Understand and reduce your IT costs

In the typical IT budget, only 13% of spending supports business innovation.

by Tim Raducha-Grace -- Many organizations are making decisions to cut IT spending with little or no insight into whether they're making cuts in the right areas. Unfortunately, almost 66% of CFOs and CIOs do not know the size of their core IT assets (1) and 33% of organizations do not know what they spend on IT assets each year (2).

In the typical IT budget, only 13% of spending supports business innovation, while 87% focuses on on-going maintenance (3). The last thing an organization wants to do is cut these valuable projects that add new business value. Developing a clear understanding of your IT costs can help your organization free up IT resources for innovation and find ways to effectively reduce costs.

Here are three steps in that direction.

Establish a business or service oriented view of IT costs. By deciding where you would like to track costs, you can start to understand the costs of IT services. There are many ways to view IT costs, but most organizations increasingly want a business or service oriented view of these costs. For example, organizations that have adopted service management practices should begin by allocating costs to their service catalog. Other organizations that allocate all their costs to business units or major applications should consider tracking their spending based on unit or application. Your organization may decide that they would like a mix of these options, such as tracking costs by IT service, but then allocating them to a specific application or business unit. Having multiple views of these costs can help greatly, but beware of making the view so complex that you cannot develop a system to provide these views.

Develop IT accounting, budgeting, and charging practices based on this business or service oriented view of IT costs. Organizations should use the method in step one to forecast future expenditures, track current costs and benefits, and allocate (or charge) costs to the consumer of the IT service. For example, if an organization decides to track costs by service catalog and customer, it should also forecast costs using this same method. I recommend that you consider developing an automated process for tracking IT costs. By clearly understanding costs, organizations find that they can immediately find savings by simply showing to the IT consumer that there may be a lower cost service that still addresses their business need.

Leverage these core financial management practices to optimize costs. By developing these practices, the IT organization and its customers can decide which IT services are profitable, which IT services exceed desired costs, and which IT services should not be provided. For example, by understanding the costs of the IT services provided by an internal IT organization, you can determine whether an external provider could be a more cost-effective alternative. Organizations can also understand which service is generating the most value, such as revenue, compared to its costs and decide to invest in that service accordingly. Through understanding your IT costs, you can shift your IT budget to spend more resources on innovation and new projects that add value to your organization.


1. October 7, 2008, Financial Times, Valuing IT assets: Managing IT assets can bring big rewards 2. October 21, 2008, Financial Times, Does IT work?: IT-related productivity gains in decline 3. Ibid.

Today's tip is based on the book, The Business of IT: How to Improve Service and Lower Costs by Robert Ryan and Tim Raducha-Grace, published by IBM Press, Sept. 2009, ISBN 0137000618, Copyright 2010 by International Business Machines Corp. For a complete Table of Contents, please visit: www.ibmpressbooks.com/title/0137000618

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