This is the second article in our Cost Transparency series*. The first introduced Cost Transparency as a way of beating the budget-cycle blues. We now look at why IT is often perceived as expensive, and how to use Cost Transparency to show it’s value instead.
IT is often perceived to be essential, but unnecessarily expensive, which pressures IT executives to reduce spending while improving service levels.
One of the main reasons for this is the way IT reports its finances. IT departments use templates and reports that have been defined by the CFO. They believe that other business leaders will use these reports to understand IT’s spending, and what outcomes their business unit receives in return.
Although these reports make a lot of sense to accountants, they don’t match up to how IT is managed or the services IT delivers that often. Since most business leaders are not accountants either, the value of IT is often lost in translation. Just because we all look at the same reports in the same meetings, doesn’t mean we all understand them in the same way.
IT financial reports go into detail about what is spent on infrastructure, networks, application maintenance, security, etc. But they don’t show why that money is spent. For example, they may show that storage costs increased by 15%, but they don’t show that the R&D group requires real-time, high-speed, online access to historical data going back 50 years. So R&D complains that IT is slow and unresponsive, and others complain that it costs too much. The end result? IT is perceived to deliver a bad service that’s expensive!
How can Cost Transparency change this perception?
Rather than hiding costs, Cost Transparency helps us to report them in ways that business leaders can relate. The most important way is to link IT expenses to how business goals are achieved, and especially profitability.
Simply put, an organization is profitable when income is greater than expenses. There are two major ways to increase profitability:
- Grow income (sell more, open new markets, increase price, etc.)
- Reduce expenses (reduce duplication, find cheaper ways to work, cut “nice-to-have” components, etc.)
When your financial reporting shows income growth, the questions are: How can you grow more? What investment do we need to make?
When your financial reporting shows that you spend money, the questions are: How can we spend less? What can you cut from your budget?
If your IT financial reports are all about how much you spend, then there’s only one thing you can do to show value: Spend less.
Unless you can show that IT spending supports something that grows income.
Only then does IT’s value change, and it is seen as a protector of the technology investment and a supporter of income growth.
Cost Transparency does this by classifying expenses in more understandable ways, and then linking them to specific business units, processes or services – in ways that the business unit leaders and organization executives can see exactly what they spend and what they get in return.
The next article in the series will look at this process in more detail, and provide some tips on how to create value-based reporting.
* In this series of articles, David Cannon, ITIL® v3 author and ITIL® 4 Lead Editor, shows you how to use Cost Transparency to change your professional life and your standing in the organization to report the value of IT.