Technology Business OperationsJustifying the right level of IT administrative oversight for your organization
IT Financial Management forControllers and CFOs Conference
The World of IT Financial Management© 2009ITFMA
April 1, 2009
Diane CarcoChris Herman
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide1
Chris HermanIT Optimization Practice
Swingtide, Inc.
Who is Swingtide?
• Consultants specializing in Technology Business Operations (TBO)(TBO)– IT Business Center of Excellence– IT Cost Reduction– Outsourcing and Insourcing Advisory– Acquisition and Divestiture Support
• Focus on CIO Business issues– Proven methodologies applied by the people who developed them
A li h d f ti l t f fi t h i l d– Accomplished cross-functional team of finance, technical and contract/sourcing experts
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide2
What you will take away from this presentationWhat you will take away from this presentation
An understanding of:g• References for the general cost of administrative oversight• Setting the right level for administrative oversight of IT:
– Using analogies to establish an appropriate cost– Building a rationale from the cost of not managing
f f• A definition of robust IT administrative oversight: Technology Business Operations (TBO)
• A benchmark survey approach for establishing the right level in be c a su ey app oac o estab s g t e g t e eyour organization
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide3
HOW MUCH DO PEOPLE PAY FOR ADMINISTRATIVE
OVERSIGHT OUTSIDE OF IT?
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide4
The Cost of Administrative Oversight:What can we learn1 3 1 5%
18 5 19 5%
What can we learn from these examples?
10%
1.3 – 1.5%: Mutual Fund Management as % of funds managed
20-30%:Executive
18.5-19.5%: Cost of fund raising as a % of funds raised
10%: G&A expense as % of revenue: Large Company
managed2-4%:Sports agent’s
commission
Search Fees
0% 5% 10% 15% 20% 25%
.03%: Audit
25%: G&A expense as % of
9.5-10.5%: Salary of Orchestra Conductor as % of
Orchestra revenue 10-15%:General
function expense as % of revenue
3-4%: The amount of the annual deal value that Gartner says should dedicated to managing an outsourcing
expense as % of revenue: Small Company
Contractor as % of total
job
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide5
a ag g a outsou c gagreement
Observations
• When administrative oversight functions are f d ll thperformed well, they are…
I• When not performed well problems surface as specific
I• When not performed well problems surface as specific
symptoms• Symptoms tend to attract solutions that only address• Symptoms tend to attract solutions that only address
symptoms
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide6
ObservationsObservations
• Administrative oversight is required:• Administrative oversight is required:– World experience in many domains shows it’s irresponsible not
to have administrative oversightg– It is necessary because it optimally enables underlying
services being delivered– It allows development of a systemic ‘root cause’ approach for
the proliferation of symptomsIt i th l f ti it t d t “ th f t” ( f t )– It is the only function situated to “see the forest” (or forests)
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide7
Using Analogies to Establish the Right Level• Analogy 1: The cost of governance is to the annual cost of an
outsourcing deal as the cost of IT Administrative Oversight is to the cost of IT Service Delivery (3 4%)cost of IT Service Delivery (3 - 4%)
• Analogy 2: G&A Expense is to Corporate Revenue as IT Administrative Oversight Expense is to IT Budget (10 – 20%)g p g ( )
7% to 10% is the Best Answer reasoning from analogies7% to 10% is the Best Answer reasoning from analogies
Decrease since corporate revenue includes a profit
Increase since much administrative oversight is included in the scope
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide8
pcomponent
pof the transaction
The Cost of Not ManagingWhat you hear
when you don’t have the right
CFO #1 (w/Internal IT service delivery): “I don’t understand my IT costs; I think we
administrative oversight
don t understand my IT costs; I think we should outsource.”
CFO #2 (w/Outsourcing in place): “Why am I not getting the savings I expected from this outsourcing agreement?; I’m bringing the service back in-house.”
You’re told of the divestiture of a Business Unit and the BU wants to strip away all ‘their’ Oracle licenses. You have no idea whatOracle licenses. You have no idea what licenses might be owned by the BU
Your email storage costs grow without limits; you’re always throwing money at it
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide9
you’re always throwing money at it
The cost of not managing wellWhat do you experience without it?
g g
• Lease payments beyond the end-of-term on nonexistent or obsolete assets
• 20% year on year storage cost increases• 20% year-on-year storage cost increases• Repetitive and frequent mainframe upgrades• Aggregate project benefits exceeding your total budget…(i.e.,Aggregate project benefits exceeding your total budget…(i.e.,
overlapping benefit claims that strain credibility)• ARC charges under an outsourcing agreement:
– Assessed based on contested levels of consumption – Exceeding total planned cost for the deal
Penalties from software license audits (or even if no penalties are• Penalties from software license audits (or, even if no penalties are assessed, then unbudgeted capital/expense to pay for undocumented licenses in use)
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide10
The cost of not managing wellWhat do you experience without it?The cost of not managing well
• Paying 5X of the revenue generated for a hosted app• Your company does layoffs while there are major unexplored
efficiencies to find in IT hardware maintenance andefficiencies to find in IT hardware maintenance and telecommunications
• Rejected tax deductions for work done in other countries• Pending audit points• Business demand is more variable than IT cost structure
S i ( t th d ki d)• Surprises (not the good kind)• Constant firefighting
Without the right administrative oversight, companies experience up to 20-30% excess cost
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide11
How much would you pay for a function that eliminates these exposures?
Cost of running TBO FunctionTBO Function
20-30%TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
Slide12
What do we mean by IT Administrative Oversight? T h l B i O ti (TBO)
CIO
Technology Business Operations (TBO):
AMO(Applications)
ITO(Infrastructure) TBO( pp ) ( )
• Asset Management• Budget/Forecasting
Ch b k• Chargeback• Communications• Compliance• Cost Management
C t R l ti hi• Customer Relationship Management
• Governance• Process Improvement
P j t P tf li M t• Project Portfolio Management (PMO)
• Reporting/Dashboards• Technology Sourcing
Thi d P t M t
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide13
• Third Party Management• Work Intake
TBO Definition:
WHAT: A cross-functional IT business office that optimally enables the efficient delivery of the core IT function (applications and infrastructure)
WHO: A unified team staffed with subject matter experts in IT Finance, Sourcing, and Technology
RESULTS IN: The best alignment with internal customer business goals matching spend to value
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide14
Why is TBO Important Now?
• IT Management has evolved from high-growth
Why is TBO Important Now?
phase to maturity phase– Most IT projects no longer have enormous ROIs. p j g
This, in addition to the difficult economy, require more precision in management and oversight
– Focus is shifting to the overall business of IT– Shift from cost center to profit alignmentShift from cost center to profit alignment– Complexity of task requires new combination of
skillsskills
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide15
Why is TBO Important Now?y s O po ta t o• A recent survey indicates that nearly half of
corporate CFOs believe that the alignment of business and IT to be weak or nonexistent
• IT/Finance convergence now seen as necessary for companies to maintain competitive advantage (David Wessels, Wharton School)
• Organizational trends indicate an increasing likelihood that CIO is a straight-line report to CFO
• With the increasing visibility of the IT finance function, CIOs and others will be seeking help to improve TBO effectiveness
• The assimilation of the IT function: “Seven or eight years from now, one of two things will happen: you’ll either see CIOs become more business oriented, or you’ll see IT become such a fabric of business that business leaders become more tech competent.”(Russell Reynolds Associates)
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide16
Associates)
Benchmark: Review of the budget numbers of large well-run companies reveals the
following average budgetary split
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide17
Benchmark for level of TBO spendBenchmark for level of TBO spend based on survey results
CIO
AMO(Applications)
ITO(Infrastructure) TBOIT Expense (Applications) (Infrastructure) TBO
RTB* 24% 48% 8%
IT Expense Budget
Projects* 20%
*Th b t l d
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide18
*These numbers represent average values surveyed
ConclusionPeople accept that there is a cost associated with an administrative• People accept that there is a cost associated with an administrative oversight function. This cost reflects the value of optimally enabling an underlying function
• The most analogous examples to the management of IT are:– The % of G&A to corporate revenue (10%-20%) and;– The % of annual outsourcing deal cost committed to governance (3-4%)– With logical adjustments, these analogies suggest a rate of 7-10%
Th t f t idi th i t d i i t ti i ht• The cost of not providing the appropriate administrative oversight could be as high as 20-30% of IT budget
• On average well run companies spend 8% of their IT expenseOn average, well run companies spend 8% of their IT expense budget on this function
• While it may be tempting for corporations to reduce staffing in TBO areas, now more than ever companies need to continue to commit resources to a TBO approach to managing IT. Correctly implemented, it creates the best alignment with internal customer
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide19
p , gbusiness goals, matching spend to value
Thanks!Thanks!Contact me with any questions or comments.
[email protected]@swingtide.com
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide20
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