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.

 

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