Your average corporate IT organization will employ a portfolio of metrics to firstly understand (and report upon) performance, and secondly – ideally – to identify and drive both service and operational improvements. And within this basket, or portfolio, of performance measures there will undoubtedly be key performance indicators (KPIs) related to aspects of financial performance. This may or not be part of a “balanced scorecard.”
But how great are these financial KPIs and how well do they drive forward necessary improvements in IT’s financial stewardship (and ideally other aspects of operational and IT service optimization)?
This blog poses the question: “Do you know really enough about your IT organization’s financial performance?” And digs into whether commonly-adopted IT financial management practices are really enough.
The IT Metrics Status Quo
The average corporate IT organization, like any other line of business, will have a standard set of performance metrics that have probably been crafted, over the years in line with what has been considered good or best practice. For example, in the case of the IT service desk, the average call handling time.
And, unfortunately, the average IT organization is not alone in succumbing to many of the common mistakes made with such function-specific metrics – for instance, that the employed KPIs can be too inwardly-focused and bear little resemblance to wider business needs and operations.
What does this look like? It’s often where a business function – such as IT – creates its own performance metrics in isolation and, while these might help at an IT level (usually operationally), they fail to deliver meaningful insight that can be used to demonstrate, and improve upon, business-level outcomes and value. This scenario is very applicable when it comes to IT financial management, or IT business management, metrics.
The Need to Co-Create IT’s Financial Metrics
To help avoid scenarios where the IT organization is measuring its financial (and operational) performance in a way that’s disconnected from business wants and needs, there’s a need to co-create cost-based metrics in conjunction with the business.
This will help to ensure that the employed financial metrics are truly relevant to business operations and success, with there also scope to improve on baselined performance to deliver real cost and efficiency improvements.
The metric-based conversation around costs will also be of benefit in terms of making internal customers, and in some cases end users, more aware of what IT costs and why – with the potential to manage demand in a way that helps to reduce costs when appropriate.
As to what these financial IT metrics should be, “it depends.” There’s not a single set of financial metrics that will suit each and every business, because each organization will have its own set of strategic drivers, goals, and opinions as to what’s important from a financial perspective. And it’s important for IT organizations to appreciate this, because lifting a set of standard financial metrics from a book, training presentation, or blog is probably never going to provide the right set of metrics (financial or otherwise).
Instead, these metrics need to be tailored to the aforementioned business wants and needs – and there’s only one reliable way to ensure this! Through focused conversations.
What Does This Mean (in Terms of Selecting Appropriate Financial Metrics)?
Having said that organizations are different, there are some common financial metrics that have a high probability of being applicable (to your organization). Plus, there are definitely benefits from employing metrics that are used by – and can therefore be compared across – multiple organizations.
Such metrics, trended over time (and even if not compared to available industry benchmarks), will help your organization to understand performance direction and help to identify opportunities for service (and cost) improvement.
Examples of commonly-benchmarked cost-related metrics include:
- IT costs as a percentage of revenue
- The average IT cost per employee (or per end user)
- The unit cost of an IT service, e.g. email, per user
- Service or application total cost of ownership (TCO)
- The percentage reduction in service and software costs over time
And with metrics such as these, even if an IT organization is struggling to demonstrate how its IT services help to co-create business value, there’s still the ability to show that the financial stewardship techniques employed are helping to improve the business’ bottom line. A good example of an IT business metric is to show the return on every dollar a business invests in a business application service.
So Far, So Good – and Then the Big “But”
Hopefully all of the above makes sense – that every IT organization should have greater understanding of, and control over, what IT costs. Plus, the ability to demonstrate that it is proactively working to optimize costs, spending the available IT budgets on the things that matter most to business success, i.e. avoiding expenditure that should ultimately be considered “wasted.”
But there’s a big “but” here. Because the need to employ suitable financial KPIs is underpinned by another need – the ability to truly understand how IT costs are incurred, i.e. why things cost what they cost, and the capability to “move the dial” such that IT expenditure is in line with business wants and needs.
This is probably best demonstrated through a few questions/examples:
- Is more spent on IT services that deliver low business value versus those that truly help to deliver against strategic goals? For instance, is the corporate email service disproportionately expensive and eating up budget that would be better used elsewhere?
- Is money unnecessarily spent on multiple applications/IT services that “do the same thing”? This is not uncommon in organizations that have a strong merger-and-acquisition history
- Do internal customers appreciate that a small drop in the availability of certain non-critical IT services will significantly reduce their costs? It might be a drop that they’re willing to accommodate if the costs savings are right (and perhaps this budget can be invested in new services they need).
So, please take a step back from day-to-day IT operations to firstly understand whether your financial KPIs are sufficiently focused on what your business wants and needs. And, in doing so, appreciate that the low level of insight that your IT organization might currently have, into what IT costs and why, is probably damaging – both in terms of IT expenditure optimization and also the level of business success.
Ideally the question of “Should your IT cost what it currently does?” should be repositioned to something more akin to: “Is IT spending the right amount and on the right things?”
ITBMO looks forward to hearing back from you around your thoughts, and we are happy to assist you modernizing your IT business and financial metrics to deliver what is relative to your business.