Michael Krigsman’s recent post estimating the worldwide cost of IT failure at $3T sparked an internal debate about technology investments and how to measure IT success. In the traditional view of IT as a cost center, success is measured in primarily in terms of IT cost as a percent of revenue. IT leaders are applauded when they can deliver projects under budget, on time, and keep the overall cost low as a percent of revenue. But, is this actually good for the business?
The cost-center view of IT has been challenged recently by the advent of technologies such as cloud, social and mobile that have the potential to impact top-line metrics such as customer engagement, retention, cross-sell and more. In fact, the Hackett group has found that world class companies invest 5% more than the median on technology while spending far less than in areas like Finance, HR and Procurement. Why is this? Is it because forward-thinking companies recognize that IT can be a differentiator and a strategic enabler?
Battle of the Brains - Appirio Experts Debate the Best Single Metric
So, the question we’re debating is, “How IT should be measured?” Is it business impact, cost savings or something else entirely? Here’s one case for business impact as the metric:
On the flip side, here is a case to continue viewing IT as a cost center, where success is measured primarily in terms of IT cost as a percent of revenue:
We’d also love to hear from you. What do you think? Please add your thoughts in comments or tweet them using #appirio #itsuccess.
A company must be able to clearly distinguish between the keeping-the-lights-on spending and discretionary spending on IT. The focus on the former is cost and on the later is investment-for-growth. A CIO should be able to manage the former is a given . The real question is if a CIO can drive discretionary spending in a company ( for example to reduce time to market or improve brand perception). Cloud, Mobile and Social come into play there.
ReplyDeleteIn the spirit of this blog post, I've recorded my comments as a video!
ReplyDeletehttp://www.youtube.com/watch?v=mB3OPWDf8_w
Clearly business impact. At my last company we made an acquisition of a company that had 25 people and $30M in revenue. They had over $15.8M in EBITDA. Their "IT" or technology costs made up over 30% of their costs (almost exclusively licensing costs). Their personel costs were under 10%, and online marketing (google ad-words) made up most of the remainder. Their use of technology drove up the % share of IT simply because it increased revenues while decreasing personel costs through increased productivity / leverage-ability, and those IT costs grew with revenue while the personel costs did not. If you used % of revenue as a measure of IT success they would have been a great failure when in fact they had a very profitable company that was also very flexible - they could instantly scale over 80% of their cost basis in response to changes in demand without having to let go of a single human resource.
ReplyDeleteCan you imagine if we could use technology to earn over 50% EBITDA and scale our cost basis and delivery capacity instantly based on demand? Would we be considered failures just because our technology costs where higher than industry averages?