From a budgetary perspective, IT is often viewed as a cost centre which inherently focusses on cost reduction while ignoring the benefits it brings, both financial and other. With IT as a profit centre in mind, the IT costs are linked with the value they create, the increase in productivity, and the benefit of innovation.
Breaking down the IT spend per platform so that each cost can be attributed to a specific business capability and internally invoiced facilitates offsetting the costs against the value for each of the business capabilities. The value creation by introducing smart solutions (e.g. customer experience or for following up on customer loyalty) translate into profit and can no longer be considered as cost only. In addition, less financially performant capabilities become visible and can be given the right attention to turn them into profitable ones.
As such, those business capabilities for which IT creates profit can be measured and visualised. Technology budgets are likely to increase in the future, thereby forcing organisations to reduce traditional technology spending and look for funds outside the conventional IT budget, which is often provided by the organisational entity that acts as the sponsor.
How to practically approach this within your organisation?
This must not be confused with cost reduction of some sort, which does not take into account potential benefits and value. Hence, the discussion must focus on how IT services can be valued beyond the costs that they entail as if you were to commercialize the service for external use and potential profit.
Instil a P&L mindset within IT by tracking both value and cost of improvements and compare costs with the increased productivity and the innovation IT brings.
There must be clear demarcations of the benefit that can be attributed to IT, so these are not solely attributed to business.
Discuss what mechanism (e.g. zero based costing or activity based costing) and metrics can be used to allocate costs as well as benefits to individual services. Consult your finance department to be informed on the available options for internal invoicing, as this approach is not that common and often disputed by business departments that are reluctant regarding a transfer of IT-related budget to their own budget.
Jan Verbruggen
Managing Partner Xperian BV
