IT Planning: When are “Costs” Actually the Costs?

Contributed by John Saaty

IT planning is quickly evolving with solutions that provide greater cost transparency and attribution. This is a good thing. For years (decades?), the IT organization has run as a non-cost attributable business operation. Because IT is not customer facing, and in many cases not even specific to a product, the costs related to IT were rolled up into G&A expenses.

As the executive suite and CIOs become more attuned to the importance of instrumenting the organization with technological capabilities, it has become much more important to understand the relevant costs. CIOs will often bucket the IT investments broadly into categories including: strategic, informational, transactional, and infrastructure. IT Financial Management solutions provide detailed transparency for cost attribution across various types of projects and cost pools. But in planning, cost is really an estimate of future use of resources and can be inaccurate.

Many IT planners understand that this inherent inaccuracy is somewhat expected, and so in the IT planning process they can use the “fudge factor” to sandbag and build in IT costs that go far beyond what could be reasonably expected. This provides for shadow budgets that can be redeployed to pet projects and the like. A recent Corporate Executive Board study quote: “93% of business partners view IT strategic planning as important, but only 23% believe it’s effective.” CEB Ignition Guide to Strategic Planning. What is the root of this lack of belief in effectiveness?  Much of it lies in the fact that people simply don’t trust the financial or resourcing estimates. The cost-driven IT budgeting approach actually favors players who can effectively manipulate cost drivers to their advantage – there is little incentive to be highly accurate around cost estimation except for the altruistic goal of being a good corporate player (not usually an award given out, by the way).

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So how does one combat this? In an optimization that includes both the strategic benefit and the relative cost of an IT initiative. With the focus on relative benefits and costs across an entire portfolio, the more accurate one can be around costs and not padding the budget, the more rewarded that stakeholder is when the final tally comes for the projects that are to be funded. This is because benefit relative to cost is calculated into the tradeoffs, and if the cost is relatively so high for the benefit delivered, the project looks like a real dog in the portfolio. Accurate cost estimation is rewarded. Inaccurate or padded cost estimation is not. You may ask, why not estimate costs inaccurately on the low side so as to win the cost/benefit tradeoff? Anyone who has been through a planning cycle knows that once the financial plan is baked it is really difficult to go back with hat in hand to ask for more resources…not good. You need to get what you need at the time of planning.

We have been through numerous resource optimization exercises with clients and time and again have seen how the perspective of benefit-to-cost tradeoffs drive significantly more discipline in the business case development and planning process. The discipline comes in both for cost estimation and also for benefit attainment towards specific priority-driven goals.

More on this topic can be read in a recent Forrester Research article that was published in the Fall of 2016 and is available for free here.   

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