During tough times, IT costs are under careful examination. If you do not understand what the costs are, you will lose savings – or you might save from the wrong place: the future of your business. So, what are the essential basics of IT financial management everyone should know? Sofigate experts Petteri Mikkonen, Mikko Saari and Janne Sonkamo reveal their tips.
We live in a time of tough decisions and cost-cutting – and IT costs are no exception. As a result of the global crisis, business leaders have to consider their priorities to safeguard their production and business.
The need for cost-cutting and efficiency is always present in the field of technology, but the need for it has increased during the corona crisis. The need for thorough IT financial management is now more important than ever. Reasonable and justified efficiency can’t be achieved and cost-saving measures can’t be made if you don’t understand what the costs consist of.
Do you understand where your costs come from?
Take a moment to think about whether you can quickly name the things you can cut from. What are your company’s short-term key services, the so-called low-hanging fruit, that will enable you to cope with the worst turbulence? What are the main cost drivers for these services?
Unfortunately, the answers often sound like this: “We know the costs of IT, but there is actually a lack of visibility in the IT services, applications, infrastructure, and so on.” In this case, the answer is no: you do not know the costs of your IT. They are unknown, “a black box”.
It is not easy to make decisions about cutting technology costs under pressure. However, with the right tools, practices, and fact-based information, IT and technology leaders can respond to a crisis and make strategic decisions. The impact of these decisions is not limited to the current situation, but they will ensure the success of the business in the future as well.
Here are four core things to consider right now
- Make life easier with ready-made frameworks and create an overall picture of the situation
Many IT functions rely heavily on various standardised frameworks: for example, service management uses ITIL and enterprise architecture TOGAF. Ready-made frameworks are quick to implement and include structures, models, and practices that bring people from different parts of the organisation onto the same page using common terminology. Why should IT financial management be an exception, why should it have to work without a frame of reference?
The first step in deepening your understanding is to create an overall picture of the technology portfolio and the costs associated with it. An essential part of this is the frame of reference or structure by which costs can be categorised and modelled.
The open industry standard TBM (Technology Business Management) Framework provides an excellent tool that allows a company to get an overall picture of cost allocation with relatively little effort. It can even reveal surprising abnormalities as well as observations and therefore clear targets for improvement.
Cost structuring not only helps the business in the short term, its effects are much more far-reaching. Individual spot checks with the help of external analysts do not provide a long-term overall view of the cost developments. Instead, the analytics must always be available to the management right away. The structure makes it possible to demonstrate the value produced by technology more effectively.
- Yes, you also have quick wins to achieve – this is how you identify them
When it comes to technology, time commitments can be long. The general belief is that quick savings are hard to find. However, quick wins can actually be found in almost every company. It is just important to identify where to look for them.
First, it is good to be aware of what variable costs can be affected quickly. For example, find answers to the following questions:
- Which supplier agreements are about to expire in a month or two?
- Do these agreements provide business-critical content?
- Are the costs in line with the contracts and how much is the so-called separately chargeable cost that is not part of the normal delivery?
- Is a scalable pricing model being followed?
It is also a good idea to go through your long-term contracts from time to time and ensure that the services provided match the content of the contract.
Suppliers that do the same job or that work for the same outcome must also be identified. Consider whether it would be possible to consolidate contracts under a single supplier more cost-effectively.
When it comes to the duplication of work, apps can provide a good target for cost efficiency. When was the last time you carefully went through your application portfolio? Can you identify the number of users per application or the number of applications running the same function? For example, very few companies actually need four different video conferencing applications. Eliminating three results in short-term savings in licensing costs. Also, for example, on-demand cloud costs are an easy and fast scaling target.
- Prioritise projects that create value and favour agile processes
In crisis situations, the first measures often include prioritising projects and cancelling or postponing projects at the back of the priority list. This for example achieves rapid savings on employment costs and contracts.
Very often the issue is viewed in an unnecessarily one-sided manner, and the effects of projects on service production and business are not sufficiently taken into account. Usually the link between these is missing. Here, too, a clear structure such as the TBM framework and clear allocation models bring additional visibility and help in evaluating the effects.
In exceptional circumstances, rapid response is paramount. Therefore, IT teams should implement agile processes if they have not already done so. When work is based on short cycles, you achieve results fast and are able to quickly discard the initiatives with no value.
The traditional waterfall model may still be of use in certain situations, but right now might be the right time to ask if it is enough.
- Demonstrate the value and benefits of technology – do not cut the foundation for future success
In the current economic climate, a technology cost that does not create any value is an extremely easy savings target.
Unfortunately, according to Apptio, a provider of IT cost management and design tools, about 45 per cent of companies are unable to measure the value of IT. Only seven per cent can successfully demonstrate IT’s value to other business areas!
By being in this seven per cent range, you will be able to avoid unjustified cuts and create the conditions for success in the future as well.
During disruption, some companies thrive and others falter. Where do you stand?
About the authors:
Petteri Mikkonen is an expert in IT financial management and the Technology Business Management framework at Sofigate.
Mikko Saari manages Sofigate’s Business Technology Governance business area.
Janne Sonkamo is an IT financial management advisor and is responsible for customer projects at Sofigate.