Technology Business Management: Managing the Cost, Quality and Value of IT Services

TECHNOLOGY BUSINESS MANAGEMENTWHITE PAPER

Technology Business ManagementManaging the Cost, Quality and Value of IT Services

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Innovation is Your Business

EXECUTIVE SUMMARYIT is once again in the eye of the perfect storm. Enterprise CIO’s must manage IT budgets of hundreds of millions of dollars and reduce operating expense 10 percent to 15 percent year over year. While doing this, they must provide higher quality service that “aligns with the business” and manage a service delivery stream that is being turned on its head. Just another day in IT. Luckily for them, this is a path that manufacturing went down in the 1980s, and that industry can provide some valuable lessons to IT. One lesson on the road to Lean operations is that IT needs the systems and processes in place to run a strategic business function.

Technology Business Management (TBM) enables IT leadership to manage the business of IT. TBM provides IT organizations with the software and methodology to manage the cost, quality and value of their IT Services. TBM solutions enable IT leaders to have ongoing and credible discussions on the cost and value of IT with business unit leaders and executive management. It provides IT operations managers the insight and data to reduce the cost of operations while improving service quality. And it enables IT Finance to provide a fair and accurate Bill of IT back to the business and simplify the budgeting, forecasting and planning processes. TBM solutions ensure that decision makers on both sides of the IT fence have transparency into the cost and quality of IT in order to drive better decisions and alignment on the allocation of IT resources to business priorities.

Apptio is the leading provider of TBM solutions. Their suite of applications and SaaS delivery model provide IT organizations an efficient and cost effective approach to quickly adopt and realize the ongoing benefits of TBM.

LIFE IN THE PRESSURE COOKERI“Why does IT cost so much?”

“I can get email services online cheaper than this!”

“How much do we spend on eMail each year, fully loaded?”

“We just bought 24TB of storage! Where did it all go? Who’s

using it and how are we going to fund this?”

“What is the ROI on our server virtualization project?”

“I know we can save money in application rationalization, but

I don’t have the data to prove it.”

“We have to start the budgeting process in August to get it

all in by the end of the year, and it’s still never right.”

These questions and comments (or similar) are heard in

nearly every large enterprise IT shop around the world. IT has

grown so fast so quickly, it hasn’t had the time to build in

proper financial management systems or 21st century

business processes. Other business functions have

developed processes and systems to help them manage

their business. Finance has Corporate Performance

Management systems, Sales has Customer Relationship

Management, and Manufacturing has Enterprise Resource

Planning. You can be sure that most modern manufacturing

managers can tell you the cost to produce their widgets

down to the penny, including all material, labor, facilities and

operations costs.

“More than half of all capital spending by businesses worldwide goes to IT. Yet most non-technical leaders remain skeptical about whether their IT investments are paying off. They are frustrated with their IT departments - and they respond by putting pressure on IT costs.”-Richard Hunter, George Westerman. The Real Business of IT. How CIOs Create and Communicate Value. Boston, MA: Harvard Business Press, 2009.

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Technology Business ManagementManageing the Cost, Quality and Value of IT Services

However, IT has to deal with additional complexity as well.

They have a factory floor—IT operations—that changes on a

weekly basis due to new systems, new architectures and

new projects being deployed. Most IT shops also have a

significant amount of infrastructure that is virtualized, blurring

the lines of cost allocation. And finally, The Cloud provides

completely new, or possibly many new, supply lines for IT

service delivery that IT has to manage, provide cost

transparency and manage the cost and quality of IT service

delivery.

And all the while, IT’s customers (the business units) are

screaming “it costs too much,” “where’s my money going?”,

“why can’t I have 24x7 support service?”, and “I need more!”

IT leaders can no longer afford to calculate the cost of IT

services on spreadsheets. Nor can they put off implementing

real cost allocation systems (chargeback or “showback”) to

provide business users the proper financial reporting on

where they are spending their IT budgets. And they shouldn’t

settle for last-century processes for budgeting, forecasting

and planning while their business counterparts all have

better tools to do their jobs.

TIME TO LOOK AT THING DIFFERENTLY

To effectively and accurately manage the technology

resources and new investments of enterprise IT, new

methods and solutions are required. IT must think about

running IT more like a business. They should focus on three

critical elements:

1. Customer value -- Providing high value products and

services to their customers (the right service at the right

price)

2. Operational excellence —Continuously driving down the

cost of operations while increasing service quality

3. Strategic relevance —Increase the value of IT’s role in the

business through tighter alignment with business

priorities and a more proactive role in driving company

initiatives

Many IT organizations are adopting ITIL best practices in

mapping out the services IT provides to the business units.

This is the first step in aligning to customer value. And

indeed, ITIL guidelines are written to help IT align around the

value they are providing to the business. If IT is a factory,

the services it provides are the economic unit of value for

the business. To align on customer value, IT needs to

understand the total cost it takes to deliver those services

on an annual basis, communicate the cost, consumption

and performance metrics to the business consumers, and

have regular discussions on how the business values those

services. By having an open discussion between the buyer

and seller of IT services with full transparency into the cost

and performance of those services, the true value of

services will be understood.

Every business organization must continually improve the

cost of operations. But most IT shops actually have pretty

poor data on the total annual cost to provide IT services.

They can’t identify key IT cost drivers nor where to find cost

inefficiencies. Nor do they have the specific tools to help

analyze ROI or provide justification for cost reduction

projects. Without this data, operation managers are ill

prepared to effectively improve cost efficiency.

Successful manufacturing organizations and supply chains

have rigorous processes and sophisticated tools to track

and analyze the cost of production or supply at every step

of the operation. Whole teams are organized around

squeezing pennies out of a manufacturing line. And this is

not a once a year or quarterly process, but a day-in and

day-out part of every manager’s responsibilities. The

difference between manufacturing and IT is that

manufacturing has the tools and processes in place for

every manager to individually make better decisions on

reducing the cost of operations. IT does not.

With respect to strategic alignment of IT to the business, it

is critical to the success of the CIO to show the value of IT

to the organization. In doing so, CIOs build credibility in their

ability to run a financially responsible organiza tion that is

“Unit cost per service is a far better metric. It provides information that everyone can use and assess across enterprises…Such measures also help IT make the case that value-for-money performance is improving.”-Richard Hunter, George Westerman. The Real Business of IT. How CIOs Create and Communicate Value. Boston, MA: Harvard Business Press, 2009.

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aligned with the priorities of the business. But this is

something that is earned over time and as a response to

being successful in demonstrating customer value and

operational excellence. As any technology vendor to

enterprise IT organizations knows, you first have to prove

that you provide high quality product at prices better than

the competition, over and over again, before you gain the

trust, respect and credibility to become “strategic.” Beyond

that, the CIO must provide accurate and thorough financial

reporting. They need the ability to track business unit spend

on IT in order to manage a budget, plan accurately, track

common financial performance metrics like ROI, ROA,

CapEx vs. Opex blend, Fixed vs. Variable, and provide

proper transparency to all stakeholders. By running an

efficient organization, the CIO builds credibility and creates

the platform to drive more strategic initiatives.

For IT Operations, TBM provides insight into cost, quality

and utilization of IT services, at a granular level. This

empowers IT managers to make cost optimization decisions

and understand the impact of those decisions on the IT

services and users. Through greater insight, analysis, and

decision support tools, IT can reduce the cost of operations

by 10percent to 15 percent annually.

For IT Finance, TBM provides Service Costing and

Chargeback capabilities to drive better analysis of cost

drivers and financial reporting mechanisms. TBM also

delivers the Budgeting, Forecasting & Planning applications

to establish a system of record for budgeting and

forecasting, and to simplify the B&F processes for faster

cycle time and improved accuracy. Having a TBM system

of record automates the data acquisition and management

processes. This frees up IT Finance to provide more valuable

analysis, reporting, and recommendations.

For the business units —the owners of the IT budget--,

TBM provides transparency into IT spend. Finance leaders

can understand where their budget is going and influence

the future direction of their IT resources based on business

priorities.

For the CIO, TBM is a system to manage his or her business.

TBM provides the reporting and dashboards necessary to

manage the business performance of IT. It empowers the IT

team to drive cost optimization efforts at a grass roots level

and forces business leaders to become accountable for their

impact on IT spend. And it gives them the data to prove their

success and drive more important initiatives.

HOW THINGS WORK TODAYIn today’s world of enterprise IT, accurately understanding

financial aspects of IT is extremely challenging. Typically, a

sea of spreadsheets is used to figure out the TCO of IT. The

cost of assets—hardware and software—may be kept in IT

Asset Management systems, procurement or General Ledger

(GL) systems. Service Desk systems track labor resources in

operations, but rarely have cost associated with them.

Project and Portfolio Management tracks labor in

development and “Change the Business” (CTB) operations.

Any outsourcing charges usually come in a lump sum and do

not reflect their allocation to IT services as defined by the

“For some businesses, government, and non-profit organizations, the perceived lack of measurable value from IT investments results from the IT service provider’s ineffective business practices. Business Practices include the methods, processes, procedures and rules followed by an organization to achieve its objectives.”-Robert Ryan, Tm-Raducha-Grace. The Business of IT. How to Improve Service and Lower Costs.

This is the era of “Lean IT” and better business alignment

through a new paradigm in managing IT like a business. To

drive that transformation successfully, CIOs need the tools

and processes that businesses use to manage their cost

efficiency and financial performance.

A BETTER WAY TO RUN IT

This category of business management solutions for IT is

called Technology Business Management (TBM) software.

TBM is a promising new software category intended to

facilitate CIOs and IT Leaders in their understanding of

the cost, quality, and value of IT services. With TBM,

IT leverages accepted best practices of financial and

performance management systems used by other business

units and then applies those to the complex environment of

IT. This creates a better, consistent approach for IT business

management and the business overall.

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business. And facilities, administration and other costs are

lost in a myriad of spreadsheets.

To consolidate these costs and allocate indirect costs to

their respective IT services is a manual and painstaking

process undertaken each budgeting cycle. This process

results in IT and Finance regularly spending a ridiculous

amount of time to inventory and track IT assets. The

outcome at the end of this process is at best a point-in-time

understanding of the direct costs of IT Services with limited

ability to drive improvement decisions, provide proper

financial transparency or indicate quality or value. At worst, it

is only vaguely accurate, drives incorrect business behavior

based on unfair allocation policies and is out of date as soon

as it is complete. This drives financial reporting that is not

trusted, not widely distributed, and incapable of providing

the analysis capabilities to actually drive improvement

decisions.

MAJOR INEFFICIENCIES

Today’s existing methodologies for managing IT financial

costs are inefficient, expensive, and incomplete. IT Leaders

simply do not possess the data and tools necessary to make

good cost-based decisions, therefore leaving a lot of

inefficiency within IT. When TCO projects are undertaken

(usually on a yearly or greater basis), the data collection and

modeling take weeks to complete. The spreadsheet-based

cost models are overly complex and accessible to only a few

people, making them impractical for wide-spread data

analytics. This hampers individuals’ ability to understand and

cost optimize in their own domain.

Likewise, during the budgeting, forecasting and planning

process, the opportunity cost of labor is high. It is reported

that IT and Finance organizations can typically expend up to

10% of available staff hours on budget projects during

forecasting periods. Jack Welch, former CEO of GE, was

quoted as saying “The budgeting process at most

companies has to be the most ineffective practice in

management.” Again, due to the reliance on spreadsheet-

based, non-collaborative and manual-intensive processes,

the budgeting, forecasting and variance reporting times are

the bane of IT finance. And yet, why is it that IT is one of the

last groups to use these arcane processes and not take

advantage of 21st century technology?

INTRODUCING TECHNOLOGY BUSINESS MANAGEMENT

The Technology Business Management class of software

represents a new concept and opportunity in enterprise IT

Financial Management and planning. TBM brings parity for

CIOs with their counterparts in other business units such as

Finance, Manufacturing, and Sales by providing financial and

performance management capabilities. It leverages the well

known and widely accepted best practices of financial and

performance management, used regularly by other functions

in the organization, and now applies them to the complexity

found in IT environments.

TBM aims to help IT leaders manage the business of IT

through deep visibility into the cost of IT and improved

communication to the business units on the cost, quality and

value of IT. TBM allows for streamlined and more accurate

budgeting, forecasting and planning capabilities. TBM is

comprised of a complete suite of applications that provide

closed loop cost and performance management, cost

optimization, financial and performance reporting (i.e., IT

Cost Transparency), business demand-based budgeting and

forecasting, all within the construct of IT Services and the

ITIL framework.

IT SERVICES AS THE ECONOMIC UNTI OF IT VALUE

Central to the architecture of a TBM solution are the set of IT

Services delivered to the business. Organizing around IT

services provides a common language on which to align IT

with the Business and create a market for IT products. This

establishes a framework for IT to operate like a ‘business’

and manage the true costs and value of the services

delivered., IT can then make supply decisions based on

demand and weigh market alternatives (cloud, outsourcing)

on equal terms. In addition, IT can establish a credible

baseline unit cost of each service and acquire visibility into

“Techniques in this category (Reduce Resource Costs) will usually pay back within a year, and have the potential to reduce the IT budget by 10% to 20% when combined.”-A Checklist for Cost Optimization. Michael Smith, RichardHunter, Barbara Gomolski. Boston, MA: Gartner, May 2009.

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the discrete cost drivers of each service. By tracking the cost

per business service, IT leaders can communicate with

business leaders in a language they understand, manage

demand for IT Services, and better align with business

priorities.

TBM gives the CIO the cost and quality data and system of

record to drive cost efficiency within the IT organization and

the reporting to drive alignment across business units. The

CIO now possesses the data and business case to drive the

strategic initiatives necessary to take the business where it

needs to go.

THE BENEFITS OF TECHNOLOGY BUSINESS MANAGEMENTOrganizations realize benefits from implementing a TBM

solution in three main areas: IT Cost Transparency,

Communicating the Cost and Value of IT and Improved

Budgeting, Forecasting and Planning Processes.

ACHIEVE IT SERVICE COST TRANSPARENCY

IT Service Cost Transparency provides deep visibility into the

true costs and cost drivers of IT services. A clear

understanding of the unit cost drivers along with powerful data

analytics and “What If” scenario analysis enables IT managers

to root out cost inefficiencies and make cost optimization a

continuous and organization-wide effort. Cost data can be

input into the TBM system directly or via spreadsheets. For

true activity-based costing, TBM systems can be integrated

with existing IT management systems (Asset Management,

Service Desk, PPM, etc.). As a result, organizations will find it

possible to reduce the cost of IT operations by 10 percent to

15 percent year over year.

Fair and accurate service costing also becomes the basis for

proper chargeback policies. As most organizations move to a

shared service model to gain economies of scale, it becomes

increasingly important to understand the IT Service TCO in

order to charge the business units for their fair share of IT

resources. When IT departments leverage virtualization or

Cloud services, the ability to track service TCO becomes more

complex. But chargeback will only work if the allocation

policies are fair and accurate, thus driving the need for proper,

and preferably activity-based, IT service costing systems.

COMMUNICATING THE COST AND VALUE OF IT

There is likely not a CIO in the world today that hasn’t heard

“Why does IT cost so much? Where is my money going? I’m

sure I can get services from the Cloud cheaper!” To the

contrary, most enterprise IT shops can provide most services

at a cheaper rate and higher quality than outsiders due to

scale, lower overhead and no profit margin. However,

without proper IT Cost Transparency and financial reporting

systems, CIOs would never be able to show where the

money is going, how much it truly costs, and how they are

better than the alternative.

In the new era of TBM, where IT is run like a business with

transparency, IT needs to provide good reporting on the cost

and value of IT services. IT leaders cannot become strategic

partners with the business if the business doesn’t trust that

IT is handling their costs properly.

But beyond building trust and proving proper cost

management, TBM makes a business unit accountable for

managing the demand of IT Services and fulfilling their roll in

reducing cost. IT now has a framework for reporting the cost,

consumption and value of IT services, enabling the business

units to make decisions based on the consumption and

value of IT services.

“The only way to improve ROI estimates in new projects is to increase visibility into the costs associated with the existing approach, because if you can’t measure what you are paying today, you can’t estimate what you’ll save tomorrow. Therefore, IT organizations must start to build cost models for their existing infrastructure, which isn’t as easy it sounds.”-Counting the Cost of the Elephant in the Data Center.

Consider a “Bill of IT Services,” just like one might get from a

wireless phone company, that includes the various services

one subscribes to (voice, data, text, etc.), how much of those

services one consumes (minutes, kilobytes, etc.), the unit

rate for those services and the total bill. The subscriber then

is responsible for how much he or she spends, which

services are most important to him, and whether they want

to subscribe to more or less services. Through TBM it is

possible to create a Bill of IT for each business unit

consuming IT resources and create a process for managing

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the demand for IT. The Bill of IT also becomes the basis for

Chargeback policies—whether with direct bill back, or by

setting unit prices based on clear understanding of the IT

Service TCO.

BUDGETING, FORCASTING AND PLANNING

Improved budgeting processes based on the TBM solutions

results in a more collaborative and efficient experience for

the organization. Forecasting, budgeting, and planning can

now become joint exercises between IT and the Business

Unit teams. Together, they can leverage a single system of

record designed for IT, standardize workflow processes and

create a collaborative and streamlined process. This

eliminates the inefficiencies of today’s sea of static

spreadsheets and helps reduce the time and labor in the

overall budgeting process. Critically important to the TBM

process, and IT’s ability to communicate with the business,

is a budgeting and planning process built around IT Services.

Instead of the typical “General Ledger” line item view of the

past, TBM solutions transform the GL view into a services

view to align with Service TCO, Bill of IT and the language of

the business.

When IT leaders know with great certainty the annual cost to

deploy and maintain any IT service, they eliminate a great

funding challenge—the classic problem that IT never

receives adequate funding to maintain new IT projects or

services. With clarity on the TCO of services, IT can push

funding back to the business by saying “this is how much

this is going to cost IT to run for the next 3 years. I need

these dollars in the IT budget before I can support this

project.”

But more accurate planning and budget control is a huge

benefit to the business. With service costs being tracked

automatically (in real-time), IT finance can run variance

reports on an as needed basis, obtain “alerts” on budget

overruns, and determine the cause of unexpected cost

trends directly in the TBM system. The ability to provide

accurate rolling three-year forecasts enables the business to

operate much more efficiently. The CIO can then give the

CFO a plan to manage the fixed vs. variable cost, transfer

Keep-the-lights-on (KTLO) operational expense to Change

the Business (CTB) projects, and optimize Return on Assets

(ROA). This will earn the CIO many gold stars and the

latitude to pursue more strategic initiatives.

APPTIO’S TECHNOLOGY BUSINESS MANAGEMENT SUITE

In reviewing solutions available today in the Technology

Business Management market, Seattle based Apptio is the

clear leader. Apptio’s modular and scalable enterprise

Software as a Service (SaaS) solution is successfully being

used by many Fortune 500 firms today.

Apptio’s suite of applications lends added flexibility for IT

organizations as they build a fully mature budgeting and

financial management lifecycle process. Apptio’s best-of-

breed portfolio approach eliminates the potential for the ‘boil

the ocean’ project mentality. Instead, specific Apptio

modules can be incrementally turned on to help customers

recognize quicker time to value on software investments

while establishing a modular, extensible TBM solution

architecture for their project.

Apptio’s portfolio is comprised of five separate SaaS-based

applications that leverage a common modeling, analytics

and data management platform.

IT SERVICE COSTING

This module enables the IT and Finance teams to work

together to appropriately model their fully-loaded costs of IT

services being delivered. It creates a single system of record

that helps automate the service costing processes, manage

and track any changes made over time, and contribute

validated data to cost allocation or Chargeback policies that

may be in effect for the organization. Apptio’s visual

modeling and allocation policies are easy to use and flexible

enough to get started fast with a simple services model and

mature into an activity based costing methodology. The

analytics available within Service Costing assist IT in

understanding cost drivers, identifying areas for potential

cost reductions, and offering “What If“ analysis to quantify

the financial impact of IT investments.

BILL OF IT

The Bill of IT module enables IT organizations to distribute

reports to the organization’s business units and other

significant departments on the financial costs of the IT

services they are consuming. The reports are similar in

concept to a cell phone statement. Reports detail the IT

services being consumed and associated costs. This module

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helps articulate the actual value of IT services in a language

that the business units appreciate. It encourages ongoing

conversations between the business units and IT regarding

future demands for IT services and prioritization of

resources.

BENCHMARKING

The Benchmarking module offers a cost efficient and

long-term methodology to IT cost benchmarking that

supports Apptio’s concept of “Continual Cost Optimization.”

Apptio provides industry cost and performance

measurements side-by-side with the actual costs and

metrics from the customer’s model. Benchmark metrics are

collected from over 3,000 companies across more than 20

major industrial segments by an independent benchmarking

agency. Metrics are updated on a regular basis. The data

includes high level financial benchmarks, granular

infrastructure and support unit cost metrics, and application

service unit costs.

SERVICE QUALITY AND UTILIZATION

The Service Quality and Utilization module measures and

tracks metrics that map the value and usage of delivered IT

services. Calculating and reporting on these service levels

provides a measurement of the value of a service back to the

business units. These service levels can then also be used to

tier the pricing of otherwise similar services. Operational

metrics around usage of IT services provides insight into

capacity and helps identify underutilized services that are

targets for IT consolidation or virtualization. Actual usage

data can then drive true consumption-based chargeback

policies (i.e., activity based costing).

BUDGETING AND FORECASTING

The Budgeting and Forecasting module bridges the gap

between the corporation’s general ledger and the services

view IT requires to operate their business. Apptio’s

application streamlines planning processes and increases

productivity within the organization. Automated data

management can eliminate juggling of spreadsheets and

role-based access and versioning control enable group

collaboration.

NEVER A BETTER TIME TO GET STARTED

Technology Business Management is ushering in a new way

of running IT. TBM improves cost efficiency, tightens

alignment with business priorities, and increases the

productivity of the IT organization. TBM enables IT leaders to

gain control of and properly manage cost, quality, and value

of their IT Services. Through better visibility and analysis of

the costs of IT, the IT organization will make better decisions

to reduce costs and increase efficiency. With proper

reporting of the cost and value of IT services to the business

units, IT will drive a better working relationship aligned on

business priorities and properly managing the demand for IT

services. With TBM’s closed loop financial management

process, IT will be able to manage the financial performance

of the department more closely and with greater agility. IT

can then allocate more resources to higher priority, strategic

projects.

Apptio is a leader in delivering TBM solutions to enterprises.

Their best-of-breed suite of applications and SaaS delivery

model provide IT organizations with an efficient and cost

effective approach to quickly adopt and realize the ongoing

benefits of TBM. Global 2000 IT organizations have adopted

Apptio to provide credible ongoing budgeting, financial

reporting, forecasting, and strategic planning on the costs,

utilization, and value of IT services.

Just as companies in the 1980s improved operations by

adopting Lean practices and resource planning, IT

organizations adopting TBM today will become more cost

efficient and agile. The strategic advantage will make them

market leaders for decades to come. For more information,

please visit http://www.apptio.com.

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ABOUT APPTIO

Apptio is the leading provider of SaaS-based Technology

Business Management (TBM) solutions. Apptio enables IT

leaders to manage the cost, quality and value of IT Services

by providing deep visibility into the total cost of IT services,

communicating the value of IT to the business through an

interactive “Bill of IT,” and strategically aligning the planning,

budgeting and forecasting processes. Using Apptio, IT

leaders can drive cost reduction decisions, manage the

utilization and performance of IT services, and more

effectively run the business of IT. Apptio’s TBM solutions

play a critical role in helping companies understand and

drive chargeback, virtualization, cloud and other key

technology initiatives. Organizations such as Blue Cross Blue

Shield of Kansas, BNP Paribas, Cisco, EMD Chemical and

Starbucks use Apptio to reduce cost and align IT with

business priorities. For more information on Apptio, please

visit www.apptio.com or the Lean IT blog at apptio.com/

blog.

Corporate Headquarters USA (+1) 432 453 5861 Apptio Europe +44 (0) 207 608 5176 www.apptio.com

Technology Business Management: Managing the Cost, Quality and Value of IT Services

Technology

Transcript of Technology Business Management: Managing the Cost, Quality and Value of IT Services