The price of change

The price of change

Organisations that are serious about aligning IT with their business objectives must move away from simply focusing on cost and take a new approach to the difficult task of measuring its true value.

With innovation firmly back on the agenda in the boardrooms of big Australian companies, and all departments expected to contribute, a growing number of organisations are looking for ways to measure the value that information technology delivers to their businesses – rather than simply allocating a fixed budget every year for maintaining operations. As these traditional models are ¬challenged by new ways of doing things, it  makes sense to ask whether cloud ¬computing will offer greater visibility to the true costs and benefits of IT.

If nothing else, the move to more ¬flexible technology sourcing models, where organisations pay only for what they use, should help senior executives more easily correlate the relationship between business activities and IT expenditure. Yet for all its promise, there is a long journey ahead in terms of the maturity of cloud services offered by ¬suppliers and the education of users.

Still, IT executives will hope this is another step on a road to business integration in which IT will no longer be viewed as a costly support function by other ¬members of the executive team.

New approach

Gartner analyst John Roberts says it is easy for chief financial officers to see the cost of IT because it has a dedicated budget. The real challenge, however, is to stop focusing solely on ways of lowering costs in favour of a new approach that is centred on the value IT delivers to the business. This can't be done by considering it on its own because it has no intrinsic business value.

In contrast, taking an activity-based approach to measuring IT in terms of its

contribution to the business might reveal, for example, that the price of managing people in the organisation costs $50 per employee per month. Reverting to manual processes, however, could be $70 a month or more.

In some banks, the chief information officer owns the customer transaction process because it relies so heavily on technology, but Roberts says the airline industry probably offers the best example of IT's impact on business operations.

"If you want to fly somewhere these days you don't call anybody – you go online, look at your options, make a payment and print your own boarding pass," he says. "The IT costs associated with allowing customers to do that may have increased but the total business process cost of getting them onto planes has been halved. That's the key as you focus IT on adding value instead of viewing it as a cost centre."

In about 30 percent of cases, Roberts estimates, CIOs are taking a leadership role in analysing these processes. Rather than acting as the servant of the business, they are actively looking for the improvement in business outcome as a result of changes in IT services.

Some CFOs have also grabbed the bull by the horns. At Queensland University of Technology, for example, a group in the accounting department became the leader of a business intelligence change that ¬enabled the university to build a ¬single view of its students.

Instead of following the traditional model that separates different functions like administration and courses into silos, the university has brought all its information together and is now able to optimise resource allocations and manage complexity more effectively.

"This is the changing role of the CFO in  terms of no longer being seen as the nasty person who says you need to cut 10 percent from your budget," Roberts says. "They must also drive better business outcomes and recognise that sometimes more needs to be spent on IT if it can deliver a business saving somewhere else in the organisation."

Other organisations have created a dedicated team that addresses the issue of IT's business value as part of quality improvement, business development or innovation efforts. Roberts says it is vital to include the CIO in those discussions.

The Australian Bureau of Statistics has also provided some examples of IT's role in delivering business results. For example, it identified more than 60 processes associated with bringing a new employee into an organisation and how IT could be used to improve efficiency by automating and streamlining many of those processes, reducing duplication and human error into the bargain.

Adding it up

Yet even where IT has played a clear and prominent role in transforming business processes, quantifying that contribution remains something of a head-scratching exercise. In the airline scenario, for ¬example, how much of the profit margin improvement should be attributed to the technology that's behind the processes and how much to the marketing effort that went into convincing travellers to change their behaviour?

"The reason activity-based costing is often used for projects but then dropped is that it's extremely difficult to measure and there's no right way of calculating the number," Roberts says.

"If I tell you that HR costs are $10 per employee, you have all sorts of assumptions behind that. There's a mixture of direct and indirect, fixed and variable costs that go into it."

Despite the obvious difficulties associated with measuring the business value of IT, there is growing recognition of the need to do so. The Boston Consulting Group (BCG), a global management consultancy, held events in Canberra, Melbourne and Sydney during March to promote the launch of a framework it has developed in conjunction with other members of the Innovation Value Institute (IVI).

Dubbed the IT capability maturity framework (IT-CMF), it offers CIOs a standardised method of evaluating IT capabilities in their organisation strategically in terms of business value. It also ¬provides a way of communicating the core aims and performance of the IT department to the CEO, CFO and other senior business executives.

Attendees at the launch included ¬representatives from all the major banks, insurance companies and telcos, as well as state and federal government departments. Ralf Dreischmeier, a senior partner with BCG, says it started looking at the business value of IT about four years ago to address what it considers to be an industry-wide problem.

"The way IT as a profession has evolved, it is still not very mature and there's a lack of focus on value creation for the wider business," he says. "There's nothing that looks at the IT function holistically and asks how we can improve capabilities across all that it does."

Dreischmeier says the IVI holds ¬conferences twice a year at which a broad range of C-suite executives share thoughts on how the framework is helping their business build a more meaningful view of IT's business contribution.

"They get a level of transparency and have a much better understanding of where IT is up to, where they want to take it and where the company wants to invest in technology to improve capabilities and deliver business value to shareholders," he says. "I might be an optimist but I strongly believe that the next generation of executives, some of whom are already in ¬position, will have a completely different affiliation to technology and are far more technologically literate."

BT Financial Group's CIO Tony Forward says his interest in the framework was originally based on an interest in using external benchmarking, or comparison testing, as a way of figuring out new opportunities.

"There are many frameworks in our profession, too many probably, but they are mostly very inward looking," he says. "They're mostly about the process of how we do our business but this one addresses what value we currently create and what value we ought to create. That makes it more strategic."

In common with all other financial service organisations in a post-global financial crisis world, BTFG, which is owned by Westpac Banking Corporation, has innovation near the top of its agenda. However, Forward cautions that this must be balanced against the need to comply with the growing demands of a "regulatory tsunami" that has been fuelled by the ¬economic meltdown.

"The important thing for us is to work out how we can service customers better while still cutting costs," Forward says. "Every CIO, CFO and CEO in town has that issue.

"CFOs will be focused on the bottom line if the top line isn't there but, if you can get revenue up, that offers a whole new perspective and we can drive that with technology in many instances. That's the conversation to have."

Proceed with caution

So what of cloud computing? Roberts says a growing number of organisations are looking at cloud services because of the variable cost model. He warns, however, that there will be no free lunches because an infrastructure investment has been made somewhere and the supplier needs to make a return on it.

Longhaus analyst Scott Stewart, who was formerly the CIO at equities brokerage Wilson HTM, says that even though pressure to cut costs is now coming down to technology executives from board level, diligence and caution is required in evaluating a cloud offering.

"There is a high degree of tension between the buy side and the sell side," Stewart says. "Executives are tired of the old [own-your-own] infrastructure model. The situation is going to get to the point of boards asking 'why own IT?' But the ¬[technology] industry is still locked into the product model."

He cautions that attempts to move into the cloud an existing licence arrangement – where a price has already been struck and which still has time to run – can ¬sometimes encounter resistance because the software vendor does not want to lose forward revenue. He says the ideal time to negotiate a move to the cloud is when ¬significant software licensing agreements mature. This is the point at which the buyer has the whip hand in setting the terms of a deal and on calling the price.

Equally, companies will be unwilling to move to the cloud if they still need to get a return on investment from existing hardware. Ross Miller, CIO at GPT Group says this is a constraint as they have recently made an investment in hardware for their day-to-day production systems. Once the five-year lifecycle is up, however, he says he'd be surprised if they owned any IT infrastructure after that.

The complexity of the tasks of evaluating the suitability of cloud services for ¬different business functions, picking the right time to make the switch and educating users on how to make the most of them means that it is likely to be some time yet before the impact on technology costing is understood and, more importantly, whether or not this is going to flow through into meaningful valuations of the business contribution of IT.

Miller says the relatively low cost and ability to access resources when needed in cloud implementations may make discerning the value of IT easier as you can try things out. "It is much cheaper – you're not actually paying for a box – so you can try some innovation without it costing a whole lot of capital."

Roberts is convinced this industry shift will be crucial in altering the perception of IT predominantly as a cost of doing business rather than as a potential driver of competitive advantage.

"Only when there are truly variable costs can you drive changes in behaviour," he says. "Cloud computing will play a large role in doing that." Brian Corrigan

Sidebar: Mix and match: using services for cyclical swings

Chief financial officer of engineering firm Ausenco, Craig Allen and chief information officer Paul Young say using the cloud doesn't provide a greater insight into the value of IT investments, but they're convinced the infrastructure it relies on is secure enough and the variable cost model provides their business with the flexibility it needs to be more competitive.

The company has almost completed putting email, CRM and Sharepoint software into the cloud. "I don't see cloud as hype," Young says, with total cost of ownership "significantly less" than traditional IT investments. He says a key question to ask when determining the value a process provides and whether it should be bought and maintained internally is whether it provides a competitive advantage. If it doesn't, he says, they have increasingly viewed these processes as a commodity and sought to buy it as a complete solution externally.

"With the advent of virtualisation and cloud platforms we have been able to not only solve the immediate issue, but to address other issues such as business continuity, data archiving and providing a better experience to our users globally," Young says.

"We have also been able to move away from a capital expenditure approach to these services to an [operational expenditure] cost that we can flex as business conditions change." This is particularly relevant to a business like Ausenco, with clients in the mining and construction sectors.

"In a seasonal industry, which is tied to mining booms and busts, one of the problems is when you provide these services internally, it is very capex based," Young says.

"One of the benefits I see, which is one of the reasons we agreed to this, is we want services that we are actually going to be able to dial up as we do acquisitions and scale back during short periods."

For CFO Craig Allen, Young's arrival coincided with Ausenco's acquisition of three businesses – Sandwell, Vector Engineering and Pipeline Systems – to diversify away from mining.

"We were trying to connect them together in a whole lot of different ways and were looking at different ways to do that without spending multimillion dollars on servers and hardware," Allen recalls.

For him, the value of moving to use cloud was not that difficult to calculate. "It is reasonably easy if you can be really honest about the total cost in your organisation to provide it," he says.

"The manpower that IT needs to support it; the capital investments that you need to make on an ongoing basis; the infrastructure refreshes that you're going to have to do over a two-three-year period.

"We just billed up a total cost of ownership of doing it internally and compared that to some of the leading vendors and the prices that we could negotiate."

But a critical factor was network speed, reliability and security. "If it is unreliable or lacks security, you are undertaking more risk for the sake of dollars," Allen says.

"So really it was whether technology was sitting where we were able to confidently say 'well there is no greater risk going into the cloud, but there are a whole lot of other tangible and intangible benefits'.”

Maintaining business continuity was one of the benefits tested recently. With Ausenco's headquarters in Brisbane, its offices were hit by the floods in January.

Allen says they had a more robust disaster recovery as a result of their systems being in the cloud. "With Ausenco's disaster recovery plan, incorporating key IT benefits through offsite data security and remote accessing provided minimal disruption to normal business operations," he says.

Now if they need to increase work on a particular project or have a new client, they don't have to deal with long lead times for hardware, they just need to buy extra licences for software. "As opposed to just saying I have to wait three weeks for them all to turn up and I have got go and plug them in and then I have got a depreciating asset sitting in my business that I am going to turn over in three years."

Allen and Young reckon it also provides them with a competitive advantage at the moment. They can get resources available much more quickly to the various often remote locations they work in.

"Ausenco is a global business, and delivering key IT infrastructure and technology on a 'plug and play' basis provides the ideal opportunity to align with our clients' requirements," Allen says. "This, combined with significant advances in mobile technology, instant video, and wireless networking perfectly suits these demands to be more flexible and cost competitive." Shaun Drummond

MIS Australia

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