IT cost reduction

With a wide-spread economic downturn well underway, top managers are prioritizing cost
reduction as never before—and they are looking for new solutions and proven practices. It's inevitable that cost-cutting efforts will land heavily on IT since it is a significant cost center and because it impacts costs in almost every business activity.

Two areas that historically (and often wrongly) have received the lion's share of cost cutting attention are discretionary spend and IT funds earmarked for business growth. It’s
not that these approaches to short term cost-cutting don’t help, of course. They can be (and often are) highly effective at the department and project level, where smart middle managers can do a fine job of prioritizing the right candidates for cuts from their points of view. But
in the case of discretionary spend, on average it only accounts for about a fifth of today’s overall IT budget. Too often, cuts made only in discretionary IT spending can have unintended consequences by affecting IT service quality, which in turn diminishes the value and demand for IT services and negatively impacts business growth.

Measuring the value of IT

Many IT organizations are under increasing pressure to demonstrate and improve the business value of their IT investments. Many of the attempts to do so have been focused on ROI measures at the front end as part of developing a business case for the IT portfolio’s proposed investments — but these are only estimates of expected business value. Actual delivered business value can only be measured by taking a life-cycle approach, working with the business to measure actual benefits after the project is complete.
Firms that strive for best practice in IT portfolio management need to apply a credible standard
methodology across the enterprise to measure the business value of investments, both when
proposed and when delivered.

IT organizations that are looking for a straightforward methodology for valuing IT investments
should take a look at the BVI methodology developed by Intel’s IT organization. Intel, the world
leader in silicon innovation, is one of the most technology intensive organizations in the world and IT plays a critical role in its success.

The BVI methodology helps Intel prioritize investment options, make data-driven decisions, and
monitor progress. It goes beyond using purely financial criteria to encompass business value and
what Intel calls “IT efficiency”:

• Business value measures both tangible and intangible benefits. Benefits are assessed based on a set of weighted criteria that include such things as customer need, business and technical risks, strategic fit, revenue potential, level of required investment, and quantification of innovation and learning generated. Each project is given a numerical score for each criterion and the weighted totals are summed to give a single quantitative number for its business value.
  
• IT efficiency measures its impact on the IT organization. In an effort to reduce costs and become more agile, IT organizations are increasingly developing enterprise architectures, establishing standards, and acquiring core competencies in key skill areas. How well a project complies or “fits” within this framework establishes its IT efficiency. A project that does not conform to the architecture and/or standards will be more costly to implement and support and will also entail greater risks. Using a set of weighted criteria enables Intel to quantify the IT efficiency of each project.
• Financial criteria measure financial attractiveness. Intel clearly distinguishes business value from financial value. There are some projects which have significant business value (e.g.,responding to a competitor’s threat) but may not be financially attractive. Other investments may be costly but required as a result of regulatory or compliance purposes (Sarbanes-Oxley). Intel typically uses at least three financial metrics in determining financial attractiveness to avoid some of the problems outlined earlier. Using NPV, IRR, and payback period together gives a more robust assessment of a project’s true financial attractiveness.

BVI provides Intel IT with a common language and framework for discussing IT investments,
assessing business value and IT efficiency contribution based on common criteria, and
prioritizing diverse investments based on the environment and IT strategy. The BVI process
enables continued and proactive alignment of the IT project portfolio with corporate and IT
business strategies.

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How to develop a business case

A business case is a tool that supports planning and decision-making, including decisions about whether to buy, which vendor to choose, and when to implement. Business cases are generally designed to answer the question: What are the likely financial and other business consequences if we take this or that action (or decision)?
A good business case shows expected cash flow consequences of the action, over time, and—most important—also includes the methods and rationale that were used for quantifying benefits and costs. The latter are important because every business case in a complex environment requires assumptions, arbitrary judgments, and the development of new data. The case, in other words, is built from information that goes beyond existing budgets and business plans.
This gives you a framework for showing management how they can work with you to implement financial tactics: reduce costs, increase gains, and accelerate gains. The case also describes the overall impact of your proposal in terms that every financially astute manager looks for: discounted cash flow, payback period, and internal rate of return.
The business case is not a budget, not a management accounting report, and not a financial reporting statement. This distinction is important for deciding which kind of cost and benefit data go into the business case: incremental values or total cost and benefit figures. Incremental values are probably the right choice in decision support situations, especially where a proposed action is viewed as a potential investment. On the other hand, it is more appropriate to build the case from total cost and benefit figures when the purpose is budgetary or business planning.

Read the full paper here