The Complexity of Cost: the core elements of an ICT cost model Reply

cost model. financial modelThere are 2 reasons why IT cost cost reduction strategies are so difficult:  Firstly, many of the benefits of ICT are intangible and it is difficult to trace their origin.  It is hard to determine the value of increased customer service or the increase in productivity from better search and retrieval of information.   Secondly, many of the inputs which actually make IT systems work are left unaccounted for and unaccountable.  The management glue which implements the systems (often poorly and contrary to the architecture) and the project tools, systems and methods which build/customise  the system (because IT, unlike standard captital goods, is often maintained as a going concern under constant development, e.g. upgrades, customisation, workflows etc) are very difficult to cost.

Standard IT cost models only account for the hard costs of the goods and services necessary to implement and maintain the infrastructure, applications and ancillary services.  Anything more is believed to be a project cost needed to be funded by the overhead.

This is unsatisfactory.

The value of technology systems – embedded systems excluded – is in the ability of information workers to apply their knowledge by communicating with the relevant experts (customers, suppliers etc) within a structured workflow (process) in order to achieve a corporate goal.

Capturing the dependencies of knowledge and process within the cost model, therefore, is critical.   Showing how the IT system enables the relevant capability is the critical factor.  A system is more valuable when used by employees who are trained than less trained.  A system is more valuable when workers can operate, with flexibility, from different locations.  A system is more valuable where workers can collaborate to solve problems and bring their knowledge to bear on relevant problems.  So how much is knowledge management worth?

The full cost of a system – the way they are traditionally modelled – assumes 100% (at least!) effectiveness.  Cost models such as COSYSMO and COSYSMOR account for internal capability with statistical coefficients.  Modelling soft costs such as information effectiveness and technology performance helps the business define the root causes of poor performance rather than subjective self-analysis.  If a firm makes the wrong assessment of capability scores in COSYSMO the projected cost of an IT system could be out by tens of millions.

Financial models for IT should therefore focus less on the cost of technology and more on the cost of capability.  The answer to this is in modelling soft costs (management costs), indirect costs and project costs as well as the hard costs of the system’s infrastructure, apps and services.

 

Never Calculate Without First Knowing the Answer! Reply

The core problem in modeling of anything, especially of project performance, is not understanding what the answer should look like. This leads to naive and uninformed decisions. Know what you’re looking for before you start looking for it, than you’ll have a higher probability of recognizing it when you see it.

via herdingcats.typepad.com

One senior executive of a financial institution was recently reminiscing about the implementation of probabilistic modelling in his organisation.  He said that Monte Carlo analysis was implemented, enthusiastically at first, but then the joy died down.  

He explained how they had a number of investments and projects within a range of portfolios.  Each one showed a 100% chance of success when the financial models were simulated.  Limited attention was paid to these projects as they ran their course and each one suffered catastrophic losses.  How could probabilistic modelling fail them so badly?

For any mildly experienced manager at a financial institution there would have been a gut feeling for standard risks.  Senior managers would have know, roughly, the risks and opportunities on each project – within range.

The key to decent probabilistic modelling is to infuse some element of Bayesian analysis, i.e. build in what you do know to what you don’t know.  This will not only help improve the granularity of the model itself (and therefore the usefulness of the simulation) but it will also limit the uncertainty of the critical ranges themselves.

The Complexity of Cost (Pt.2): a 3-tiered strategy for an effective ICT cost reduction program Reply

cost-reduction

In our last blog we recounted that most ICT cost reduction programs fail.  More to the point, we noted how they fail in larger businesses through a vicious cycle following increased overhead from poor process analysis.  All this stems from a limited view of direct and indirect ICT spend.

In summ, the answer is detailed cost modelling of ICT which analyses the firm’s technology in its place as a business capability enabler. This is vital in the current economic climate otherwise businesses will simply benchmark their costs against similar firms rather than try to pare ICT costs to the bone.

The results of traditional IT programs?

  1. ICT cost reduction programs usually only attack the easy and obvious.  For sustained cost management in ICT the cost reduction program needs to attack:  (i) soft costs (indirect spend), (ii) managerial costs and (iii) program costs as well as all the standard hard costs.
  2. Cost cutting reduces capability.  Traditional approach is to cut applications and services as well as heads but capability will eventually suffer.  Senior people are often made redundant was work is pushed from higher to lower paybands.  With them also goes much of the firm knowledge capital and goodwill of the firm.  If we want to quantify this cost of lost knowledge it is the difference between the market value and the book value of a business.

The problem is that IT is usually seen as a black box.  Few senior executives understand the subtle dependencies which stretch from technology throughout the business.  More importantly, few understand that actual capex and opex of ICT  just represents the hard costs of ICT.  In addition to the hard costs are the soft costs, the management costs and the program costs of ICT.  In more detail:

  • Soft Costs relate to all the indirect spend which flows from ICT procurement.  This may include travel for non-IT personnel involved in change, training and customisation or process change etc.
  • Managerial Costs is the accumulated cost of decision making from management.  This is pure overhead and is not accounted for in the Cost of Goods Sold but rather shows up in bloated Sales, General & Administrative (SGA) accounts.
  • Program Costs are the costs of running ICT programs beyond the costs accounted for in the various cost allocation systems.  These can be the cost of running distributed teams, the cost of low development capability etc.  Such cost coefficients are statistically generated.

On top of all these are the hard costs of ICT.

Borrowing diagrams from Accenture  the solution is to run a 3-tiered cost reduction strategy:

strategic cost management.accenture

After the easy stuff is done, the business must ultimately streamline its processes (and align cost structures accordingly) and then lower it non-discretionary spend.  The key is to (i) see the whole process, (ii) understand the dependencies, and (iii) engage locally.

  • Minimise (Hard Costs) –  Tactical Cost Reduction. Grab the low hanging fruit and take out the obvious costs; the costs in plain sight.  Engage locally with account managers and business unit leaders to reduce headcount but understand and model the dependencies by seeing the whole capability.  The Boston Consulting Group advise that managers proceed on third of a third rule, ie 1/3 of all FTEs are non customer facing and 1/3 of those can be removed without adverse impact on the business.
  • Optimise (Soft & Program Costs) –  Proactive Cost Governance.  This involves detailed spend analysis and process optimisation.  Indirect process costs grow like barnacles on a ship.  The longer they are there the more they are accepted but ultimately they increase the financial drag on a business.  Remove all the invented tasks by modelling the firm’s value chain and seeing where the processes fit into larger business capabilities.  Once this is done executives can optimise the key cost drivers and their inputs.  This improves the delivery model for ICT and enables better demand management.  Accompanying these operational actions the business should improve cost governance.  It can achieve this by removing the management structures around excessive process governance.  This requires a more active and dynamic GRC system but ultimately the business feels a lighter GRC touch.  Most importantly, simplify processes and remove the  ‘cost of complexity‘ ie vertical integration and convoluted workflows which increase process time and transactional costs.

cost reduction level.accenture

  • Re-design (Program & Managerial Costs) –  Strategic Cost Management.  In order to achieve significant and lasting cost reduction benefits the business must lower its discretionary spend.  However, managerial cost structures (which are significant) can only be made redundant when the overall complexity is reduced.  Once this happens shared services may be implemented and rationalised.  The ICT offering can be standardised and the business can create re-usable technology components.  Then the business can change its transfer pricing models and look towards offering the customer-facing SBUs a more sophisticated multi-channel mix of capabilities, ie give them the agility to increase their high-end customer offerings.   Only once this is achieved can the business look towards modernising and streamline technical architectures.

The key is to look at ICT as a capability enabler and not as a business unit in its own right.  ICT should have to justify its very existence.  However, once it does and develops full cost transparency then and only then can it move forward in real partnership with the business.

 

The Complexity of Cost (Pt.1): problems with ICT cost reduction Reply

cost reduction

In a crisis the company P&L statement can be a useful starting point for cost reduction programs.  Over the long term, however, general ledger entries do not have the required level of detail to garner the requisite per unit analysis (McKinsey, May 2010).  Unfortunately, few companies do not have systems which can analyse the complexity of cost and spend in order to make accurate and detailed changes.

In the following series of blogs we will highlight the problems with standard ICT cost reduction & management programs and detail how to structure and run one effectively.

The key to an effective ICT cost reduction & management program is detailed cost modelling.  Most financial systems do not capture costs at the right level of detail for businesses to perform accurate and detailed cost reductions.  Businesses need to perform intricate spend analyses and build up intricate cost models for ICT which highlight the following:

  • The capabilities which various ICT components support (and where in the Value Chain they lie).  Only through this level of visibility can the business consolidate their ICT spend.
  • The HR and process dependencies which are indirectly attributed to various ICT elements.  Only with this level of detail can ICT remove duplication and redundancy.

In the absence of this granularity, cost reduction programs invariably fail or fail to stick.  In fact, McKinsey & Co note that 90% of cost reduction programs fail.  Only 10% of these programs actually succeed in realising sustained cost management three years on.

In a typical IT cost reduction cycle the following happens:

  • Headcount is reduced.  The remaining people then have to work harder (but with fewer skills, because tasks are pushed to the lower pay bands) to achieve the same amount of work.
  • Many, often unique, soft skills are also removed (from experienced people in the higher pay bands) in the redundancies.
  • Overall service levels decrease.
  • Further cost reductions are then required and some applications and services are axed.

In simple businesses this is not a problem.  In large and complex businesses the outcome usually follows a vicious cycle, namely:

  1. The firm still needs to retain a significant management overhead in order to deal with complexity.
  2. In these cases, poor transfer pricing and high overhead allocations mean that perfectly good, competitive core business process seem cost-ineffective.
  3. Critically, Kaplan notes in his seminal work “Relevance Lost: The Rise and Fall of Management Accounting” that the increased costs of  processes leads to outsourcing of perfectly good processes.
  4. Capability suffers and the  business loses competitive advantage.
  5.  The business is no longer able to deal with the level of complexity and complexity reaches an inflection point.  The business outsources the whole problem (eg, large ERM programs with much customisation),  getting locked into  horrific terms and conditions.
  6. Core business is lost and competitive advantage is reduced. Remaining managers pad out their budgets with excessive risk and contingency in order to shield themselves from further cost reductions.
  7. Overheads increase again and the business eventually prices itself out of the market.

cost reduction.accenture

In a recent (2010) Accenture survey on general cost reduction effectiveness in the banking industry, 40% of  respondents noted that the program has reduced overall ICT effectiveness and impacted adversely on both customer service and general management.

in order to reduce costs effectively without impinging on capability as well as making new costs stick, it is essential to view costs and spend at the most granular level possible.

In our next blogs we will go into detail how to structure and run an effective ICT cost reduction and cost management program including effective ICT cost modelling.

 

The Law of Mobility: The legal implications of BYOD 2

BYOD

The legal ramifications of moves towards corporate Bring-Your-Own-Device policies extend far beyond simple issues of IT security and the legal discovery issues of locally held commercial data.  The biggest challenge facing the commercial world is how far businesses will have to go in regulating the online life of an employee.

Most companies have a dusty old clause in their employee contracts which states that there is no privacy in the use of firm equipment.  Recent proposed legislative amendments in the US and cases in Canada (R. v. Cole, 2012 SCC 53) clearly show that the use of social media on corporate platforms is (a) increasingly permissible  and (b) restricted from company access.  More importantly, it highlights how corporate and personal data are being blended together in a socio-corporate online collage.

Previously, companies and government departments have been able to ignore personal cries for BYOD due to: (i)  enterprise security concerns, (ii) legal risks around e-Discovery (iii) a perception of limited utility in social media and (iv) cost pressures relating to IT support costs.  However, now:

BYOD,McKinsey.Graph

  1. Enterprise security is no longer an excuse.  Increases in corporate cloud-based applications and desktop virtualisation mean that limited data is stored or cached on local devices.  In addition, any security breaches can be isolated to a certain user profile.  In the end, Bradley Manning and Wikileaks highlight the fact that there is little that will stop a disgruntled employee if they are intent on data theft.  Heavily layered, holistic security is the only answer.
  2. Mobile connectivity and enterprise workflows reduce local data storage.  Previously, compliance requirements for eDiscovery have limited the ability to store data locally.  However, mobile coverage is now better and  costs have reduced for 3/4G  and wifi acess.  Coupled with cloud/virtual apps and the ability to sign-in/sign-out documents from company portals means that firms can reap the benefits of extended and flexible working along with greater Discovery compliance.
  3. The benefits of social media have extended the boundaries and time of the corporate workplace.  Corporate blogging has now, apparently, increased to 38% with two-thirds of companies having a social media presence (beyond the 50% level in 2009).  Social media not only provides additional channels for marketing but it also increases both external and internal customer/stakeholder engagement (and such engagement extends both beyond the doors and timeframes of the office).
  4. Multi-Device support does not require bigger IT departments.  In fact, support is far more user-friendly (e.g. Salesforce.com, MS 365 etc) and has not resulted in burgeoning IT departments.  Companies can specify what devices they do support and outsource platform support to infrastructure providers.

The fact of the matter is that companies and government departments must move to BYOD sooner rather than later.  In a recent article, Elizabeth Johnson of law firm Poyner Spruill LLP notes that in the US:

  • 87% of people confirm that they use personal devices at work.
  • 48% of companies state that they will not allow it.
  • 57% of the same companies acknowledge that employees do it anyway.
  • 72% check email on their personal devices.
  • 42% check email on personal devices even when sick.

In fact, many US college students claim that they would accept lower pay for the flexibility to use personal devices at work.  Whatever the case the creeping cloud of BYOD will take hold, if only due to the cost benefits of not having to pay for new devices enabled by better enterprise apps and improved enterprise security.

I would posit that much of blame for limited uptake can be laid on the fact that organisations are simply unwilling to deal with the additional layer of complexity.  BYOD lies at the nexus point of enterprise trust:  their data in your hands.  How far are companies willing to let go of their information in order to reduce costs and increase productivity?  Will the law protect commercial interests in data rather just IP? Or computer based personal records?  In the case of Phonedog v Kravitz the employers (Phonedog) set up the Twitter account “@PhoneDog_Noah”, which the employee used “to disseminate information and promote PhoneDog’s services.”  During his employment, Kravitz’s Twitter account attracted approximately 17,000 followers.  When he left he kept using it and gained another 10,000 followers.  Phonedog claimed that the account was theirs and sued for damages.  The court was satisfied that an economic interest was established and that harm was done.

In brief, the answer is that companies need to define the touchpoints where their data meets the social sphere.  If businesses are to reap the benefits of increased customer/stakeholder management through wider adoption of emerging social software platforms, enabled by BYOD then they need to deal with the added complexity at the nexus point of security, legal and information management.

 

The Social Enterprise: what will business 2.0 look like? Reply

social-enterprise

If Andrew McAfee‘s book “Enterprise 2.0: New Collaborative Tools for your Organization’s Toughest Challenges” is to be believed then:

“We are on the cusp of a management revolution that is likely to be as profound and unsettling as the one that gave birth to the modern industrial age. Driven by the emergence of powerful new collaborative technologies, this transformation will radically reshape the nature of work, the boundaries of the enterprise, and the responsibilities of business leaders.”

Most pundits believe that Enterprise 2.0 is the full adoption of Web 2.o by an organisation.  In the next few years, therefore, we will see:

  • Cloud technologies and better enterprise application security enable bring-your-own-device and with it the greater fragmentation of organisational information.
  • Greater transparency of organisational work through social media leaks (i.e. people advertising their work and mistakes on the internet)
  • The decomposition of many more business processes into micro-tasks (much of which can be outsourced or contracted out).
  • The improvement of distributed working practices enabled by better collaboration tools, devices and connectivity.
  • Increased pace of business through improved self-governance and, in turn, empowered by better oversight (from GRC and finance software to more pervasive CRM implementations).
  • Shorter time-to-market cycles driven by improved idea generation and organisational creativity (so called – ‘ideation’).

So, is Enterprise 2.0 the social enterprise?  Are the benefits of Enterprise 2.0 merely social?  Simply a more hectic work schedule enabled by greater ease of using mobile devices and tighter communities of practice?

McKinsey Social Enterprise

A 2010 survey by McKinsey & Company found that most executives do believe that this is the sum total of Enterprise 2.0 benefits.  Most simply believe that (i) knowledge flow and management will improve.  Many believe that (ii)  their marketing channels will be greatly improved whilst only a few believe that (iii)  revenue or margins will increase in the networked enterprise.

If this is the dawn of the new enterprise then why do so many large businesses find it difficult even to implement Microsoft SharePoint?

The most likely truth is that this is not the dawn of Enterprise 2.0.  We are probably not on the cusp of a grand new age of information work.  Our businesses are unlikely to change significantly, although the hype will be re-sold by IT vendors for some time. One only has to hearken back to the ’80’s to remember to cries of the ‘paperless office’ to realise the low probability of Enterprise 2.0 materialising.

Whether it will be Enterprise 2.0 is debatable but we are entering the age of  The Social Entreprise.  It has ushered in a new age of commercial culture but it will unlikely herald a paradigm shift in commercial structures.  The truth is that human networks and communities operate in parallel to corporate reality.  Networks are how humans interact  – they are not how humans are paid.  Ask anyone who has ever been through or performed a cost reduction exercise.  In short, emerging social software platforms (ESSPs) are fun and sexy but the do not currently affect operations in most businesses.  Emerging social software platforms will make a difference internally when they affect cost structures and not just when they show up in sales figures.  This means that ESSPs need to be able to track and apportion innovation; they need to actively manage workflow (not just passive engines); they need to engage dynamically in governance and highlight good corporate participation and collaboration.   Only once these elements are incorporated into scales of remuneration and talent sourcing will both the enterprise and the workers benefit.

Maybe then we can move to Enterprise 3.0.

Will the HR Function Survive Enterprise 2.0? 1

HR

What will HR look like in the future?  If recent articles online are to be believed then the HR function will be more powerful and more important than ever.  We do know the following:

  • We do know that the standard job market will become more fragmented as better information management allows much work as we know it to become commoditised.
  • We do know that in a world where executive education is highly specialised and more competitive the acquisition of top talent will become more difficult as senior executives look for a richer, more cross-functional, more multi-disciplinary skillsets in their stars.
  • We do know that top execs will add complexity to HR through cross-functional skillsets (i.e. top talent will be less obvious because they will not necessarily rise in vertical portfolios.  The best project manager may also be a registered psychologist, for instance).

What we do not know is just how the enterprise will react.  The onset of better databasing technologies and mobile methods of capture did not ease the information management problem in organisations (rather it has just created mountains of unmanageable data).

  • So, will the  fragmentation of the labour market and the rise of cross-functional skill sets add too much complexity?  Will the HR market be able to cope?
  • Will the HR function reach an inflection point where complexity is too great and the entire function is outsourced completely? Or,
  • will better information management allow line managers to integrate talent sourcing directly into operational business processes?

Future of HR.ChartIf a  recent (27 Sep 2012) survey by KPMG is an indicator then cost pressures in businesses mean that they will have to get smarter about HR if they are to remain competitive.  In boom times even with 35% of respondents arguing for greater direct collaboration with operational management, it is unlikely that even this volume of vociferous response would change the HR paradigm.  However, with the cost pressures at almost unbearable levels and social media increasing the transparency and speed of operations, it is unlikely that the HR function will survive even as it stands today.

The following outcomes are likeley: (i) Commoditised work will be consumed by line management into standard operations, and (ii) top, cross-functional talent will be outsourced to ever more high-end boutique HR consultancies.  Smaller HR firms will fall by the wayside but the high-end firms will demand higher margins and their clients will demand greater results.  It is possible that, much like IT services of the ’90s boutique HR consultancies could take stakes in realised profit that certain new-hires make.

Whatever the answer is it will be global and there will be big money in it.

Enterprise Architecture:why EA programs fail to deliver Reply

Enterprise architecture has long promised the alignment of the technical ICT of the organisation with its business strategy.  For the same length of time it has steadfastly failed to deliver this.  In order for enterprise architecture to (a) deliver alignment, and (b) execute strategy it must incorporate commercial concepts within the metamodel so that it may directly use both financial analysis as well as legal parameters.

Enterprise architecture has never been solely about infrastructure.  Enterprise capacity can easily be catered for in data centre management.  Enterprise architecture has been largely focused on enterprise applications integration.  Integrating data models and their schema across the distributed enterprise to create harmonious workflows for the fewest people promises to realise the goal of reducing labour whilst purchasing the cheapest software.  Enterprise architecture should be about driving the development of ICT architectures and business process directly from the value chain.

Enterprise architecture still provides businesses and departments with the greatest hope for the harmonious analysis and development of the enterprise.  It fails largely, however, for the following reasons:

  1. Complexity of Metamodel.  Financial language is not generally incorporated in the language of metamodels.  It is possible but not generally done.  When I was at EDS Value Management was an architectural discipline within the Agile RightStep® architectural framework.  Whilst at Serco a number of us tried to incorporate value against the various objects in architectural models withing the MEGA® modelling suite.  However, in order to take advantage of financials modelling tools would need to incorporate stochastic simulations and not just discrete event simulation into their analytical capabilities.  This explains the disparity, often large, between architectural models and financial models.
  2. Systems Engineering.  EA still remains largely focused on enterprise systems engineering.  It needs to shift its focus to enterprise engineering systems.  Where the former focuses on the minutiae of systems interaction the latter is concerned with the integration of one engineering system to another.  If the enterprise sees the financial function as an engineering system then enterprise architects should be able to use their ontological skills in metamodelling to create seamless pull-through of analysis from Finance to Design.  Some of these concepts will be explored in a later blog.
  3. Complexity of Programs.  EA still remains an ICT skill used to support large programs.  In order to capture enterprise relevance it needs to elevate itself from the technically complicated to the organisationally complex.  Given that information systems largely exist to reduce organisational entropy, one of EA’s greatest benefits will be to realise the harmonisation of working practices and not merely implementing monolithic technology.
  4. Lack of Financial Relevance.  EA needs to support value management and not just technology management.  This is as much a problem of program selection as it is the extension of the metamodel.  Automating the Balanced Scorecard  still remains one of the best initial EA programs there is.  It is relevant to both the C-suite as well as providing a direct and tangible impact on the measurement of strategy execution and financial management.

The answer, therefore, is to focus on capabilities and not on architectures.    The former delivers measurable commercial value but the latter will consume the enterprise in a needless pursuit of perfection.  In our next blog we will examine how to architect capability directly from the value chain.

How will enterprise Architecture Reduce Legal Costs? Reply

In mid 2009 I received an e-mail from Mark Hurd, then CEO of Hewlett Packard.  This wasn’t unusual because I was at EDS UK and we all got an e-mail from our new CEO.  He wanted to explain that over and above the 26,000 people he was already getting rid of in the new enterprise there would be further reductions.

Why?

He went on to write that earnings were down 20% so his investors wanted to know when he was getting rid of another 20% of his workforce.  He went on to add that he was resisting their advice as it would hurt us on the rebound.

Clever Mark.

The point of the story is how one determines, precisely and effectively, what are the right parts of your cost structures are the ones to get rid of?  Typical commercial reasoning suggests that the best cost structures to cut are: headcounts, marketing, training, procurement and travel.  These are the easiest but you don’t have to be Lou Gerstner to realise that you shouldn’t cut marketing or travel in a downturn.  Pick up any edition of HBR and you’ll know that you need to focus on core business and cut the rest.

So how do we find core business and what on earth does it have to do with my legal costs?

Have you ever done a push-up?  What muscles do you think are used? Chest? Yep. Triceps? Oh yeah.  What about anterior deltoid? What about the supraspinatus or the infraspinatus or the teres minor? What about the teres major and the suprascapularis? These are all synergistic muscles in the push up that help hold your shoulder girdle stable and stop you toppling over to one side.  Likewise with business.  There are an enormous number of synergistic activities which assist core processes.

Don’t worry we’re getting to the bit about legal costs.

Your core business will be the fundamental raison d’être of your company.  For instance.  You might think that you own a network outsourcing company but when you ask yourself why your company really exists and what it seeks to really achieve, you might find the answer being that it transforms the customer relations of client companies? Now you need to determine what are all the essential processes which support transformation (which we’ll look at another time)After that one must discover the dependent, people, information, systems and infrastructure for these processes.

That’s the easy bit.

Now you need to architect it into some form of commercial reality and make it happen.  Once this beautiful strategy is executed in a new and improved operating model you will be left with a pile of paper which enshrines the agreements you have made with partners to make this reality.  Contracts – and they don’t come cheap.

Did you notice a theme?  I talked thereabove about the seamless architectural process which blends to bring synergy to the design and form of your new business.  The realistic amongst us will know there is always a great crash as the momentum behind any deal brings it into contact with the immovable object of the law.  The beautiful deal we created is then mangled through lawyers until what we wanted is barely recognisable.

What if this horrid legal process was an integrated part of the architectural process?  What if our business architects, our technicians and deal-makers were all joined in a common, collaborative architectural process which derived legal clauses directly from the technical and commercial detail of the deal?  Wouldn’t the contract then become a dynamic and fluid document which formed part of the management of the program?  Wouldn’t the contract(s) be lean, precise and swift to negotiate and put in play?

Welcome to Citadel, where enterprise architecture meets the law.

Strategies for Increasing Return-on-Information Reply

The key to gaining more financial return from corporate IT systems is to increase the value added by management.

Technology which is implemented by profit centres and is specifically designed to support operational, revenue raising workflows (such as in the financial services or insurance sectors) may be measured through standard Net Present Value calculations.  If it directly increases cash flow then there is little problem in measuring its value.

In corporate systems which are generally considered ‘overhead’ it is much harder to assess whether a system has been worthwhile let alone profitable.  How does a business assess the value of the company portal?  How do they assess the value of information management systems?  In most of these instances the business case for a new portal can simply be justified on the basis of (a) better user interface (often classed as the ‘user experience), (b) need to upgrade the current application, and (c) need for greater compliance.  A cost analysis does not need to be run because the business needs some sort of portal and is not going to get rid of it, so the point is moot.

This is an appalling way to buy large corporate IT.  Companies which purchase systems without rigorous cost analysis and a commitment to longer term cost reduction may reduce the lifetime costs for the simple capital purchase but massively increase the overall cost of IT throughout the enterprise in 3 ways:

  1. Increased Support Costs.  The cost of support, training and change per user is colossal for corporate IT systems.  Not only are support staff expensive but management increases to control support staff and management costs are infinitely more expensive and harder to control.  With non-transactional systems such as portals and information management systems, management’s variable expenses also increase as the business tries to make the system work and fit into the business.  In such circumstances, CFOs should monitor variable expenses in cost centres as such costs would not have appeared in the cost model for the initial business case.
  2. Increased Transactional Costs.  Corporate transactions (the train of workflow) increases the further away information is from the customer.  Portals and information/knowledge management systems are about as far away from customers as information can get.  With each ‘transaction’ comes increased ‘setup’ costs as information is passed from management to management.  Imagine, as a customer request is passed from the service centre to management it gets closer to a portal system and passes into almost a corporate black-hole as management attempts to find answers to questions which loop endlessly.  Uncontrolled corporate workflow which increases transactions not only has the ability to increase management costs but it also has the ability to increase management.  Management needs to ensure that transactional costs are minimised by keeping workflows as close to customers as possible.  This is enabled by empowering service representatives to resolve customer disputes and queries themselves.  Management should, ideally, not seek to micromanage but rather train well and guide through detailed, flexible policy.
  3. Increased Vertical Integration.  With the complexity of modern systems, businesses have a propensity to duplicate roles or application functionality from shared service centres.  Companies can reduce vertical integration by (i) ensuring that non-operational workflows are stripped out of profit centres, and (ii) cost centres have a lower management-to-capital ratio.  Surveys have shown that companies can spend less than 10% on ICT budgets whilst still delivering 2% better productivity results.

Information is an incredibly valuable commercial asset.  In many cases, companies hold vast reserves of ‘intellectual capital’ which can be commercialised and valued with a modicum of effort.  In fact, companies should seek to understand the value of their information by constantly assessing the viability of divesting discrete parts of the business (for more on the value of an M&A approach,  follow this link).  Unfortunately, most businesses burn most of the value of their information through clumsy and blanket approaches to managing it.  By purchasing systems which can be directly associated with higher transactional workflow and reduced variable management costs the return-on-information is vastly increased.