In "The New Voice of the CIO, a recent report from IBM's Institute for Business Value, one key concept is that IT success rests, in part, on raising the ROI of IT by simultaneously being both "savvy value creators" and "relentless cost cutters." One CIO quoted in the study says, "the balance between new projects and cost control is the dichotomy of my life."
The reason why enhancing the ROI of IT mandates both value creation and cost cutting is that each new item of value built today requires both operations and support resources, and maintenance and enhancement resources, for the useful life of the system, application or feature that's been built.
"If you're not pursuing continuous improvement, IT will soon cost more than it needs to and ultimately more than you can afford in a competitive world."
The math is fairly pernicious. The common guideline is that for every five-person team or every five full-time equivalents that develop a system, one person, or one FTE, must be retained at completion to provide maintenance and enhancement (M+E) support through the system's useful life. Additionally, ongoing year-to-year operations and support costs are as low as 20 percent and often on the order of 30 percent of the cost to develop a system (see Raising the ROI of IT for more on this model).
Apply those numbers in a compounded fashion a few budget cycles into the future and all budget dollars for developing new functions are consumed. Yet, the business world constantly changes. New competitive threats emerge. New systems must be developed just to stay even, much less get ahead. So, while IT is being a "savvy value creator," it must relentlessly cut costs.
Bart Perkins of Leverage Partners points out that if you buy a package that is a misfit in function or scale, the M+E load can be significant. He cites a company with a small IT team and a small IT budget that implemented PeopleSoft when a more middle-market solution may have been advisable. The result is a 40 percent ratio for maintenance and enhancement support -- twice the norm. Similarly, a large company could buy a middle-market solution and enhance it themselves, when they should have bought PeopleSoft or its equivalent, with a like result; greatly increased maintenance costs to handle all upgrades, changes and adjustments. Fit is important.
Anyone who has priced out the cost of a secure data center knows that prices can be all over the map. In one situation, I observed a customer in the financial services market that had such stringent requirements for backup, recovery, fail-over and the like that the projected cost of operations for a major new system doubled over the configuration normally seen by its vendor.
Policies have an impact on efficiency. As my colleague Dennis Wenk points out, under design or management of change processes, recovery capabilities, security protocols and the like can result in massive down-stream correction and repair costs. He suggests that the value of policies can be quantified through estimation of the risk incurred by not using them. Understanding expected loss directs the right amount of investment to critical functions and processes. Reducing the expected loss and protecting an organization's IT assets and systems will drive significant competitive advantage.
Relying on Moore's Law to reduce the cost of technology is not enough. If you're not pursuing continuous improvement, IT will soon cost more than it needs to and ultimately more than you can afford in a competitive world. If you can, design and build systems of quality. Invest a little more up front in the data, the application design, and the development approach, to make long-term cost of ownership lower. Invest as well in the proper facilities, management practices and controls. Find your balance. You will harvest the benefits year-in and year-out in lower support and operations costs.
Organizations can either invest their resources in increasing their expected gains (i.e., build new function) or they can invest their resources to reduce their expected losses (i.e., implement proper controls). Selecting the mix is done through reaching consensus across IT and with business on risk mitigation activities and measuring the effect economically. These must be active and interactive discussions between the IT function and the rest of the business on the trade-offs involved. It also means adjusting past decisions as conditions change. The IBM study describes these attributes as those of an "insightful visionary" and an "able pragmatist." Doing both of these well in the interest of creating the right combination of new value and reduced costs is the best way to manage your return on IT.