For many technology executives, the least fun part of the job is the budget. However, the economics of your organization, its productivity and contribution to profits are the only real concerns of CxOs. Therefore, it is best to be on top of your economic performance – so that it is easier for your to connect your department’s activity to value.
When times are good, it is easy to forget about the economic concerns. Even the CFO might give you a pass if the technology infrastructure works, and the economics looks ok. Over time, as markets change and as a company matures, you will learn that CFOs eventually will come knocking on your door asking for economies and improved services (i.e., increased quality, better nimbleness, etc).
Many technology executives assume that if they meet budget, they’ll be ok over time. That’s the same logic as painting a room, only to discover later that you have painted yourself into a corner. There are warning signs to look out for. These include:
– Your technology budget as a percentage of revenue is higher than your competitors.
– Operations cost per employee, customer, transaction or unit are increasing as revenue rises; in fact, you’d expect costs per unit to decrease.
– You spend to budget, while company revenue start to take a hit (hint: business as usual is not an option).
– Your business partners are buying technology for themselves, because they can and/or because they are dissatisfied with your performance.
– =>70% of your budget is spent purely on operations, without a proper balance for improving or growing the business.
– Commodity functions (service desk, backups, patching, systems administration) are 90% employee staffed.
– =<20% of your development staff are off-shore.
– You run too many projects. This is a particularly toxic problem if most of the labor for the project is capitalized. You end up with massively overvalued “assets” that may become embarrassing write-offs, and are hiding the true cost of technology staff costs.
– You have too many technologies, and therefore your environment is unnecessarily complex. Each technology drives a critical mass of expertise and matériel (compute, O/S, storage, network, middleware, database) that forms constituencies of vested interest, duplication (in design, build, testing and operation) and complexity agita.
– Although you systems perform, there are instances where you have over-engineered or “gold plated” solutions. E.g., although you have 100% or 200% hardware redundancy, also you have full gold plated hardware maintenance 7x24x365 on all servers when this level of maintenance is not required: not even on your critical servers. (Think about it; if you don’t get it, contact me!).
Fortunately, there are well established tactics for the technology executive to follow (even if, in practice, some of these tactics are quite difficult to implement properly) to drain the toxic swamp of cost. Such tactics include:
1. Benchmarking. Use a third party, such as Apptio (based in Bellevue, WA) company to analyze your GL feeds and determine your true costs of service. Get a grip on how much it actually costs to operate your ERP, email or data center. Figure out where the money going beyond the traditional cost center lines of people/labor, facilities, utilities, maintenance and licensing. Understand what your platforms really cost you.
2. Use the Technology Business Council frameworks for to standardize metrics and benchmarks for performance so that work can be easily aligned to ROIC, agility and value.
3. Educate your CxO, without lecturing; learn and respond to CxO cues. Be prepared to talk about the economics of your organization with the CxO and the distinct levels of functional utility you bring to Run The Business (RTB), Grow The Business (GTB) and Improve The Business (ITB). Ensure that there’s a balance to be struck between these categories of initiative. Have a multiple year plan that includes a rolling capital budget for refreshes or transformations, including a server and storage asset plan, and an enterprise license plan.
4. Be prepared to outsource (right-shore), leap frog or cannibalize. Use disruptive tech to move your costs to a lower economic cost curve (SaaS, Cloud) in combination with BPO as a first step to isolate and (eventually) retire areas of cost. Clean up old, non-compliant systems. Use target architecture and roadmaps to assist with planning, and enforcement.
5. Reduce the long tail of vendors. How many vendors are you paying and why? Try to trade fewer vendors for price and scale breaks. And reduce complexity.
6. Scan your projects to ensure alignment and correct prioritization. Eliminate non-conforming projects.
7. Eliminate non-essential or non-value add activities.
8. If you use charge back costing, ensure you review how cost is allocated fairly. And be prepared to talk about disruptive economics, and the hidden costs of Cloud, etc. Listen to your customers if they are paying the tax AND buying from someone else!
To follow through on these tactics, you have to have a crackerjack financial governance team that can provide the data and insights you need to make decisions. Specifically, to help you with:
– Capital budget planning.
– Opex vs capex analysis; data normalization.
– Deciding which costs are fixed infrastructure and which ones are demand driven.
– Determining the NPV or IRR of pay as you go versus buy/rent or lease; identifying idle or underused assets (e.g., infrastructure sitting idle 90% of the time).
– Normalizing and optimizing labor costs, so that the right work done in the right place for the right cost performed rightly.
– Reviewing and controlling maintenance budgets; ensuring that not too much, and not too little is spent.
– Figure out platform costs, not just line item costs.
There’s a lot to discuss here. Join me in the conversation.
Mike Ross <TechOpsExec@gmail.com>.
#techopsexec
Useful links
Technology Business Management and Technology Business Council http://blogs.wsj.com/cio/tag/technology-business-management-council/
Fortune 500 tips
http://www.cioinsight.com/books-for-cios/fortune-500-cios-share-tech-business-management-secrets/
Appito
Tech Ops Exec 