It: the rest of the company is always talking about Total Cost of Ownership (TCO) and IT should be doing the same. Within IT we realize that the cost of a server is not just its purchase price. Rather it’s the purchase price + operating system maintenance + electricity + cooling + 3rd party software costs + etc. Some studies say that the cost of just powering a server are 3x the initial purchase price over the life of the server. An IT device’s life expectancy is roughly 3 years — after that everything starts getting much more expensive (Windows 95 support anyone?). Having an IT plan to refresh your IT assets is key to managing these costs.

2. Standards Rule!: How did Southwest airlines get to be such a successful airline? One of their main secrets is that they fly only one type of airplane — Boeing 737s. This simplifies pilot training, maintenance, ticket sales, etc. The more standardized you can keep your IT environment, the easier it becomes to manage. Standardizing also allows you to (1) reduce costs and (2) buy hardware/software in bulk and get bigger discounts. Once again, industry wisdom is that by standardizing you’ll need only 1/5 the support staff that you would need to be paying for otherwise.
3. Pull It Over Buddy – Software License Management: This is an issue that nobody likes to talk about because we all suspect that we are probably using software that we don’t have a license for. The flip side of this is that we are probably paying for licenses that we aren’t using. Getting this issue under control and presenting it to the rest of the company as a cost savings program helps IT to better align with the rest of the company.
4. To Outsource Or Not: Welcome to the 21st Century where everyone needs to be considering how much of their IT operations they should outsource. Cary uses the following metrics to make project by project outsourcing decisions. If a job will last at least 12 months and will require more than 700 hours of effort, he hires an employee to do it. If the role is part of a strategic project (e.g. custom development) he once again uses employees to do it. Everything else is up for outsourcing consideration.
5. Custom vs. COTS: Developing a customized application to support a part of your business is very much like having a baby — it signs you up for a lifetime of responsibility. Implementing large enterprise applications can be difficult and they are constantly undergoing changes. Here’s a different way of looking at things: use commercial off the shelf (COTS) products and instead of changing them to fit your business, change you business to fit the products. Every time that you can do this, the savings in development and support will make the effort well worth the pain of change.
6. Data Center or Closet?: Where should you put your precious servers? The instinctive IT answer is to co-locate them in a data center. However, if you only have a few servers, then perhaps creating an on site computer room will allow you to save roughly 50% what co-location would cost. Please remember: if you use a computer room, you will need to have a very good off site data backup plan.

There you have it. Six simple tips on how IT can adapt and become more of an integral part of how your company operates. Consider these just the starting point on your road to alignment success!

Tags: revenue, success, IT, business advantage, TCO

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