Financial Management for Effective Sourcing

It’s all about the dollars, Euro’s or Yen! Financials are critical in this innovative world, especially the post Global Financial Crisis world. And the financial implications should be on the mind of every CIO and one of the key options is balancing sourcing options. What is changing in many organizations is the focus is changing from bottom line costs to top line revenue.

Whilst on my most recent travels to Europe, I heard of the pressures organizations face to dramatically reduce costs and solve the age old question of why IT is so expensive!

Although  almost every IT organization is  doing a great job of financial accounting with new projects, the visibility into these metrics is lost once the IT-enabled business change is delivered into production and becomes a part of  of “business as usual.”

Many IT organizations I speak with simply cannot give  a fair accounting of where the money is going in terms of business capability or, more importantly, directly identifying the business value — which leads to an inability for IT to its  value  to the lines-of-business. The unfortunate outcome is that this lack of visibility leads to the perception that IT can be delivered cheaper and certainly faster.

One of the principal roles of the CIO must be proving that IT is an effective custodian of the assets and cash under their control. The growing pressure on transparency puts added pressure on IT to prove it can effectively plan, budget, manage, and control its total budget.

The CIO of a global manufacturer mentioned to me that this year’s IT budget increase has eroded within the first 60 days of the year due to an organizational mandate of a 5 percent organizational cut in budgets. Even with the dramatic efficiencies gained with automation, rationalization of systems and an ongoing application rationalization exercise, there is little low hanging fruit remaining to cut. The CIO determined that the business should determine where cuts were to be made. To provide total transparency to the business, the company implemented a system to track costs of consumed services back to the business. This enabled the business to determine where to apply cost savings and/or to provide additional funding to IT.

This reminded me of a previous visit to the UK where the IT Finance Management from a large UK government department shared how they saved 24 million pounds in the first year of implementing a process of “show back” of service costs. This allowed all costs visible to the business and made the business accountable for consumption.

Effective cost management is one phase of the process of effective financial management. It allows for a baseline to communicate that consumption equates to real costs that must be met somewhere in the organization.

Phase 2, and potentially a larger saving opportunity is the transparency in sourcing decisions to allow for cost- effective sourcing decisions. The challenge here is that the demand of IT capability is never linear and the industry trend will be to outsource infrastructure while IT focuses on value-add.

To drive pro-active value, the emerging enterprise should provide additional capability for the consumer of IT-enabled business to determine what they will consume, at what service level and at what price. To deliver this capability, the IT organization will need to provide transparency to the business in the sourcing choices. In the future, the business may indeed make its own choices and fundamentally challenge the IT organization.

Article source: CA PPM Blog

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