I've received some good feedback and comments from readers in the field regarding an entry I made recently about I.T. costs and profitability. One comment discussed the notion that I.T. chargeback really isn't profitability, but rather just a shifting of sands, as the business has money which is simply re-allocated. In this entry we'll explore some other notions of profitability for I.T. along with discussing why Chargeback works in certain industries, but not in others.
We'll also discuss the notions of standardization and it's correlation to profitability. As always, I'd like to hear from you. What is it you have questions on or disagree with?
First, I'd like to point out the following Gartner report: "Profitable Business Models in I.T. Professional Services" It discusses the nature of profitability related to alignment. What it doesn't address is the cost aspect of the I.T. services provided in relation to the business profitability.
Here's another report (albeit from a vendor of profitability systems) which discusses a valuation framework and profitability alignment. However, I am of the opinion that this vendor's notions appear to be based on ITIL and CoBIT frameworks (which are based on SEI / CMMI) as standardizations. A quote from their paper: "The increased transparency and financial integrity resulting from implementing this process contributed to Schwabâ€™s ability to increase their operating margin by $600 Million."
Why should I care?
The ability of IT to be profitable and actually make money for business is dependant on standards, BPM (business process management), alignment, and operating margins. IT is a slice of business that has to sell it's projects (typically) internally to other parts of the organization. In this situation they also receive much of their funding from within the business sides of the organization. I.T.'s ability to produce, while keeping costs low, quality high, and delivery on-time, is in direct proportion to the costs that are incorporated into the bids that the business side makes to the external customers. Why? because the cost has to be paid somewhere.
By initiating competitive cost management, alignment, and standardization within I.T. business itself can become more competitive on the bids to their customers, and thus are enabled to win more bids at a lower cost with higher quality. This is only one angle.
But what about Chargeback?
Chargeback to other lines of business is an interesting proposition, one of the readers made a comment that chargeback is nothing more than moving money around inside the total company, and that this does not reflect profitability within I.T. at all. I would state that while this may be true for some organizations, it is not true for those organizations where different lines of business earn profit through their own contracting, and have their own customer base, and furthermore write their own contracts for "their" teams within I.T. - When I.T. is segmented in this fashion (where you can't talk to the person next to you without giving them a charge number, even though they are in I.T.) profitability of Chargeback to that line of business becomes a reality. It is no longer simply "shifting the sands."
In another report: "IT Spending, Staffing, and Technology Trends" They discuss the notions of where the money is being spent, and where the high costs are being accumulated. While most I.T. departments (and people) fight standardization, and consistency, they eventually are pressured into working on those directions (or they face extinction).
A number of "new" consulting companies in the past 7 years have all hammered away at the notions that they are "compliant" and standardized, and have passed audits - so that their costs are lower, their quality output is better, and that they can deliver on-time. This has (in some cases) turned out to be completely false - and I.T. project costs have risen (not fallen) as a result of their mis-steps.
Let me give you an idea of what happens to costs, time, and overhead once standardization and quality BPM have been achieved:
PRODUCTIVITY METRICS Performance (Averaged)
Unit Performance Measurement Pre Vs Post CMMI / L3
1. Requirements Management Person days 50% Reduction
2. Impact Assessment Days per work object 43% Reduction
3. Design Reverse Engineering Person days 33% Reduction
4. Test Coverage Cases per drop 300% Increase
5. Regression Testing Efforts Days per drop 80% Reduction
6. Unit Level Testing Days per work object 50% Reduction
7. Code Review Effort Days per work object 33% Reduction
8. Code Freeze Duration Days prior to a drop 80% Reduction
9. Work Objects per Drop Number 67% Increase
10. Drop Frequency Drops per month No Restriction
Ok, so CMMI, ITIL, ISACA, and CoBIT are all part of improving the profitability, standardizing I.T. and getting a handle on how to audit and produce better I.T. products. What about the charge-back portion of making money? How does that fit in?
Well, if you think about it this way: as I explained earlier - some businesses don't "win contracts" based on different sectors of business or different lines of business, in these cases charge-back doesn't do much except begin to hold business accountable for their demands on how much data they want to have accessible, how fast they want it accessible - so in a way chargeback works to the advantage of of I.T. as a cost-control measure and a reality check on the business expectations and requirements they are putting forward.
In other situations, different lines of business win their own contracts, and each "segment" or sector of "I.T." is competing for funding. If a particular segment or sector of I.T. can draw funding away from those that are in-efficient, poor quality, or have bad delivery times (over-budget, beyond scope, etc..) then I.T. overall improves it's efficiency, because this underperforming I.T. unit (which is high cost) must either change it's ways to conform to standards, and start managing better, or go out of business (be replaced by the better I.T. team). This draws funding across lines of business, while providing lower cost bids to the end-customer regardless of business unit making the bid.
Chargebackâ€™s are very effective when applied within the correct context, they can be helpful within single businesses as well.
How can I.T. make money as a result of standardization?
Well, I'm not the first one to discuss this, as I pointed out before: I.T. is a business that should be run like a business, and like any good business it needs to be capable of selling projects to other companies, it also needs to be competitive for the entire business so that customers don't leave and go to the competition. I.T. through standardization can optimize their processes so well, that they can "slice off" pieces of their business process flow which can be "sold" to external customers. They can act as a data virtualization or hosting company for data, or they can act as consultants for a variety of tasks.
Take Qwest for example, they are a telecom company which operates Server Hosting (virtualization) farms, as does Lockheed Martin, as does SAIC, and a few others. In this arena, I.T. is mitigating internal costs by acquiring and developing external sources of income, hopefully this becomes a profitable stream.
If you have thoughts or comments, I'd love to hear them.
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Posted March 25, 2007 6:05 AM
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