ITFMA It Finance Conference

1. Technology Business Operations
Justifying the right level of IT administrative oversight for your organization
IT Financial Management for
Controllers and CFOs Conference
The World of IT Financial Management© 2009
ITFMA
April 1, 2009
Diane Carco
Chris Herman
IT Optimization Practice
Swingtide, Inc.
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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2. Who is Swingtide?
• Consultants specializing in Technology Business Operations
(TBO)
– IT Business Center of Excellence
– IT Cost Reduction
– Outsourcing and Insourcing Advisory
– Acquisition and Divestiture Support
• Focus on CIO Business issues
– Proven methodologies applied by the people who developed them
–A
Accomplished cross-functional team of finance, technical and
li h d f ti lt f fi t hi l d
contract/sourcing experts
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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3. What you will take away from this presentation
An understanding of:
g
• References for the general cost of administrative oversight
• Setting the right level for administrative oversight of IT:
– Using analogies to establish an appropriate cost
– Building a rationale from the cost of not managing
• A definition of robust IT administrative oversight: Technology
f f
Business Operations (TBO)
• A benchmark su ey app oac for estab s g t e right level in
be c a survey approach o establishing the g t e e
your organization
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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4. HOW MUCH DO PEOPLE PAY
FOR ADMINISTRATIVE
OVERSIGHT OUTSIDE OF IT?
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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5. The Cost of Administrative Oversight:
What can we learn
1 3 – 1 5%
1.3 1.5%:
from these examples?
Mutual Fund
Management
20-30%:
as % of funds
Executive
managed
10%:
10% G&A expense 18.5-19.5%:
18 5 19 5% Cost of Search Fees
2-4%:
as % of revenue: fund raising as a % of
Sports
Large Company funds raised
agent’s
commission
0% 5% 10% 15% 20% 25%
9.5-10.5%: Salary of
Orchestra Conductor as % of
.03%: 10-15%: 25%: G&A
Orchestra revenue
Audit General expense as % of
function Contractor revenue: Small
3-4%: The amount of the
expense as % of total Company
annual deal value that Gartner
as % of job
says should dedicated to
revenue
managing an outsou c g
a ag g a outsourcing
agreement
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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6. Observations
• When administrative oversight functions are
performed well, they are…
f d ll th
I
• When not performed well problems surface as specific
symptoms
• Symptoms tend to attract solutions that only address
symptoms
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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7. Observations
• Administrative oversight is required:
– World experience in many domains shows it’s irresponsible not
to have administrative oversight
g
– It is necessary because it optimally enables underlying
services being delivered
– It allows development of a systemic ‘root cause’ approach for
the proliferation of symptoms
– It i th only function situated to “see the forest” (or f
is the l f ti it t d t “ th f t” ( forests)
t)
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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8. Using Analogies to Establish the Right Level
• Analogy 1: The cost of governance is to the annual cost of an
outsourcing deal as the cost of IT Administrative Oversight is to the
cost of IT Service Delivery (3 - 4%)
• Analogy 2: G&A Expense is to Corporate Revenue as IT Administrative
Oversight Expense is to IT Budget (10 – 20%)
g p g( )
7% to 10% is the Best Answer
reasoning from analogies
Increase since much Decrease since
administrative oversight corporate revenue
is included in the scope
p includes a profit
p
of the transaction component
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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9. The Cost of Not Managing
What you hear
when you don’t have the right
administrative oversight
CFO #1 (w/Internal IT service delivery): “I
don t
don’t understand my IT costs; I think we
should outsource.”
CFO #2 (w/Outsourcing in place): “Why am I
not getting the savings I expected from this
outsourcing agreement?; I’m bringing the
service back in-house.”
You’re told of the divestiture of a Business
Unit and the BU wants to strip away all ‘their’
Oracle licenses. You have no idea what
licenses might be owned by the BU
Your email storage costs grow without limits;
you’re always throwing money at it
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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10. The cost of not managing well
gg
What do you experience without it?
• Lease payments beyond the end-of-term on nonexistent or obsolete
assets
• 20% year on year storage cost increases
year-on-year
• Repetitive and frequent mainframe upgrades
• Aggregate project benefits exceeding your total budget…(i.e.,
overlapping benefit claims that strain credibility)
• ARC charges under an outsourcing agreement:
– Assessed based on contested levels of consumption
– Exceeding total planned cost for the deal
• Penalties from software license audits (or, even if no penalties are
(or
assessed, then unbudgeted capital/expense to pay for undocumented
licenses in use)
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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11. The cost of not managing well
What do you experience without it?
• Paying 5X of the revenue generated for a hosted app
• Your company does layoffs while there are major unexplored
efficiencies to find in IT hardware maintenance and
telecommunications
• Rejected tax deductions for work done in other countries
• Pending audit points
• Business demand is more variable than IT cost structure
S i ( t th d ki d)
• Surprises (not the good kind)
• Constant firefighting
Without the right administrative oversight,
companies experience up to 20-30% excess cost
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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12. How much would you pay for a function that
eliminates these exposures?
Cost of running
TBO Function
20-30%
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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13. What do we mean by IT Administrative Oversight?
Thl
Technology B i
Business O
Operations (TBO)
ti (TBO):
CIO
AMO ITO
TBO
(Applications)
( pp ) (Infrastructure)
( )
• Asset Management
• Budget/Forecasting
• Ch
Chargeback
bk
• Communications
• Compliance
• Cost Management
•C t
Customer R l ti hi
Relationship
Management
• Governance
• Process Improvement
• P j t Portfolio Management
Project P tf li M t
(PMO)
• Reporting/Dashboards
• Technology Sourcing
• Thi d Party Management
Third P t M t
• Work Intake
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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14. TBO Definition:
WHAT: A cross-functional IT business office that
optimally enables the efficient delivery of the
core IT function (applications and infrastructure)
WHO: A unified team staffed with subject matter
experts in IT Finance, Sourcing, and Technology
RESULTS IN: The best alignment with internal
customer business goals matching spend to
value
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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15. Why is TBO Important Now?
• IT Management has evolved from high-growth
phase to maturity phase
– Most IT projects no longer have enormous ROIs.
pj g
This, in addition to the difficult economy, require
more precision in management and oversight
– Focus is shifting to the overall business of IT
– Shift from cost center to profit alignment
– Complexity of task requires new combination of
skills
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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16. Why is TBO Important Now?
ys O po ta t o
• A recent survey indicates that nearly half of
corporate CFOs believe that the alignment of
business and IT to be weak or nonexistent
• IT/Finance convergence now seen as necessary
for companies to maintain competitive advantage
(David Wessels, Wharton School)
• Organizational trends indicate an increasing
likelihood that CIO is a straight-line report to CFO
• With the increasing visibility of the IT finance
function, CIOs and others will be seeking help to
improve TBO effectiveness
• The assimilation of the IT function: “Seven or
eight years from now, one of two things will
happen: you’ll either see CIOs become more
business oriented, or you’ll see IT become such a
fabric of business that business leaders become
more tech competent.”(Russell Reynolds
Associates)
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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17. Benchmark: Review of the budget numbers
of large well-run companies reveals the
following average budgetary split
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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18. Benchmark for level of TBO spend
based on survey results
CIO
AMO ITO
TBO
IT Expense
IT Expense (Applications) (Infrastructure)
Budget
RTB* 24% 48% 8%
Projects* 20%
*These numbers represent average values surveyed
*Th b t l d
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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19. Conclusion
• People accept that there is a cost associated with an administrative
oversight function. This cost reflects the value of optimally enabling
an underlying function
• The most analogous examples to the management of IT are:
– The % of G&A to corporate revenue (10%-20%) and;
– The % of annual outsourcing deal cost committed to governance (3-4%)
– With logical adjustments, these analogies suggest a rate of 7-10%
• Th cost of not providing the appropriate administrative oversight
The tf t idi th i t d i i t ti i ht
could be as high as 20-30% of IT budget
• On average, well run companies spend 8% of their IT expense
average
budget on this function
• While it may be tempting for corporations to reduce staffing in TBO
areas, now more than ever companies need to continue to commit
resources to a TBO approach to managing IT. Correctly
implemented, it creates the best alignment with internal customer
p , g
business goals, matching spend to value
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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20. Thanks!
Contact me with any questions or comments.
dcarco@swingtide.com
cherman@swingtide.com
TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009
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