Whitepaper
Using the Enterprise Architecture to Achieve Effective IT Cost Management
Executive Summary
As comfortable as it has been to leave cost processing and reporting in the hands of Corporate Controlling, IT managers under pressure to explain costs, justify new investment, and defend decisions are finding the information base they have to work with inadequate. Capturing IT costs merely as general overhead keeps the enterprise from truly understanding IT’s contribution to the business, hindering identification of savings potential that could free up financial resources for innovation. IT managers need differentiated methods for viewing, measuring and planning.
The enterprise architecture is the supporting foundation for an enterprise’s business processes. In mapping costs to architectural elements and then aggregating them in various combinations that are relevant to the business, IT can achieve a clear understanding of costs and a defendable position against the preconceptions that IT organizations can’t control their costs and don’t understand financial planning issues.
Architecture-related definition, benchmarking and budgeting of costs provides a reliable foundation for sound planning that supports
- IT cost reduction
- Optimal IT investment planning
- IT outsourcing decisions
- Accurate IT service pricing
- Effective IT asset management.
- Transparent IT contract management.
- Reliable IT audit reporting
- Improved IT/business relationship.
planningIT, for architecture-based strategic IT planning, incorporates structures, processes and functionality that establish a framework within the architecture for effective IT cost management. Architecture objects have costs associated with them and are brought into relationship with organizations and business processes that use them. The availability of cost information in this context enables more meaningful benchmarking, project proposals that are more precise, reliable budgeting and wellfounded investment decisions.
Run IT like a Business
The success and reputation of an organization’s IT department depends heavily on its ability to balance cost and performance. Despite ever increasing demands from its customers, IT is expected to return top value to the enterprise – quantitative as well as qualitative. Gone are the days when IT could take advantage of the wonder and awe (at best) or (at worst) the resentful ignorance of technical plebes, and fill its budgeting coffers without so much as a business case. Today, the CIO – operating more often than not under the CFO and beholden unto the Damocles sword of outsourcing - must be in control of costs and be able to cost justify investment expenditures. Nevertheless, many IT organizations have not managed to develop reliable measurements and methods that enable proper judgement and control over which contribution IT makes to the enterprise. Better IT cost and budget management is needed, and this for the following reasons:
- IT is playing an increasingly stronger role in business process execution. It is thus necessary to be able to accurately measure IT’s participation in the process.
- IT services for the business are provided by many ‘suppliers’ each managing and budgeting their costs separately and leading to transparency problems.
- Demands for lower cost and greater efficiency are forcing companies to look for cost-optimal solutions.
- Shorter product, market and innovation cycles require regular assessment of the value and efficiency of existing and future IT solutions.
- Global networking and unlimited information exchange enable new business models. The accurate evaluation of the opportunities and risks place higher demands on the planning of new IT solutions.
- Mergers and acquisitions make it necessary to consolidate heterogeneous IT solutions. A solid cost analysis is a deciding evaluation criterion.
In the search for more efficiency and cost control, IT managers are realizing that the exact costs for IT aren’t really known. Most CIO’s know how much they spend on hardware, software and personnel but not what their costs are for application development and hosting, business process support or IT lifecycle costs, for example. Why is this? Firstly, because IT processes are not aligned with the business strategy and, secondly, because ERP-based controlling practices do not reflect the cost management necessities of IT. Alignment between business and IT is critical in order to have the necessary transparency into costs. Using enterprise architecture management (EAM) best practices to obtain insight into IT/business relationships allows IT managers to associate IT costs with the fundamental (architectural) elements of business processes, thus shedding light on where costs occur and enabling decisions as to cost reduction. And in applying refined cost management techniques to IT, the IT finance manager can better understand, analyze and manage IT costs, leading IT to become a more strategic player in managing the business.
“IT is becoming embedded in and indistinguishable from many key business processes. Increasingly, the IT component (and its costs) is becoming inseparable from the business process.“ - Why It May Be Inappropriate to Look at IT Costs as a Stand-Alone Activity, Gartner, Barbara Gomolski, George A. Mansour, 30 October 2006
