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Can cloud and a budget driven organization coexist?

on ‎10-29-2013 01:42 PM

Budget.jpgOver the last couple months, the same discussion keeps popping up over and over again. It started last august at a cloud introduction workshop I ran for an insurance company. I talked about the need to manage the service portfolio and highlighted the importance of a proper governance between business and IT. One of the attendees complained that the business had no understanding of the cost associated with the development of new services. They were always asking for the Rolls-Royce service, not realizing the cost associated with the development of such service and its impact on the budget of the IT department.


From my own days in programming applications for customers, I remember numerous discussions about additional functionality needed by the users and how, through showing the cost associated with the extra developments and asking for the cost reduction or revenue creation generated by those we managed to keep engineering changes to something reasonable. Ultimately, a similar discussion is needed.


Having said this, and realizing that cloud computing allows IT to address more closely the needs of the business through the development of needed services and the provision of more infrastructure when required, is the current budget based funding of IT the best way to finance the use of digital technologies within the enterprise.


A budget based IT organization

We all know how it works. Towards the end of the fiscal year, IT is either given a top line budget number which is the result of compromises made between the heads of the business units and the CFO, or is asked to build, within predefined guidelines, a budget. In the latter case this budget will most often be negotiated, and frankly, I have never seen it growing in such discussions.


With that budget, the CIO will first run the existing operations, which in most companies takes 70 to 80% of the budget, as there is no way the key enterprise systems can be shut down. With the last 20 to 30% he will fund infrastructure upgrades, improvements in operations (which may reduce the cost of running the operations), the development of new functionality and any other innovation he may think of.


Let me take as example a 1B$ company, devoting 2.5% of turn-over to IT, that means the total IT budget is 25 million $. Anywhere between 17.5 and 20M$ will be spent on operations, leaving only 5 to 7.5M$ for improvements. If 40% of that improvement can be devoted to innovation and the development of new functionality, that leaves us around 2 to 3M$. If all of that is devoted to the creation of new services, at is the budget available to address all needs of the enterprise.


The CIO can decide either to develop this functionality within the IT department or source it from external sources (SaaS for example). The latter seems the most obvious for many such services as it looks like less expensive due to the fact there is no upfront investment required.


But by doing so the CIO puts a “Damocles sword” on top of his budget. Indeed, the great advantage of pay-per-use, is you pay only for what you use. These services will be used by the business, but paid for by IT. So, now, the CIO adds to his budget a variable portion that is completely outside his control. Having managed budgets for years, I can tell you this immediately rings some alarm bells with me, and I’m sure not to be the only one.


Geoffrey Moore makes the difference between the systems of records and the systems of engagements. Systems of records are the “single source of the truth”. They contain the key information of the enterprise and are often the systems we put in place in the late ‘90s, to reduce the fear of the millennium bug. They are critical for the enterprise, but in most companies, their usage is pretty stable. Actually, that is what IT used to manage, hence the budget based approach.


Systems of engagements are more recent. They consist of environments allowing users to collaborate amongst themselves or with customers, suppliers, partners and/or regulation entities to just name a few. Increasingly they are influenced by social media approaches and by their share nature the needs change all the time. New projects are started, new services offered, partnerships disappear while other grow. Such constantly changing demand is difficult to manage within the frame of a budget. Is that the reason why many IT departments are seen as non-responsive by the users? That may definitely have a role in it.


So, when dealing with requests related to systems of engagement, it is key for the IT department to justify the investments it makes and demonstrate how they address the needs of the business. How can this be done?


Using Business indicators

Agreeing a set of business indicators or KPIs that are common to IT and the business, and then measuring and monitoring them, is the easiest, but probably the least binding way of tying the interests of business and IT together. For example, if the company objective is to improve the eco-system collaboration I discussed in my previous blog post, we could measure some of the SCOR KPIs related to agility and responsiveness. Unfortunately if they don’t improve, both the business teams and IT can easily find external reasons why this may happen, hence the fact they do not truly force a feeling of joint ownership.



Showback consists in IT reporting regularly, for example monthly, the actual IT consumption for each of the business units, departments and/or functions. The customer I talk about at the top of this entry decided to implement precisely this, but actually adds a caveat to it. The actual consumption of this year will serve as allocator for the assignment of the IT budget to the business units. In doing this, management incent the business units not to consume IT services unnecessary, not to keep VM’s provisioned when no longer needed, not to ask for the development of Rolls-Royce services etc. Because if they do that this year, their allocation of next year’s IT budget may grow dramatically, making them less profitable.



One more drastic approach is to move away from the use of predefined budgets for IT, but rather consider IT as a zero sum organization. In other words, transform IT in an organization that every month transfers its costs to the business units in accordance with their usage. The advantage is there is a direct correlation between the consumption of IT services by the business units and the IT costs they have to bear. But many business units will balk at such approach as it adds an unknown cost factor that is not under their direct control. This is only partially true as they define how much IT they use, but they will argue they have no control over the total cost of the IT department.



The more drastic approach is to set-up IT as an internal business unit and have them charging for their services by unit cost, being it hourly, daily or monthly. In other words, when business users browse the service catalog they are made aware of the actual cost of a particular service to their department budget. The objective of IT is to run their operations in such a way they are making neither loss nor profit. In this model there is a risk for IT, in the sense that, if they do not set their pricing correctly, they may run in the red. It’s probably the best way of doing things, but many CFOs do not have the confidence that IT can run a business. Here the issue becomes more an issue of trust.



The traditional financing of the IT department does not facilitate the provisioning of adequate cloud services to the business as the budget does not take into account the consumption variability IT is confronted with in the “ new style of IT”. On the other hand, the business is not incented in asking what they really need, no more, no less. Making IT responsible for running its own operations and making the business pay for what they are actually using incent both to work together to deliver what is required for the business. But fundamentally it boils down to a single question. Does the enterprise management actually trust the IT management team to run a business? 

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on ‎11-12-2013 10:48 PM

Good Stuff .......................

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