Why IT Financial Management Equals Cost Reductions
To avoid a vicious cycle of cost reductions, IT organizations must have a financial accounting system that details how each business unit’s project funds are spent.
By John Palinkas
I was talking with some friends the other day about financial management. Since most of the people are in IT organizations, the focus of the conversation quickly shifted to cost reductions. After a few minutes of discussion, it occurred to me that most IT organizations think of financial management only in terms of cost reductions. And most business units think of IT as the largest cost center and, therefore, are always seeking to reduce IT-related costs, which led me to start thinking about how these opposing thought patterns came about and how we can serve as catalysts to change the business units’ current perceptions.
Let me use an example that we are all familiar with. Think of your typical teenager heading off to college. The student will, of course, need money to live on. In today’s age of extended families, the college-bound student will likely receive funds from multiple sources: parents, stepparents, grandparents, aunts and uncles, and so on. You get the idea. Everyone contributes some money—and harbors some expectations about how their contribution should be spent.
Of course, after attending college for a few months, our student discovers there are other absolutely essential expenses, such as attending concerts, buying new clothes and traveling to an exotic place for spring break. After a few months, the parents will receive a plaintive call requesting more money. Being responsible adults, the parents ask how the money was spent. They are anticipating an answer that aligns with their expectations: food, textbooks, course fees and so on. Instead, our student proceeds to tell them how all of the money was spent, not just what was received from the parents.
Now the frustration begins. The parents want a detailed accounting of how their money was spent. They don’t care that grandma gave the student money for new clothes; they want to know what the student did with their money. Of course, our student has no idea of what was done with the parents’ money. The student just viewed all of the funds as one big pot of money to be spent on what was needed. And, of course, our student’s needs didn’t totally align with the original purpose of the funds. Being responsible, the parents reduce the amount of money they provide to the student. And so starts the vicious cycle of cost reductions.
You can see where this is headed. Think of the IT organization as our college student and the multiple business units as the parents. The business units have very specific business objectives that are supported by business projects. They are funding IT to execute these business projects. However, most IT organizations use “economy of scale” as an excuse to lump all of the funding into one large pool and then subdivide it into categories that only have meaning to the IT organization. Yes, some functions like e-mail and phone services are truly universal and should be spread proportionally. (I call this “the peanut butter.”) And business units will accept this reasoning provided the peanut butter is kept to a minimum. As for the rest of the budget, the business units feel justified in their expectations of knowing how IT is spending its money to support its business projects.
If IT organizations want to break this vicious cycle of cost reductions, they need a financial accounting system in terms of business projects supporting business functions. With it, IT will be prepared to inform each business unit how its money was spent on its business projects. Yes, there is a layer of peanut butter, but keep it under 30 percent. If you start providing this type of financial transparency to your business units regularly, you might get a pleasant surprise the next time you ask for more money. Just remember: don’t tell them about spring break.
About the Author
John Palinkas is a partner at The IT Transformation Institute. ITTI is a catalyst for transforming the IT industry. ITTI helps change the DNA of IT teams, solving today’s problems and breaking the cycles that led to them, and to create next-generation IT organizations. John has spent more than three decades in the IT services industry, working with industry leaders like AT&T, AT&T Solutions and British Telecom. He has led numerous multimillion dollar, multiyear outsourcing and service-delivery engagements for dozens of Fortune 500 firms. He has extensive experience and expertise in IT transformation efforts, outsourcing analysis, M&A integrations and service implementations. He can be reached via email at John.Palinkas@TransformingIT.org, and you can follow him on Twitter via @jpalinkas.
You can read his previous CIO Insight article, “The Difference Between Change and Transformation,” by clicking here.