Getting Started

This media-rich book authored by the TBM Council combines videos, interactive graphics, and the TBM Index where you can measure and compare key performance metrics with other CIOs.

Please touch the video above to learn how to interact with this book, and gain the most out your experience.

Getting StartedHOW TO USE THE BOOK

Getting Started

LinkedIn Authentication

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Touch the LinkedIn logo above to sign in with your LinkedIn account. In doing so, you will have full access to the TBM Index and other resources in the book. We ask for LinkedIn authentication to help ensure the integrity of TBM Index data. Your company’s industry and size are used for demographic purposes. No other information, including your connections, are used without your explicit permission. Your LinkedIn data will not be shared with third parties.

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Meet the Council

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TOUCH THE PHOTOS TO INTERACT

Meet the Board of Directors and Officers of the TBM Council. You can also meet Principal members of the Council and see demographics of other readers. Touch on any photo to read their biography and meet the leadership team.

Getting Started

At the height of the global recession that began in 2008, business technology leaders were at a turning point. Faced with the conflicting mandates of spend less on technology and drive greater business productivity, we found the traditional approaches to managing IT were no longer adequate. Although each of our situations was different, we struggled to collaborate with our business partners to make fact-based decisions about cost and quality tradeoffs, to drive the right levels of investment in our projects and services, and to maximize the business value from every dollar invested in IT.

Fundamentally, our management approaches lacked the necessary business acumen. Our business partnersi

managed their businesses one way, and we managed ours another way. We spoke different languages. They talked about cost and quality and we talked about technical constraints and service levels. When new market opportunities appeared, they justified the investments to go after them. We said no to new projects far too often because we had dysfunctional funding models.

We formed the TBM Technology Business Management Council to deal with this challenge. Rather than each of us trying to solve the problem on our own, we got together to share and discuss innovative approaches. The theme was always the same: how can we create and

Getting Started

Foreword

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leverage transparency internally and with our business partners to optimize our costs, balance the supply and demand for our services, and drive more investment in business productivity and transformation?

In this book, we share our perspectives on Technology Business Management, a prescriptive and applied set of practices for CIOs and their teams to maximize and demonstrate business value. The videos, interactive infographics, and interconnected surveys of the TBM Index provide a rich learning experience for you. We hope you will not only learn the principles of TBM but also how to apply them.

We recognize there is no substitute for conversations with other practitioners of TBM. What makes this book unique is it is a core part of a collaboration platform that connects you to us — a community of your peers who are learning about, adopting, and using TBM. We encourage you to connect and participate. Ask questions. Share your own observations and lessons. In doing so, you will have a better learning experience but you will also help us evolve the practice of Technology Business Management.

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Getting Started

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CHAPTERS INCLUDED

1. The New Business Model of IT and the Forces Shaping It2. Position Your Organization to Manage Your Supply and Demand3. Understand and Benchmark the True Cost and Performance of Your Services

FUTURE CHAPTERS

4. Provide Transparency to Link Service Delivery with Business Outcomes5. Execute Demand-Based Planning to Gain Greater Efficiencies and Alignment6. Optimize Services and Suppliers for the Best Cost for Performance7. Rationalize Your Portfolios to Sustain Value Creation8. Innovate to Drive Growth and Strategic Business Advantage9. Transform the Business by Enabling Agility Drive a Performance-Based Culture10.

Chapter Summaries

Chapter 1The New Business Model of IT and the Forces Shaping ItExecutive Summary

Over the last decade, the value equation of business technology has changed dramatically as the result of several forces that are beyond our control as technology leaders. In this chapter, we share the lessons we’ve learned in adapting to these forces, giving rise to a new paradigm for maximizing the value they deliver to the business: Technology Business Management (TBM). We introduce four decision-making capabilities that help us more efficiently run our businesses while balancing our investments in growth and business transformation. Built upon transparency, TBM complements our existing key initiatives (such as IT service management, IT governance and modernization) and applies to virtually every enterprise, regardless of your maturity or business model.

As technology leaders, we are relied upon to both run and grow our businesses. This dual role is nothing new. There has always been a tension between our investment portfolios of running and growing — and transforming — the business. This is important because we are judged — and we judge ourselves — by how well we strike the appropriate balance between these competing portfolios. Investing poorly likely puts our business at a competitive disadvantage, alienates our business partners, and in turn, limits our tenures, compensation and career paths.

The investment triangle of run, grow and transform (see next page) forms the business value equation of enterprise technology. Unfortunately, forces beyond our control have permanently altered this equation, leading to a seachange in the skills and methods we must employ to strike the right balance.

Let’s first consider how these major forces have permanently altered this value equation. Then, we will look at a new management paradigm that is needed to counter them.

Section 1

The Business of Enterprise Technology Has Changed

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The Business of Enterprise Technology Has Changed

Chapter 1Section 1

The Economic Crisis and Regulatory Expansion Constrain InnovationThe global recession that began in 2008 has made a lasting impact on business technology spending. Average IT budgets fell in every region except “emerging Asia”ii and there continues to be downward pressure on many. According to recent Network World researchiii, only a fifth of businesses have budgeted more for IT in 2012 than they did last year, with the majority (39%) keeping budgets flat.

It’s not just flat or declining budgets that have an impact on the value we deliver. It’s how we deploy those budgets. Since run-the-business spending is often fixed and non-discretionary, budget cuts generally come from our change-the-business initiatives first.

While we often try to optimize our run-the-business spending to free up budget for more strategic priorities, the recent tightening has made this more difficult for two reasons:

• Over the past several years, we became much more efficient and productive, making it much harder to find additional optimizations. Many of us have had to admit we’ve cut to the bone, there’s no more to give. We’ve got to find ways to optimize our demand instead.

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Touch each category to see how each affects your investment portfolio.

Interactive 1.1 The Technology Investment Triangle

• At the behest of our CFOs, many of us postponed expenditures on equipment and software to preserve cash. Now hardware and software refreshes, which are mostly run-the-business costs, are eating into potential grow/transform investments. In fact, from the second quarter of 2009 (when the recovery began) through the third quarter of 2011, 94 percent of capital outlays in the United States were used to replace aging high-tech equipment, machinery, and buildings. Only 6 percent was spent on business expansion.

To make matters worse, the ever-increasing regulatory burden (i.e., mandatory expenses) puts growing pressure on our run-the-business costs. The costs to comply are rarely classified as grow or transform. And since most regulations mandate additional reporting from the business, they disproportionately consume our technology budgets. Whether it’s complying with IT-focused provisions (e.g., PCI DSS, HIPAA, data privacy acts) or business-focused regulations (e.g., Sarbanes-Oxley, anti-money laundering statutes, environmental laws, changing tax code), information technology is needed. This drives up the run-the-business part of our investment triangle.

Cloud Computing and Consumerization Loosen Your Grip on Technology SpendingThe cloud has fundamentally altered our relationship with the lines of business. More than ever before, we face real competition. Where outsourcing decisions in the past were usually made by us, our business partners are increasingly making decisions to selectively outsource services such as infrastructure and software to the cloud. Even when we’re able to retain control over sourcing

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decisions, the cloud has altered the expectations of our business partners.

Here is why. Cloud providers market directly to our business partners who are savvier than ever about technology. As a result, our business partners expect to order services at a published price over the web. They want near-instant access from almost anywhere. They want an intuitive application with round-the-clock support. If we can’t meet these expectations, they are more willing than ever to build the business case and source those services directly through the cloud. This disintermediation of the IT supply chain creates a number of challenges (e.g., integration, security, administration) which cause unintended consequences for our overall investment portfolios.

Public cloud computing introduces other challenges as well. For example, it means we must be able to make apples-to-apples comparisons between our external services and internal ones. Consider end-user support for end-user software. Many SaaS providers do not provide level 1 support to end users; they expect their customers to do so. In this case, the retained cost of providing level 1 support should be included in any comparison of on-premises software to a SaaS solution.

Embracing consumer technologies — the

consumerization of IT — also affects our decision making. Our business partners and end users often compare the purchase price of consumer-grade PCs, laptops, internet service and so on to similar but commercial-grade products and services that we provide. The disparities in price and quality along with

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the inherent diversity of products and services increase the cost and complexity of running our business.

This loss of control often translates into poor business and technology decisions. Adopting public cloud services or consumer technologies without a clear understanding of their total costs, including retained costs, can spell ruin for our run-the-business budgets. Furthermore, shadow IT can impair our ability to execute a cohesive technology strategy and enterprise architecture initiative, hindering agility and impairing business alignment. Cloud and consumerization are not inherently good or bad, but our decisions to adopt them must be based on facts.

Business Growth and Competition Drive Demand Faster than Efficiency GainsIncreasing demand for our services, projects, and infrastructure often stems from business growth. The corresponding investments we make, properly classified as grow-the-business, are welcomed by our business partners. Such capital investments in new capacity often drive down our unit costs (by spreading fixed investments across more units), which help keep our run-the-business spending in check.

By taking advantage of continuous cost/performance improvements (e.g., due to forces described by the laws

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of Moorev, Koomeyvi, Bellvii, and others), hardware refreshes can help reduce our run-the-business costs. New hardware is generally cheaper to buy, power, cool, and maintain than older hardwareviii. However, these gains have barely kept pace with the growth in demandix.

We may now be at a tipping point. According to Dr. Howard Rubin, efficiency gains have offset demand growth by about 18% per year. However, he believes these gains will be more than offset by increased demand in the coming years.

Rubin cites efforts to protect revenue, tap into new revenue sources and markets, leverage new channels and support new devices as reasons for this geometric growth rate.

Increased demand is not just an issue of quantity. In order to innovate and compete, we often build or cobble together leading-edge technologies that are more powerful, complex and integrated. Creating these services may be viewed as growth or transformation, but they create a run-the-business “hangover” that is usually greater than the cost of running traditional or commoditized technologies.

While these forces apply upward pressure on our run-the-business costs, increased global competition is driving

greater accountability for growth and innovation. To be successful, we need to foster transparent conversations with our business partners to make collaborative decisions about cost and quality…and about supply and demand.

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Value Is in the Eye of the BeholderEach of the forces we described above affects our investment portfolios — and our value equation — in different ways. Some drive up our run-the-business costs while others exert greater pressure for growth and innovation. How these affect the value we deliver depends on the expectations of our business partners.

The MIT Center for Information Systems Research defines value as “delivering performance on a dimension that stakeholders find important. The performance dimension may be monetary, such as revenue or profit, or nonmonetary such as customer satisfaction or process reliability. However, delivering performance on an unimportant dimension has no value.” XII

A free marketplace has a built-in mechanism for handling the innate subjectivity of value: cost (or price). Cost helps bring supply and demand into equilibrium. If a product or service is free, demand is potentially infinite. However, putting a cost on our services starts to shape both supply and demand. Our business partners begin to understand how the cost of technology affects their cost of revenue. They will decide how much service they need, at what level of quality, and help us minimize waste. They will tell us when cost exceeds value. Cost is a very important signal.

Section 2

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Chapter 1Section 2 Value Is in the Eye of the Beholder

This does not mean we all must charge back for our services. Many of us are not ready to take this step; for some organizations it may never be needed. However, we need to enable value-based conversations with our business partners. Since value is subjective, we need to frame our discussions in quantitative terms that our business partners understand. Cost transparency helps us do this.

Transparency of quality is also important. This means clearly defining and communicating our services and their quality

(e.g., through service- and operational-level agreements, security ratings, etc.). It also means measuring and communicating the quality of service delivered.

Once the cost and qualityxiii of our services is known, how do our business partners assess value? In general, they compare our costs and quality against three factors:

1. The cost and quality of third-party alternatives: Our services should not cost more than similar-quality services from third-party providers, including the cloud. Since it is often difficult to perform apples-to-apples comparisons of services, the perception of cost and quality is important. Competitive providers often do a good job of marketing their services, making them appear better or cheaper than what we are offering.

2. The cost and quality of internal alternatives: Our business partners may own and operate their own technologies, including both applications and infrastructure. In certain operating models (e.g., decentralized IT organizations), the lines of business often own a large part of their technologies. The cost and quality advantages of greater scale may encourage our businesses to move to a shared services model, but only if and when we address political roadblocks. A clear and unbiased comparison of costs and quality helps us overcome such objections.

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3. The business outcomes enabled by our services: Innovation is the engine of growth, both to our top-line revenues and to our bottom-line profit. The growth supported by our services must justify the investments in them.

As technology leaders, we manage the cost and quality of our services. Our business partners are the best judge of business outcomes. What we need, then, is a decision-making framework for collaborating on cost, quality and business outcomes.

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Video 1.1 The Benefits of Technology Business Management

Technology Business Management (TBM) gives us a decision-making framework for maximizing the value from our technology investments. The framework relies on our foundations of financial and operational data, our service delivery people and processes, and our relationships with our business partners. It defines the disciplines that are essential to optimizing our costs so that we invest more in growth and agility.

We provide a guided tour of the TBM Framework in this book. In the remainder of this chapter, we introduce you to each component. We also introduce the TBM Index with a diagnostic for you that follows the structure of the framework. By answering a set of questions about your organization, you will get a baseline of how your organization is currently applying Technology Business Management principles. The diagnostic also benchmarks your organization against your industry peers.

In each subsequent chapter, we discuss each component of the framework in greater specificity. You will learn about the options you should consider when applying TBM, along with the pros and cons of each. Extending from the baseline diagnostic, we present additional questions in each chapter based on those options. The answers to these questions will provide actionable findings based on recommendations from TBM Council members and other experts.

Section 3

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Chapter 1Section 3 TBM: A Framework for

Maximizing Value

While your decision-making framework may be different than the TBM Framework here, it should center on driving collaborative tradeoff decisions internally and with your business partners based on facts and metrics. Tradeoffs are essential because we must find ways to drive greater value without spending more time, money or resources than we already have. Even if our budgets grow, the ability to maximize value through tradeoffs helps us stay

lean and ready for tougher times. But what kind of tradeoffs can we, and should we, be driving? To answer this question, let’s start our guided tour in the center of our framework with the decision-making capabilities.

Run the Business More Cost EffectivelyThere are four types of decision-making capabilities that help us maximize value through tradeoffs. The first two help optimize the cost and quality of services in order to run our business more cost-effectively.

First, we optimize our cost for performance. To get the right quality for the best possible price, we must balance our cost, quality and risk based upon the needs of our business partners. Balance is the operative word, as reducing cost is not always the right answer. Indeed, sometimes our business partners are willing to pay more for better quality.

Clearly there are two sides of this tradeoff. On the cost side, we must consider our total cost of ownership (TCO), not just our acquisition

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Diagram 1.1 TBM Framework

costs (a small part of the TCO for most services or technologies). Where possible, we must reduce waste and increase the utilization of our services, technologies and other assets. We must also understand our unit costs, since the volume of our services and technologies will vary based on business conditions. Our challenge is to create a total cost structure that optimizes unit costs given the volume fluctuations of our business cycles. This demonstrates business maturity, which fosters the trust of our business partners.

On the other side, we have performance. Here we refer to the various qualities of a service or technology for which we pay. These include the warranty qualities of availability,

security, and fault tolerance and the utility qualities of features and functions (i.e., business efficacy, fitness for purpose). In many cases, we can reduce our costs simply

by reducing the quality of services or by increasing the associated risks. Such decisions may be appropriate, but only when considered in the context of potential business outcomes.

Cost and performance tradeoffs address only part of our efficiency challenge. We must also rationalize to sustain value creation. Over time,

our portfolios of services, applications, technologies, infrastructures and suppliers become more complexxv. By driving up our costs and hindering agility, portfolio complexity cannibalizes innovation. To sustain our

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Diagram 1.2 Run-the-Business Capabilities

capacity to create value, we must identify when, where and how to simplify, modernize, or consolidate our portfolios and their resource components. We must appropriately trade diversity and complexity for cost reduction and simplicity.

To make those decisions, we must first understand the consumption of our resources. Any decision to alter a portfolio has an impact on consumers. We must understand who is being affected and how. We leverage our insights into consumption, cost and performance along with more strategic considerations, such as supply risks, enterprise architecture and vendor lock-in, to create properly balanced portfolios.

Improve Our Ability to Change the Business

Running our business more cost effectively increases our capacity to change our business. Not only does it free up budget for growth and transformational investments, but it helps us demonstrate credibility to our business partners. Credibility is as essential to our success as the capacity to spend on innovation.Change-the-business investments are those that help us grow revenue, exploit new ways to reduce costs,

or fundamentally improve the way we do business. They help improve the top or bottom lines of our income statements. While our run-the-business decisions can improve our bottom line by optimizing costs, they mostly

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Diagram 1.3 Change-the-Business Capabilities

do so by changing the way we deliver our technology-enabled services. For the purposes of our discussion, we define change-the-business investments as those that improve our business processes or decision-making capabilities.

We focus on two types of decisions that improve our business. First, we innovate to grow and compete by balancing our investments across a portfolio that is governed with our business partners. Our portfolio of investments may include run-the-business investments, but we often strive to maximize our investments in business growth and strategic advantages.

Innovation largely stems from the projects we undertake. Unfortunately, we often make portfolio decisions based on limited visibility into the total investments being made in our projects and services. Many tools give us insight into the hours being spent, the status of our projects, and our human resource capacity. However, we need to make decisions regarding our total investments, including the impact of projects on our longer-term run-the-business spending. Here we make investment tradeoffs based on a clear appreciation of the investments being made.

Next, we must be prepared to transform our businesses by enabling agility. Transformational opportunities

generally come along infrequently and unexpectedly, usually driven by market and technological changes that occur outside of our walls. Because these opportunities are difficult to predict, our businesses must quickly respond to take advantage of them. Agility makes this possible.

Business leaders consistently describe agility as a key to success. We enable agility through several tactics. We

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Video 1.2 TBM Provides Value Management

create cost structures that represent the right balance between flexibility and efficiency. We make investment decisions quickly, backed by the facts, and we enable more of our people to do the same. We give our business partners informed choices in the services they consume so they can quickly respond to changing market conditions. We move quickly to exploit the right market-based innovations such as mobile, cloud, collaboration, and services-oriented architecture. Once again, tradeoffs

are essential. However, agility stems from the speed and confidence of making those tradeoff decisions.

The Role of Transparency

Our decisions depend on bidirectional transparency between us and our business partners. Transparency provides the visibility we need to make optimization decisions internally. Transparency with our business partners enables us to collaborate on tradeoffs. And transparency of business demand enables us to plan with greater fidelity and safely reduce excess capacities. Most importantly, transparency builds trust. We have a new motto for today’s technology leaders: be transparent or be gone!

In our experience, few business technology executives argue with the need for better transparency. Most of our business partners demand it. Instead, many of us don’t know how to get there or what to do with it. Transparency is a sensitive matter. We can be too transparent, hiding the forest with the trees. We can reveal confidential information. We can report bad data and destroy hard-won trust. We can reveal problems but lack the tools for solving them. TBM addresses these concerns.

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Building the Foundation

TBM starts with positioning our organizations — our roles, responsibilities, and processes — to manage the supply chain of IT. This does not mean we must all reorganize for TBM. Instead, we must first understand who plays what key roles in managing our supply and demand. For example, who is responsible for defining our services? Who sources service components and manages the performance of our suppliers? Who works with our business partners to discuss their consumption and

understand their demand profiles? Who translates business demand into actionable IT plans?

The names or reporting structures for these roles is less important than how we arm our people to make decisions. Leaders in these roles must be given the facts and the decision-making framework to manage supply and demand by collaborating with our stakeholders.

The Core DisciplinesBuilding upon this foundation, TBM delivers meaningful perspectives for us to make collaborative decisions with our business partners. TBM provides an accurate picture of our costs and performance by the dimensions we need to manage, such as our services, applications, technologies, projects, data centers, suppliers, and consumers.

Getting the right perspective depends on transforming much of our data, especially financial, asset and consumption data. We have important tools for this, such as activity-based costingxvi and the bill of materials for our services. We must consider the data that is needed or recommended for such a transformation, how data quality affects our decision making, and the methods for

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Touch each element of the supply chain to understand the benefits related to IT services and projects

Interactive 1.2 The Supply Chain of Business Technology

improving our data over time. Building on top of this foundation, TBM provides bidirectional transparency between us and our business partners. On one hand, TBM shows our business partners how much they consume, how much everything costs, and at what levels of quality. On the other hand, TBM helps us assess and translate the business demand for services into technology plans.

We have several options for creating transparency with our business partners. For example, we can provide cost transparency based on actuals or by using published rates (prices). We can provide a shadow bill of IT (or showback) or charge back for our services. We can

implement a hybrid model. Each approach has advantages and disadvantages. In comparing and contrasting different models of transparency, we can decide on an approach that is best suited for our business.

We also have several options for planning with our business partners. Consider budgeting, a central component of planning. Many of us budget from a baseline, such as our prior year expenditures. However, some of us are moving to zero-based budgeting that reconsiders each line item based on the needs for next year’s business. This is more complex than baseline budgeting, but promises greater fidelity. In evaluating these alternatives, along with other, more advanced approaches to demand-based planningxvii, we can select an approach to planning that improves the value we get from it.

Continuous ImprovementEach of these decision-making disciplines helps us drive greater value. However, our value potential depends on the degree to which we can exploit them. Rarely do we possess all of the people, skills, data, tools and processes

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Diagram 1.4 The Core Disciplines

to fully exploit TBM, especially at the start. In order to both sustain and improve value creation, we must leverage our governance processes and execute roadmaps for TBM that help create and drive a performance-based culture.

The TBM Framework illustrates the necessary elements of a performance-based culture. In addition to governance and TBM roadmaps, the framework addresses change management such as training, the socialization of TBM, marketing your IT services, and the proper operational cadence for TBM decision making.

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Video 1.3 The Board Explains the TBM Framework

Technology Business Management is built to be universal. Since it is both applied and prescriptive, it has been tested and adapted by enterprises of many shapes and sizes. These include a rapidly growing list of organizations, including companies in nearly every industry; with a few million dollars in annual technology spend to many billions; and in the Americas, Europe and Asia-Pacific. TBM has been applied by both traditional IT organizations and product operations groups whose spend is often described as “cost of goods sold” (COGS)xviii. Technology organizations of different maturity levels, operating models and delivery models employ TBM xix.

Your organization is likely practicing many TBM principles already. For example, you may be providing cost transparency to your business partners or using business demand models to build your IT plans and budgets. But how does your organization compare to your industry peers? How well have you adopted the practices recommended by the TBM Council?

Section 4

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Introducing the Technology Business Management Index™

Chapter 1Section 4

The Technology Business Management Index™ will help you answer these questions. The TBM Index™ benchmarks and assesses how you and other technology leaders improve value by applying business acumen to your decision making. Following the structure of the TBM Framework, the TBM Index employs an interactive survey found in this book and through the Council website.

Structured in four main parts (see graphic on next page), the TBM Index offers you several benefits including:

• Compare your organization’s application of business practices against those recommended by the TBM Council.

• Benchmark your practices against your industry peers.

• Use the TBM Index as a basis for conversations with other TBM Council members.

• Discover which TBM practices correlate with IT metrics, such as run- vs. change-the-business percentages or IT spend as a percent of revenues.

Providing these benefits is an important goal for us. However, we have another very important goal for the TBM Index.

The Research Goal and Structure of the TBM IndexThe research goal of the TBM Index is to provide an industry-validated benchmark on the state of Technology Business Management. This will help us understand the degree to which TBM is being practiced by each industry, geography, IT operating model, and so on. In turn, we will be able to be more prescriptive in our recommendations to TBM practitioners.

Furthermore, the TBM Index will allow us to correlate specific TBM practices and principles to the value delivered by business technology providers. To do this, the TBM Index is structured into four main parts, starting with a baseline diagnostic and later introducing questions and tools to assess outcomes.

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There are many potential conclusions to be drawn from this research. For example, we will try to answer the following questions:

• How does cost transparency correlate to increased change-the-business spending?

• Does zero-based budgeting result in fewer budget variances throughout the fiscal year?

• Does providing greater service choices and tiering result in more satisfied business stakeholders?

• How does the value of TBM maturity vary by industry, geography and operating model?

• At what size of company or business technology organization is TBM most needed to create satisfied business partners?

While strength of correlation does not prove causation, it gives TBM practitioners greater confidence that the investments they make in Technology Business Management will result in the benefits they need.

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The four surveys that construct the TBM Index (Right)

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Start the TBM IndexThe TBM Index™ baseline diagnostic gives you a snapshot of TBM at your organization so you can:

Your responses are protected according to our privacy policy and will not be shared with third parties.

Complete Your Profile so that you can access group comparisons. (5 minutes)

Complete the Diagnostic to reveal your TBM Index baseline scores. (30 minutes)

Compare Your Results versus baseline, or those in your industry. (5 minutes)

Compare your organization to others in your peer group (industry, size, operating model, etc.)

See where you can improve your decision-making capabilities

Have a common benchmark for conversations with other TBM Council members

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Get Started Now Click the button to the right to launch the Index

Executive Summary

Implementing Technology Business Management (TBM) often accompanies a broader transformation of an IT organization. For many, this transformation positions the IT organization to be a better service provider and business partner. In contrast to many cost-centric IT organizations, these organizations build foundations on a unique value proposition, services aligned to that value proposition, and clear roles and responsibilities for optimizing their services portfolio by balancing supply with demand.

In this chapter, we will discuss how to position your organization to manage the supply and demand for your services. We will focus on several core components of your TBM foundation, including your technology business model, how to define services and assess their unique business value, and the key roles your people must play to manage your services as a portfolio.

Chapter 2Position Your Organization to Manage Your Supply and Demand

Build Your Foundation Based on Value

The Technology Business Management framework is built on a foundation that positions our technology organizations to manage supply and demand. This foundation defines our technology business model, the services we provide, and the roles and responsibilities that are essential to optimizing value. But to define any of these, we must carefully define our value proposition.

Many technology leaders, corporate leaders and business partners mistakenly assume their technology organization’s value proposition should mirror their corporate strategy. For example, many assume that if the corporate strategy is cost leadership, then technology should be delivered cheaply; or, conversely, a product leadership strategy justifies enormous investments in highly custom technologies and services. This line of thinking is overly simplistic, imperils corporate strategyi, and stems from failing to

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Diagram 2.1 The Foundation of TBM Positions to Manage Supply and Demand

Build Your Foundation Based on Value

Chapter 2Section 1

understand or communicate how technology will help the business succeed.

Instead, our value proposition must clearly articulate how we will enable our business to execute on its corporate strategy. Value proposition and corporate strategy are linked; but they are not the same. Best price (corporate strategy) does not mean cheapest IT. Best product does not mean custom applications. In other words, our technology is a means to an outcome, not the outcome itself.

To better understand the connection between corporate strategy and value proposition, we share examples throughout this chapter from DIRECTV (see example at right), Xerox, The Clorox Company, and Inteva Products.

Why is our value proposition so important to our Technology Business Management foundation? Because the value we promise to deliver drives both our technology business model and how we define our services. It refines what we expect from our TBM-related decision making and defines what constitutes success or failure for our technology organizations.

Create a Unique and Compelling Value PropositionThere is hardly anything more important for the success of any enterprise than its unique value proposition. More than mere messaging, our value proposition answers important questions about why we exist and the services we deliver, such as:

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• Why should my business partners source services from me as opposed to doing it themselves or buying from an external service provider?

• What must I keep in-house as opposed to sourcing externally? (Or, what is core and what is context?)

• What value should our services reinforce? What will make them unique and compelling?

• How should I communicate the value our services deliver?

Creating a unique value proposition (or unique selling proposition) has been described extensively in business literature, especially for marketing professionals. The details for creating one are beyond the scope of this chapter. However, there are some important differences between creating a unique value proposition for a company as opposed to one for an IT organization. To understand these differences, let’s begin by considering a simplistic value chain (Diagram 2.2, Pg.34) for a technology-enabled business process.

In our value chain, business value is built in four layers. We start with resources we procure and provide, such as hardware, software, and facilities. We deliver technology

services by adding value through expertise and labor. We deliver business services by packaging, delivering and supporting business applications and offering additional value through consulting, training, application development and so on. Finally, we deliver business capabilities that generate revenue, reduce costs, increase productivity or otherwise improve corporate performance.

Of course, not all of us execute all four layers of this value chain; our business partners often deliver parts of it. However, the value chains for technology-enabled business processes create or enable revenue and if done efficiently, help deliver a profit.

Now consider the services you deliver. Where do they fall in this value chain? If you’re like many business technology providers, you probably offer services that fall into several segments. This is what makes it so difficult to define your unique value proposition. The simplest way to start is to focus on the segment where you have the best opportunity to deliver the highest value to your business. This will help you define your unique value proposition.

Many IT leaders fail to deliver unique value – or if they do, they fail to accentuate and articulate this uniqueness. For example, it’s not enough to deliver technology services cost effectively; many cloud and other external service

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Diagram 2.2 Technology Business Model Archetypes

providers are equally cost-effective (or perceived as such). Your value proposition must be truly unique.

Being part of (i.e., internal to) your business provides an advantage for delivering value. You may possess real or perceived strengths in safeguarding your customer data. You may be in a position to deliver the end-to-end services your business needs. You may be able to build and support differentiated business applications based on a more intimate knowledge of your business and customers. If you have these advantages, you should use them to define your unique value proposition.

Ask your business partners these questions to reveal a little bit about your value proposition:

• Why do you source services from my organization and not a third party?

• Why not build or source your own technology-enabled services and applications?

• What do we provide that you cannot get elsewhere? What is unique about the services we deliver?

• How do we help you execute on your corporate strategy?

• Do you consider us a business partner or a service provider?

If your business partners struggle to answer these questions, or if they believe they are forced to rely on your organization, spend the time to develop or refine your unique value proposition. Need help? You probably have an expert business partner with a vested interest in you getting it right: your chief marketing officer (CMO) can help you better define your unique value propositionii. We provide recommended resources below.

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In looking at our own business technology organizations and those of other companies, we’ve identified business models that vary based on business value and organizational focus. Indeed, these two elements are highly correlated: a mostly internal focus of a technology organization results in an emphasis on managing assets and cost and creates little unique business value; a more external focus (even to the point of external customers of the business) stems from delivering business services and capabilities and therefore greater unique value.

To illustrate, refer to Interactive 2.1 (Pg.37). At the top you’ll find a business model archetype based on delivering the complete value chain described above. This archetype, what we call Business Driver, is often beyond the scope of a traditional business technology organization (i.e., an IT department). Exceptions include technology product and service providers where the technology function is integral to the customer service organization; think Facebook, Google, Yahoo!, and Salesforce.com.

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Your Technology Business Model Depends on Your Value Chain

Chapter 2Section 2

As we move down, we encounter archetypes that conform to more traditional organizations. Since our models are based on their value chains, the other models comprise various parts of the Business Driver value chain. Let’s discuss each of these, starting with the Expense Center.

Expense CenterThe Expense Center archetype is characterized by a lack of service orientation, as the move to defining and delivering services accompanies greater customer focus. The expense center IT organization is the least connected to business demand and is usually funded as a percentage of revenues, based on headcount, or through a baseline budget adjustment. These approaches poorly reflect business needs. The expense center model for IT is inappropriate for any corporate strategy. It is the vestige of an era when technology was less crucial to corporate strategy.

As its name implies, an expense center IT organization is focused on cost containment. This leads many to assume it is the right model for a company with an operational excellence (or price leadership) corporate strategy. After all, cost leadership is tantamount to market leadership for these companies. However, investing more in technology solutions often helps reduce the cost of products and services due to productivity gains.

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Interactive 2.1 Technology Business Model Archetypes

Touch the archetype labels on the left to see the differences between each business model.

Take cost leader Wal-Mart. This retailer’s technology business model is best described as a value partner. For this retail giant, cost leadership often results from outspending competitors on business technology. For example, Wal-Mart was the first retailer to build its own satellite network, at the time (1987) the largest private satellite communication system in the world, giving the retailer a distinct advantage in managing its inventory and supply chain. The retailer continues to make dramatic investments in IT to support its “every day low cost” strategy. It is this strategy, and the linkage of services to unique business value, that justifies Wal-Mart’s investments and drives its technology business model. Wal-Mart clearly

demonstrates that an expense center model is inappropriate for a cost leadership corporate strategy.

Gartner’s research shows the fallacy of an expense center orientation that seeks to reduce “cost per” relationships (above). Gartner shows that instead of setting IT spending as a percentage of revenues or dollars per employee, business technology leaders must educate their business partners by defining “IT services explicitly in business terms. Executives can then make informed decisions about the right level of spending based on the cost of these business services and the value they deliver.” This aligning of spending to services is only possible when adopting a services orientation at some point in your value chain.

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Service ProviderThe Service Provider archetype is characterized by the introduction of the service portfolio and creation or assignment of service owners and business relationship managers, all of which we will explore later in this chapter. Service providers often focus on the maturity of service management processes (e.g., ITIL) in order to define and deliver services efficiently and at the promised level of quality.

Despite rhetoric to the contrary, service providers often operate at arm’s length from their business partners, relying on the business relationship manager to understand the business partner and their required outcomes. This orientation can operate like a vendor-customer relationship. Service owners define and deliver services and business relationship managers sell them, negotiate service levels and set expectations, review performance on a regular basis and make adjustments as needed.

The service provider model is well-suited for most shared services organizations. Since they must serve the needs of multiple business constituencies, the service provider model works well to deliver standardized

services at the right (and clearly specified) levels of quality and cost. Indeed, businesses that choose a shared services approach generally do so to improve operations, something the service provider model supports.

In the service provider model, projects and other change-the-business investments are often restricted to technology services, such as new applications, which may be driven by transformational or other high-value business initiatives. However, the role of the business technology organization is often limited to the technical aspects of those projects or investments. Delivering greater value only comes from greater customer intimacy — by shifting your organizational focus more externally to your business.

Value PartnerThe Value Partner archetype is characterized by a change in the service owner and business relationship management roles that reflect a more external focus of your organization. The shift to value partner depends on earning the credibility of a trusted business partner. In this model, the term “business partner” is more than semantics; it is based on a partner-oriented relationship. In our experience, credibility is earned through the following:

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Creating a governance program that enables you, your line of business leaders and your corporate leadership to review, discuss and manage the IT investment portfolio alignment to business goals and/or capabilities.

Clearly differentiating your technology services and articulating their value and business performance through a regular review process involving your business relationship managers.

Delivering professional services such as application development, information security reviews, business application design (planning), business process analysis, enterprise architecture and others. These demonstrate that your organization knows your business and not just its technology.

Meeting other core requirements such as performance and capacity, competitive unit costs, and expedient problem resolution.

In other words, making the shift to value partner depends on delivering elements that are largely in your control as a business technology leader. In delivering these well — and demonstrating your unique value proposition when doing so — you will earn the credibility to deliver other business services and to help drive and fund business innovation.

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Video 2.1 Xerox IT Transforms from Service Partner to Value Provider

Business DriverThe Business Driver archetype could be considered the one that is not IT. These organizations truly are the business. This model is only possible when the products or services delivered to customers are largely based on your business technologies. If your company provides software, platform or infrastructure as a service in order to generate revenue, you are operating in this business model. If your business unit provides technology-based services to your external customers, you are a business driver.

It is very unusual to see a traditional brick-and-mortar institution with the majority of their business technology delivered under this business model. However, it is not uncommon to find business units within brick-and-mortar companies that are business drivers. For example, the online store of a brick-and-mortar retailer represents a business driver. Even an investment bank whose services rely heavily on technology may fit this model. The business unit of an aircraft manufacturer that provides online flight scheduling services is a business driver. In these cases, the services of these technology organizations demand such an intimate relationship between business process owners and technology decision makers (e.g., service owners) that their organizations may be indistinguishable.

Most business driver technology organizations started out that way. They were created in-house and are led by a CTOv, not a CIO. These CTOs often have much greater technology budgets than their CIO counterparts. However, with the emergence of the cloud we have begun to see CIOs be given responsibility for their company’s external “technology-as-a-service” business. This only occurs when the CIO has proven his or her ability to run IT like the business.

The business driver model is included here because Technology Business Management is equally applicable to business driver organizations. There are many CTOs on the

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TBM Council representing organizations that are not considered IT. Moreover, they often provide excellent examples of practices that should be, but often are not, applied by more traditional IT organizations. Their services-orientation and clearly defined unique value propositions are good examples.

Which Model Is Right for You?From what you’ve read, you might assume that the best model for you is the business driver or the value partner model. We will avoid labeling these as better or best and instead focus on the ramifications of each model.

As we stated above, the expense center model is inappropriate for any organization that wants to be a valued part of the business. Time and time again, expense centers are forced to evolve or they are replaced. This trend started with outsourcing and has accelerated with the cloud. The competitive intensity in our markets means our investments in technology must distinctly help us execute our business strategies. Expense center providers rarely do this.

For expense center CIOs or VPs of IT, the service provider business model is an excellent start for delivering greater value. By adopting a services strategy, developing a

service portfolio and a unique value proposition, and creating roles for service owners and business relationship managers, your organization will become less dispensable. However, this may only be one step in the right direction. Service providers are increasingly at risk of being replaced in whole or in part by external providers.

There is an exception where technology organizations are built for the purpose of delivering technology services. Common with large organizations, especially global banks,

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CTO-led technology organizations often provide hosting services and shared applications to their lines of business. Their business value stems from being more cost-effective than external service providers while delivering high-performance and specialized (e.g., via security, privacy) technology services. These organizations often operate like a cloud provider, even billing the lines of business based on actual or planned consumption of shared technology services. Sometimes they deliver services to third-party customersvi.

Value partner is the least dispensable model for a traditional IT organization. At this level you are demonstrating customer intimacy and business acumen that, in turn, create unique value. Value partner CIOs have earned a seat at the table with their business partners. They have also demonstrated they can run other shared services, beyond those that are considered technology-driven, such as procurement, human resource management, and even legal services.

Many businesses rely on providers that operate in more than one business model archetype. For example, lines of business with the global banks often maintain their own CIO-led IT organizations that build and support their own applications, hosting them on infrastructure provided by their CTO-led technology services organizations. This

provides the advantages of economies of scale and specialized services with the business knowledge needed to support business processes. Some of these organizations also provide technology-enabled customer services, characteristic of a business driver archetype.

Does this mean we can adopt a hybrid model, with one business technology organization adopting two or three business models? Yes, but examples of this are uncommon. Value partners often outsource many of their technology services — or create a separate organizational unit — so they can focus on the customer intimacy that distinguishes the value they provide. Business drivers rarely take on the business services that are characteristic of the value partners. Even when CIOs are handed the cloud business of their brick-and-mortar businesses they often maintain largely separate organizations for business service delivery and the execution of business processes.

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Which business model archetype applies to your organization? Interactive 2.2 will help you decide. For each row, select the box that best describes your organization. As part of the TBM Index, this infographic gives you the opportunity to compare your selections to those of your industry peers.

To interpret your selection of these five characteristics, look for misalignment. If your organization is a service provider, for example, your unique value proposition, service portfolio, organizational alignment, transparency processes and funding model should align to the characteristics shown in the service provider column. If they do not align, seek to understand why, as variances may prevent you from being effective in your chosen business model.

For each row, select the attribute that best describes your own organization.

Interactive 2.2 The Service Portfolio Activity Map

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As with competitive vendors in the marketplace, we must carefully define our portfolio of offerings, i.e., our services. The services we choose to provide and the way we deliver and support them determine our value to the business. Moreover, they drive our resource and skillset requirements and, in turn, our cost structure. A poor choice regarding one service affects our capacity to deliver others.

Many business technology leaders struggle to define their services. Perhaps this should be expected when so many are evolving from an expense center model focused on technologies. Sometimes the struggle stems from a failure to grasp the basic concepts of IT service managementvii. At other times, technology leaders think bottom-up (i.e., starting with the assets or resources you own) as opposed to top-down (i.e., starting with your business capabilities).

Does TBM rely on you having defined your services? Not entirely. The disciplines of TBM, such as understanding and managing true cost and performance or providing transparency to change business behavior, have been adopted by organizations that have not developed a service catalog. These organizations often manage their investments by dimensions other than services and business capabilities such as:

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Maximize Business Value with the Services You Deliver

Chapter 2Section 3

• Business applications, which approximate business services;

• Core infrastructure and technologies, such as servers, storage, networks and data centers; and

• Projects, such as software development and other capital improvements.

Many of the decisions to optimize costs, rationalize portfolios, innovate and improve agility apply well to these types of objects. However, it is often difficult to link those decisions to business outcomes without a services orientation.

For our discussion, we will refer to five types of technology and business services, as shown and defined in Interactive 2.3 (Pg.48). You may have other types of services defined for your own organization.

This taxonomy raises a couple of important questions. First, how do we distinguish business process automation from delivering business applications? Business process automation — and business services in general — are characterized by improving a business process. Simply delivering and supporting a business application fails to accomplish this goal. Indeed, almost any technology provider, with little or no knowledge of our business processes, can deliver and support an application.

Instead, consulting with our business partners, understanding their processes, and driving continuous improvement provide business value. When continuous improvement is delivered as an integral part of delivering and supporting a business application, we have business process automationviii.

Second, what’s the difference between a technology (resource) and a technology service? A resource is a procurable, such as a technology, an application, a third-party service, or labor. Resources provide value and can be delivered as a service or as part of a service by adding value through the following activities:

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• Designing and Packaging the service, including service composition and negotiating and documenting service levels with your business partners or other consumers;

• Sourcing the service and/or components in a way that strikes the proper balance of cost, quality and sourcing-related risks;

• Costing and Pricing the service so you can optimize unit costs and advertise your rates to your business partners to influence their demandix;

• Assessing Demand for the service by collaborating with business partners and translating business plans into resource requirementsx;

• Supporting and Monitoring the service to ensure your business partners and end users receive the agreed-upon value and remain satisfied; and

• Billing or Charging for your services based upon the negotiated prices (rates) and the levels of consumption or other factors.

Use the service portfolio activity map (Interactive 2.3) to clarify which types of services your organization provides and how you provide them. For each box, tap to select between “not performed”, or “performed”.

Using the infographic, evaluate your services using the technology-enabled value chain. Here, a value partner will show proficiency at all levels and across all activities while a service provider will show less proficiency across business services. You should easily spot discrepancies — potential issues that inhibit value delivery.

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For each type of service (row), select whether or not your organization performs the activity listed at the bottom. Descriptions

for service type and activities are shown by touching each item.

Interactive 2.3 Service Portfolio Map

Assess Service Value based on Your Corporate StrategyAs noted in the first chapter, the MIT Center for Information Systems Research defines value as “delivering performance on a dimension that stakeholders find important”.xi Considering what we’ve discussed previously, the performance dimension your stakeholders find most important is helping the business execute on its strategy. Begin by assessing your services based on that dimension.

In order to keep things simple, we recommend a qualitative approach to business value assessment of services. In our approach, your services fall into one of three unique business value categories — differentiator, advantageous and essential — which are defined in Interactive 2.4 (page 50). We’ve assumed that you do not provide unessential services, or that they are a very small part of your portfolio.

Most organizations offer services of each category. It is unrealistic to think we can deliver only differentiators, as many of our companies’ competitive advantages are not a product of our technology-enabled services. Sometimes they have more to do with the design and quality of products (e.g., Apple), the strength of the brand

(e.g., The Coca-Cola Company), the efficacy of the supply chain (e.g., Wal-Mart) or the skills and knowledge of employees (e.g., KPMG). Our services may be essential to exploiting these advantages, but they may not be unique by themselves. This is to be expected.

Furthermore, our business partners are bound to request services that do not support the competitive advantage of our business. For example, a collaboration service may not directly support a competitive advantage, but our business partners may insist that we provide such a service.

It is paramount that we must invest in each of our services based on contribution to our corporate strategies. For this, we must manage our services as an investment portfolio.

Manage Investments in Services as a PortfolioThe discipline and techniques of portfolio management have been applied to many kinds of investment portfolios, including those of financial instruments (e.g., stocks, bonds, and options), a firm’s products and brands, and a company’s vendors and suppliers.

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The goal of a portfolio manager is to maximize the collective benefits of our investments while managing risk through diversification. For example, financial portfolio managers purchase a variety of investments to yield a certain return at a certain level of risk; product portfolio managers invest across mature but lower growth markets and less mature but higher growth markets to balance profitability and growth; and vendor management chooses vendors and suppliers to optimize economies of scale while minimizing supplier and supply chain-related risks (e.g., supplier bankruptcies, geo-political issues, etc.).

If we view and manage our services as an investment portfolio, what trade-offs are we trying to manage? After all, many of the services we deliver are dictated by the needs of our business. We do not have the option of not providing or not investing in many of our services. In this

way, service portfolio management is very different from a stock portfolio: a hedge fund manager chooses his or her investments without regard to delivering services as part of a greater value chain.

In contrast, the IT service portfolio manager creates a model for deciding how to invest in each service. Using such a model, he or she asks the following questions about the portfolio of services:

• What business value do we expect from each service? How does each service fulfill our unique value proposition and contribute to our corporate strategy?

• For differentiator services, what are the goals of our continued investments? Should we increase or decrease our investments in each of them?

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• Are our services cost-effective? What changes can we make to improve the economics of delivering services?

• Should we rationalize essential services to free up investments for new services or improve others (or lower the cost of the portfolio)?

• Should we outsource certain services or certain parts of our service?

Furthermore, the portfolio manager works with our business partners, process owners and/or business relationship managers to identify services that are needed to satisfy new business requirements.

The service portfolio investment matrix (Interactive 2.4) helps to quickly assess a portfolio, communicate with business partners, and drive investment decisions. With this approach, services are rated according to their unique business value, as discussed above, and their financial performance. This categorizes services into one of four primary investment categories (divestment candidates, subsidizers, loss leaders and top performers), each with a different implication for future investments.

Once completed, the matrix intuitively facilitates investment planning. When used during value-based conversations with our business partners, such as through a governance body, it helps identify services that are consuming large investments but are failing to deliver unique business value. Service portfolio managers can use the matrix to define investment goals. In general, we make decisions to move services up and to the right in the matrix, shrink the size (investment level) of those

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Interactive 2.4 The Service Portfolio Investment Matrix

Touch each quadrant of the investment matrix to learn about the types of services that fall into them.

that cannot be moved, manage demand for unessential services and retire services that are not driving value.

The service portfolio matrix also facilitates more strategic decision making. In evaluating new reference architectures, for example, the matrix illustrates its impact on services in the portfolio. A modernization effort should lead to more cost-effective service delivery and potentially business value improvement. Furthermore, long-term initiatives can be broken down into phases to show their impact on a year-by-year basis.

As we discussed earlier, classifying services according to unique business value is largely qualitative. Financial performance, on the other hand, is more-or-less quantifiable, depending on the TBM tools employed. For example, the following tools help us manage the financial performance of our services:

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Interactive 2.5 Service Portfolio Matrix

Touch each service on the investment matrix to learn about the types of decisions recommended for each.

• Activity-based costing of our services to understand their unit costs and degree of efficiency (e.g., return on assets)

• Unit cost benchmarking internally over time and/or against industry peers

• Comparing the cost of services to similar ones provided by external service providers

• Comparing cost recovery (e.g., chargeback or showback) against service total cost of ownership (TCO)

To use the matrix, two additional attributes are needed for each service: their demand profile and their lifecycle stage. Growing or declining business demand is indicative of business adoption and also has implications for capacity requirements. It is also important to identify services that are in the pipeline (in the process of being developed or deployed) and those that are being retired, as these indicate potential changes in available funds.

The tools employed to understand financial performance depend, in large part, on the decisions we make regarding our business model, our approach to

transparency and planning, and other aspects of TBM. We will discuss these tools and techniques for demand management in subsequent chapters, along with a more robust discussion of portfolio management in the chapters on the decision-making capabilities of the TBM framework.

The service portfolio investment matrix is an important tool. However, its impact on business value depends on our ability to make and execute the decisions it facilitates. In other words, managing our investment portfolio depends on our people.

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Defining a compelling and unique value proposition for our organization, choosing the right technology business model, and establishing a model for managing our service portfolio is up to us and our executive team. These things must be driven from the top down, but they depend on distinct roles in our organization that may not exist if we haven’t already made the transition to service provider or value partner. We will discuss the most important roles here.

Manage Your Supply with Service Owners and Service Portfolio ManagementOur service ownersxii are like the product managers of a software companyxiii. They are accountable for the success of their services, beholden to key performance indicators set by the IT service portfolio manager and our executive management team. Good service owners deliver successful services by:

Optimize Your Team to Manage

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Optimize Your Team to Manage Supply and Demand

Chapter 2Section 4

• Understanding their markets — i.e., their customers and their potential customers;

• Creating clear value propositions for their services;

• Monitoring their service alternatives, what might be considered their competition, but must also be considered potential sources of service for the business;

• Rationalizing the technologies, such as applications, used to deliver their services;

• Building different service level packages, or tiers of service, to cost-effectively meet the distinct needs of our business partners;

• Managing the costs, budgets and financial performance for our services and service level packages; and

• Setting prices or rates that are communicated to service consumers.

Service owners are responsible for the entire lifecycle of the service. Without a lifecycle perspective, service owners will struggle to apply the portfolio management discipline, especially when it comes to making or recommending investments in new services, introducing new service packages, and retiring services.

Generally, service owners are not service managers. They are not responsible for the day-to-day operation and support of our services. They work with service managers, application owners, tower owners and others to ensure their services are performing according to expectations and commitments. Furthermore, service owners are responsible for improving the

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Diagram 2.3 Service Owners Improve Financial Performance

financial performance of their services, in essence moving services to the right in the service portfolio matrix. They are also responsible for right-sizing our investments in those services (i.e., changing the size of the bubble).

Service portfolio managers work with service owners and business relationship managers to manage the service portfolio. Together, they set the services strategy to deliver on the organization’s unique value proposition and support the company’s strategy. Our service portfolio managers must also define the key performance indicators (see following table) by which we measure service performance in order to manage our portfolios.

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Key Performance Indicator Description

Service Level Achievement

Performance against service-level agreements that have been negotiated with business partners. These often include service availability, incident response times, bug fixes and enhancements, security and compliance, etc.

End User Satisfaction

Percent of end users reporting satisfaction with the service. This is often measured through periodic end-user surveys.

Unit Cost Reduction

Reducing the per-unit costs of providing the same (or essentially the same) service over time. Unit costs should be reduced due to improved efficiencies, economies of scale and other factors. Major enhancements may require a new baseline for unit cost reduction.

Management of Service Budget

Delivering service at a total cost within the quarterly and annual budget for the service. This requires that the budget be set or translated into a service-oriented budget, which is often different than the budget managed in the general ledgerxiv.

Service-Level “P&L”

The difference between the cost of providing a service and the amount recovered from the business or when compared against third-party benchmarks such as external service providers or industry peers. This can be applied when both charging back for service delivery and when performing showback.

Investment Portfolio Alignment

The ratios of spending in services according to business-aligned classifications. This requires classifications of services and other investments (e.g., projects) according to your global business capabilities, business strategies and/or other targets.

Table 2.1 Types of Key Performance Indicators for Service Owners and Service Portfolio Managers Source: Apptio, Inc. Used with permission.

Manage Your Demand with Business Relationship Managers and Business Process OwnersOnce services are defined and owned, there is nothing more important to linking the supply of those services with business demand than the role of the business relationship manager. While service owners and service portfolio managers are accountable for the success of what we deliver, business relationship managers help make our business partners successful and satisfied with our services. They fulfill this role by:

• Liaising with business partners to understand their needs and their business plans

• Working with service owners, enterprise architects, business process owners and others to define and propose solutions to new business problems

• Communicating the business value and the cost of services in the portfolio (or, more specifically, catalog)

• Assessing and negotiating the business demand for our services

• Identifying and addressing service-related issues

by working with service owners, service managersxvi, enterprise architects and others.

Business relationship managers are like the account managers of a services vendor (and are sometimes called account managers or client relationship managers): they listen to their customers (our business partners), understand their business plans and pains, and propose solutions. They also wield the service catalog and identify the need for new services in the pipeline. In this regard, they influence our supply.

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Video 2.2 The Proper Role of Business Relationship Managers

They are also authorities on demand patterns. They serve a critical demand management function by prioritizing what is most important from our business partners, communicating the cost of service choices, and helping close or defer low value requests from the business. They operate with their IT hats on by being mindful of supply-side constraints, and with the goal of ensuring customer success.

Business process owners also play a key role in demand management. They are a different kind of business partner than those who own a line of business. They often reside in a shared services organization and are responsible for the design, implementation and improvement of common enterprise processes and are accountable for achieving promised benefits.

Together, our business relationship managers and business process owners define business value and manage demand. They are best positioned to understand business plans and pains and position the right solutions. It may be counterintuitive

to make these roles responsible for defining value, but value is a function of business need. These roles form the bridge between business processes and our services, and are essential to delivering value. In this way, they are responsible for the business value and demand dimensions of our service portfolio matrix.

Since their processes are usually high-value and differentiated, business process owners should be paired with the owners of services that support their processes. In many cases, this is a one-to-one pairing of the two. In this case, service owners may interact little with business relationship managers. Thus, pairing your service owners with process owners may provide the needed supply-and-demand linkage between your services and the business.

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Diagram 2.4 Business Relationship Managers and Business Process Owners Manage Business Value

IT Finance Must Facilitate Our Business DecisionsMany organizations have an IT finance role. Traditionally, this role creates and manages the IT budget within the parameters set forth by corporate finance. This role may also own the IT asset management and procurement functions, responsible for approving purchases and recording new assets, dispositions or changes. For many organizations, this role has mostly been a controller function.

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Key Performance Indicator

Description

Service level Achievement Performance against service-level agreements for all services provided to a business partner.

Business Partner Satisfaction Percent of services for which the business partner’s end users are reporting satisfaction.

Business Planning Percent of services provided to a business partner for which there is a documented business plan, including demand estimate.

Business Partner-Level “P&L”

The difference between the cost of providing services to and the amount recovered from a business partner. This can be applied when both charging back for service delivery and when performing showback.

Project Performance

Execution of projects against project plans for the business partner. This includes projects that are delivered under agreements with the business partner, such as those included in professional services offerings.

Economic Value Added (EVA)

Total profitability from the operations of a business unit from the perspective of the shareholder. Can be employed only if EVA measurements are supported by corporate finance.

Table 2.2 Key Performance Indicators for Business Relationship Managers and Business Process Owners Source: Apptio, Inc. Used with permission.

To enable more meaningful decision making, the IT organization needs a CFO of IT — a true financial advisor for business decision making. IT leaders and our business partners need financial analysis in order to optimize our investments. For many organizations, this will require upgrading skillsets and tools. We must employ many of the same techniques that CFOs employ — activity-based modeling, business intelligence, portfolio analysis, cost restructuring and opportunity cost management. Indeed, these techniques are essential to Technology Business Management. We will begin to discuss them in the next chapter.

In this way, the role of IT finance is evolving by providing more value-added analysis. This does not mean everyone will have a finance function within their IT organizations. Many will rely on corporate finance for this function. Regardless of our organizational model, corporate finance and IT must align, work from the same source data, and employ consistent approaches to making financial decisions.

Other Supply-Side Roles Are EvolvingService owners and business relationship managers are essential roles for managing the supply and demand for our services. We focused our discussion on these, as they often do not exist in organizations that have not made the shift to delivering services. However, we see other supply-side roles evolving with the shift to Technology Business Management.

Take technology procurement. In the shift to delivering IT and business services, a category management approach for sourcing from third parties is often more effective. With category management, the procurement function pivots its focus from vendors to the needs of the internal service providers. Its goal is to maximize the value of a product or service category to the organization by managing total cost of ownership (TCO), risk, operational performance and so on, not just the purchase cost and quality of a technology. The shift to category management often occurs with better insight into the downstream impacts of sourcing decisions on the services being provided. For example, when the true TCO of a category of hardware is known, decisions must often be made that span suppliers and contracts. Category planning and execution becomes essential to service performance.

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We also see capacity management evolving. This occurs because once services are defined and their bills of materials (BOMs) are well known, business plans can be translated much more accurately into capacity plans. As the costs of capacity-related decisions (e.g., excess capacity) become clear, service owners can work more closely with capacity planners to more cost-effectively balance capacity-related risks with capacity-related costs. As a result, capacity planners will become more service centric.

Finally, enterprise architecture is becoming much more TCO-aware. Once they have the tools for understanding the TCO-related impact of their standards, along with service owners holding them accountable, enterprise architects will alter their decision-making approach. As trade-offs between the benefits of proposed architecture standards and their costs become clear, architects and their constituents are able to understand not only the impact on the enterprise but the impacts to individual services. This, combined with better demand planning, helps the organization measure the real benefit of architecture changes.

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This chapter has focused on the foundation of the Technology Business Management framework. We’ve discussed our unique value propositions, technology business models, services and service portfolios, and foundational roles and responsibilities, all of which are essential to TBM. These elements of our foundation enable us to practice the disciplines of the framework: understanding and benchmarking true costs and performance, delivering transparency to change behavior, and planning with greater confidence.

The foundation we’ve described also directly relates to the decision-making capabilities of the TBM framework. You should be able to see how service owners and service portfolio managers help optimize run-the-business investments by optimizing the financial performance and levels of investment in our services. These decisions help optimize

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Build the TBM Disciplines and Capabilities on Our Foundation

Diagram 2.5 Our Foundational Roles Enable our RtB/CtB Optimizations

Chapter 2Section 5

cost-for-performance and rationalize to sustain value creation.

You should also understand now how our business relationship managers and business process owners help drive change-the-business investments. In managing the business value dimension of our service portfolio matrix along with our service demand profiles, these roles help innovation to grow, compete, and transform by enabling agility.

Taking the Next StepWith the tools provided in this chapter, spend some time to create or clarify your unique value proposition and create a plan to deliver the right services; it takes time to get them right. In fact, our value propositions and our services will continue to evolve; there is no final version.

Meanwhile, bear in mind that TBM applies to three of the four technology business models. The essential ingredient is your services. If you currently operate as a service provider, or are working on becoming one, TBM will provide essential tools for defining or refining your services and pave the way for delivering greater value.

If you run a value partner organization, evaluate the alignment and clarity of your roles and responsibilities. Do your service owners understand their role in optimizing the financial performance of their services? Have your service portfolio managers created an effective model for making investment decisions? Have you paired your service owners and business process owners so they decide on trade-offs that optimize their business processes?

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If you’re a leader in a business driver organization, assess the ability of your product managers (i.e., service owners) to optimize financial performance. In many cases, product managers are bound to revenue goals but lack the accountability and tools for managing TCO. By optimizing transactional costs and the consumption of shared resources, your service owners can often help avoid or delay major fixed investments, such as data center expansions.

Ultimately, the ability to drive the right decisions depends on our decision-making tools. Our next three chapters will describe in detail how to adopt the TBM disciplines that provide these tools.

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Chapter 3Understand and Benchmark Your True Cost and PerformanceExecutive Summary

Earlier in the book, we established that value is a function of the cost, quality and business outcomes of what we deliver. To maximize value, your managers need clear and effective levers for managing these variables. In our world of limited resources, the IT shops that deliver the most value are those that root out waste, make the necessary tradeoffs of cost and quality and direct resources to the services or projects that maximize profit or create a competitive advantage.

In this chapter, we discuss the levers needed to optimize cost and performance. We will show how to create a more consumption-driven accounting model of your costs and resources. In turn, this will give you data you need to collaborate with your business partners on the investments you’re making, use a bill of IT to shape demand and assess business demand to create a more meaningful IT plan.

In the latter part of the 17th century, Isaac Newton began a series of experiments on light. His goal was to understand the fundamental nature of light and why it behaves like it does. Newton wasn’t satisfied with what his unaided eyes revealed, but he lacked the tools needed to determine the true nature of light. To give him new perspectives, he created innovative optics such as the first refracting telescope and multi-prism arrays.

Optics work by transforming light. They bend, reflect and refract light to help us see clearly and give us otherwise impossible perspectives. Car mirrors let us see behind us, microscopes magnify the very small, and camera lenses allow us to capture moments and share them around the world. In doing so, optics provide us the perspectives we need to make decisions in our daily lives.

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Chapter 3Section 1 Understanding Our True Costs and

Performance Depends on Our Optics

Diagram 3.1 : Understanding True Costs and Performance Empowers TBM Disciplines and

Decision-Making

We depend on a different kind of optics to make decisions about our technology investments. Our optics include our resource consumption and demand models that bend, split and combine data much like Newton’s multi-prism arrays did with light. With the right models, our decision-making system provides valuable perspectives through dashboards, reports, KPIs and other metrics.

In this chapter, we will show how to build consumption-driven cost and resource models to provide the perspectives our people need to make smart tradeoffs.

How an Accounting ModelEmpowers a TransformationWe are not the first to discover that our accounting models often distort our perspectives. Nor are we the first to undergo a revolution in accounting and the way in which we manage outcomes. Beginning in the 1970s, the manufacturing sector made fundamental changes to their cost models. In turn, those accounting changes empowered management approaches and design techniques that completely transformed how they delivered products.

What led to the accounting changes? Foremost, manufacturers automated more work with robotics and computing. They equipped their production personnel with more advanced tooling to boost productivity. By making production even more capital intensive, automation shifted more of the production cost from direct labor to overhead, an indirect expense. It also added new costs into the overhead, such as the engineering, support and maintenance of equipment. Suddenly, capital and overhead dominated manufacturing’s cost structure.

Traditional cost accounting methods proved insufficient. They relied too heavily on direct costs, especially labor. Accountants would allocate overhead (e.g., facilities,

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Figure 3.1 New Optics are Needed to Transform a Corporate Accounting Model Comprised of GL Accounts

and Cost Centers

utilities, equipment, management labor and supplies) to products based on the amount of labor and other direct costs. The more labor-intensive the product, the more overhead they would allocate to it. This approach distorted the true cost of products where automation (an indirect cost) both reduced labor (the primary direct cost) and consumed a greater share of the total.

For many manufacturers, the solution was activity-based costing (ABC). Instead of allocating overhead directly to products, ABC assigns overhead first to manufacturing activities such as inserting a rivet, soldering a wire, applying a quart of paint, performing a test or fixing a defect. The cost of each activity includes the direct cost of labor and materials and the indirect costs of equipment depreciation, facility leases, utilities and more. The cost of a product is the combination of its activity-based costs.

This proved to be a powerful change. Not only did it create more accurate product costs, but it also provided levers — the activities — that plant managers, engineers, designers and cost accountants could pull to change the cost of a product. For example, automotive engineers saw the true cost of, say, a dashboard. They discovered the impact of dashboard designs that required more assemblies. More assemblies (activities) not only added to

the build cost of the dashboard, they increased inspection time (another activity) and the number of defects (more activities). Activities drive costs, and this became apparent with ABC.

ABC helped transform manufacturing by empowering decision makers. It enabled new approaches, such as Design for Manufacturability and Assembly (DFMA), which considers the impact of a product’s design on the manufacturing process. ABC helped many firms adopt Total Quality Management (TQM) by exposing the true cost of testing for and fixing defects and revealing the impact of their decisions on quality. ABC helped spur Lean Manufacturing by encouraging process engineers to eliminate or reduce non-value added activitiesi.

The impact of this change was dramatic. Because these methods were first adopted by Japanese manufacturers, they helped shift the balance of manufacturing strength from the United States and Germany to Japan. Companies like Toyota redesigned production using these new insights, creating their own production systems (e.g., the Toyota Production System) and becoming global cost and quality leaders by the end of the 1980s.

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How can we use accounting to empower our own transformation and improve value? This depends on the roles we have in our organization and the decisions we expect our people to make. As we discussed in the previous chapter, fulfilling our unique value proposition depends on roles such as service owners, service portfolio managers and business relationship managers. These people simultaneously manage the value of our services, the business demand for them and their financial performance.

Rarely is our financial accounting model sufficient for these roles. Our financial model is designed first for external investors and lenders. It sacrifices important perspectives for the sake of making our financial statements comparable with those of other companies. While our financial accounting is sufficient for those external audiences, internal decision makers routinely need a different perspective.

To understand this better, assess how well your current model arms your managers to balance cost and performance, rationalize portfolios, innovate better and improve business agility – the decision-making capabilities of the TBM framework. Over the next few pages, we will discuss what is needed for each of these types of decisions.

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Chapter 3Section 2 Arm Your People with the

Right Perspectives

Chapter 3

Optimizing Cost for PerformanceOptimizing the cost-for-performance ratio of our services depends on tradeoffs we must make at every layer of our value chain. Our service owners are most responsible for these decisions, collaborating with business relationship managers, vendor managers and others on both sides (supply and demand) of our services.

Our service owners make cost and performance tradeoffs when delivering services. As illustrated by our Service Portfolio Activity Map in chapter two (Pg. 44), service delivery activities include designing and packaging our services, sourcing their components, costing and pricing and so on. These activities are like those taken by a manufacturer to deliver products to the marketplace. Similarly, our service owners can make decisions during each activity to eliminate waste, find more

cost-effective alternatives for service components, and smartly trade cost for performance.

Our new accounting model must help our services owners see eye-to-eye with their suppliers and consumers, often represented by vendor managers and business relationship managers. On one hand, our service owners need a

supply-side view of their services. They must see the direct costs of their services, such as application development labor or the invoices for outsourced services. They also need an appreciation of their indirect costs, such as the shared infrastructure they consume to provide their services.

On the other hand, our service owners need a demand perspective. For those of us

delivering services, our business partners think in terms of the services we provide, not about infrastructure or software. Our service owners and business relationship managers must communicate the value and cost of the services being delivered, understand

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Video 3.1 Using Cost, Consumption and Utilization Data to Provide Levers for Optimizing Costs

the business demand for those services and translate anticipated demand into an efficient resource plan.

In Interactive 3.1, we describe several essential perspectives our service owners need for trading cost for performance (and risk). Some of these enable optimizations that can be made unilaterally and some facilitate tradeoff discussions with others.

Open the Interactive graphic. Then rate how well your accounting model provides the data required for each

perspective. This will help you evaluate how well your current model arms your managers to make important tradeoff decisions.

If you’re like many business technology leaders who are beginning the TBM journey, you may find that your accounting model fails to empower the cost-for-performance tradeoff decisions. In this chapter, we will focus on how to create the right model. Then in chapter six, we will provide a more comprehensive set of cost-for-performance tradeoff decisions.

Rationalizing Portfolios to Sustain Value CreationRationalizing our portfolios helps us focus our scarce resources on our most critical services, technologies, infrastructures and vendors. It simplifies what we manage and deliver. To rationalize our portfolios, our portfolio managers must understand the cost, performance and consumption (demand) of their portfolio constituents.

Nowhere is this more important than our portfolio of services. Working with our service owners and business relationship managers, service portfolio managers help

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Interactive 3.1 Rate Your Perspectives for Managing Service Cost for Performance

optimize our services and decide when new services are needed and existing ones should be retired. They make decisions to trade resources between the services in our catalog and those in our pipeline (in development). They drive our service rationalization process.

To do this, we recommend a decision-making framework such as the Service Portfolio Matrix (Pg. 51) introduced in chapter two. This framework triggers actions such as the review of poorly performing services or the decision to retire a poorly consumed service. The primary factors we review to trigger these actions are cost-for-performance, unique business value and business demand. Our service portfolio managers do not manage these factors for our services; they create the decision-making framework and monitor it for changes. A rise in

cost, a decline in performance or value, or a change in demand should trigger a review.

Our business relationship managers work with our business partners to evaluate the business value of our services, the Y-axis of our service portfolio matrix. In determining value, they should apply criteria established by our service portfolio managers. They may use surveys to do so, but business value is usually a subjective measurement. Regardless of how we measure the business value of our services, it should be reviewed at least annually or when we change our business plans or modify our services.

With the right accounting model, we can systematically measure the financial performance (our X-axis) and demand (a third dimension of our model) for our services. We already described how the right accounting model

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Interactive 3.2 Service Portfolio Matrix Plots Financial Performance, Value, Investment and Demand for our Services

provides the true cost of our services. Service level management measures the performance of our services against our service level agreements, while other disciplines (e.g., capacity management, business continuity management, security management) help measure riskii, another important element of service performance and quality.

Our service portfolio matrix also depends on comparing our measurements to something else. Consider cost-for-

performance. The total cost of a service is not terribly meaningful without perspective. Instead, we need to evaluate the cost of delivering a unit of service, how that unit cost has changed, how it compares to any target cost and, in certain cases, how it compares to third-party unit costs. Evaluating cost-for-performance is the role of benchmarking, which is made possible with the right model.

Now consider demand. As with our unit costs, we must evaluate demand based on how it is changing. Here it is useful to review the consumption of our services over the past several months, quarters and sometimes years. Our business relationship managers should also work with our business partners to estimate future demand.

Our model should systematically measure cost, performance, risk and demand to provide these essential perspectives. These perspectives are described in Interactive 3.3. For each one, rate how well your current model provides these perspectives for rationalizing your portfolios. We will explore rationalization decisions in chapter seven.

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Interactive 3.3 Rate Your Perspectives for Rationalizing Your Portfolios

Innovating to Grow and CompeteLike our other decisions, those that drive innovation also depend on service portfolio management. The tools we use to rationalize our service portfolios also guide our decisions to invest in new services or enhance existing ones. Here our service portfolio managers must monitor the size of the investments being made, the status of associated projects and the estimated impact of new investments on our continuing operations.

Let’s start with what service portfolio managers need to monitor new investments. For purchases of equipment and software with quick deployments, existing financial accounting processes are often sufficient. We obtain and review vendor proposals, select a vendor, negotiate price and terms and execute the contract. The final cost to our business with such purchases is usually close to the estimated purchase price.

For longer-duration capital projects, our financial accounting model is insufficient. Projects such as new software development, major software enhancements and the integration of software are much more difficult to estimate with certainty.

It should be no surprise that our initial capital expenditure estimates are wrong. Failing to accurately plan and estimate projects is a common occurrence. Many of us have adopted approaches such as agile software development and ARC/RRCiii contract terms that assume our initial requirements and cost estimates are wrong. Instead, these methods provide for improved cost estimates with each release, iteration or sprint. In this way, we “spiral into accuracy” over time.

Our accounting model must adapt to this spiral-into-accuracy reality. Our service portfolio managers must have ongoing insights into the continuously changing CapEx of their pipeline services. Raw data (e.g., labor hours, project status and project risk) for these insights may come from our project management tools and monthly vendor statements, but it must be combined with financial data to be meaningful for making portfolio tradeoffs.

Estimating the OpEx impact of our pipeline services suffers from a different problem. The impact of new services includes not only the amortization and depreciation of our new systems and software, but also their maintenance and support costs. These include our help desk, application development and infrastructure support, many of which are shared resources. Without a

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service-oriented model of our operating costs that includes our shared resources, it is almost impossible to accurately assess the operating impact of new services.

By failing to include the true cost of new services in our plans, we merely absorb their operating cost when they are delivered. In turn, we often expect our infrastructure, support and development teams to manage the extra burden without new resources. While they usually manage to get by, this contributes to less visible detriments such as reduced service performance, a diminished capacity for innovation and staff frustration. It also sets the

expectation that we can continue building new services without budgeting for their support.

Our service portfolio managers and others depend on a model that provides ongoing monitoring of our project-related investments and accurately assesses the impact on ongoing operations. In Interactive 3.4, you will find perspectives that enable portfolio managers and other stakeholders to make portfolio investment tradeoffs.

Transforming by Enabling AgilityTransforming our businesses sometimes means delivering services and technologies that radically change our business capabilities or introduce fundamentally new ones. Examples of this type of transformation are rare. More often, a new competitor emerges and disrupts our existing business model, leaving us to wonder why we cannot deliver radical business innovations more quickly.

Such innovations are often stifled by our own inertia. We have so much invested in our current business model, people, skillsets, channels, processes, infrastructures and data that it is nearly impossible to pivot when we see a new opportunity. Our problem is not a lack of creativity;

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Interactive 3.4 Rate Your Perspectives for Driving Innovation

it’s an excess of business mass. This is why so few industry disruptions come from established players.

So instead of focusing on radical or disruptive innovations, we will focus on a different kind of transformation – one based on agility. Businesses that are able to respond more quickly to changes (in our markets, regulations, technological landscape, etc.) are more apt to thrive. Our agility obviously depends on more than just our accounting model. But the right model can empower decisions to improve agility by changing our inertia and by accelerating difficult decisions.

The office of the CIO and other executive stakeholders are most responsible for our agility. Unlike optimization decisions that can be made by the roles we discussed earlier, improving agility depends on setting and achieving more fundamental changes. These include tradeoffs to our cost structure (shifting fixed costs to variable or CapEx to OpEx) and our portfolios (setting targets for a reduction in the number of our applications) that are driven by top-down targets. These changes also include streamlining the way we make decisions and improving confidence in our planning.

In Interactive 3.5, we share the important perspectives needed to improve agility. The decisions they enable

translate into goals and metrics that are met by our service portfolio managers, service owners, vendor management and other managers. We will more fully explore how to improve agility in chapter nine.

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Interactive 3.5 Rate Your Perspectives for Improving Agility

To make the decisions described by the TBM framework, we rely on models that combine and transform five types of data: financial, technology, service, project and business. The first two types are essential for most perspectives in every organization; the latter three are often needed for advanced perspectives and are dependent on how we operate.

This combination of data is one of the defining characteristics of Technology Business Management. Other disciplines depend on some of these same datasets but are often constrained in the perspectives they provide. For example, IT financial managers often include non-financial data in their analysis but they stop short in providing the granular insights our service owners need to make tradeoffs. Our perspectives are delivered by consumption-driven cost and resource models that combine and transform our data.

In this section, we will explore the data and the models we need to provide the right perspectives. We will also address some of the most fundamental challenges in creating our models, such as data quality, defining resource allocation rules and creating trust in our models. For most of our decision-making needs, we need to understand the

Section 3

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Chapter 3Section 3 Use Models to Transform

Your Data

consumption of our resources, services and projects. Most of the time, this means consumption of our financial resources.

Our models may be used for non-financial resources as well: power and cooling (e.g., kilowatts, carbon), WAN bandwidth, labor hours, rack space, and so on. For example, eBay models their environmental impact along with costs on a per-transaction basis (see Video 3.2).

Modeling other resources can help us understand how our services, projects and business capabilities are driving those resources. We can answer questions like:

• How much power is consumed by each application?

• How many servers are needed for each CRM user?

• How much project labor is consumed for a service?

• What percentage of our data center capacity (rack space) is consumed by our storage infrastructure?

These insights help us manage fixed- or limited-capacity resources (e.g., floor space, skilled labor, WAN bandwidth). In turn, they help us avoid investments in new capacity. For

example, if we optimize the power consumed by each of our business transactions, we can support more transactions with the same infrastructure.

Insights into non-monetary resource consumption also help us create more accurate decomposition models. By revealing how resources are consumed by each unit of service, we can more accurately translate business plans into resource plans.

All of this means we have a choice to make about the models we create. Normally, we begin by modeling the consumption of costs. This helps us understand how our technologies and services drive our costs. Our primary cost model also supports the majority of decisions we need to make and often serves as a design template for other models.

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Video 3.2 eBay Models and Monitors Power, Carbon, Water and Cost Consumed per Transaction (47 minutes)

Find Your Sources of TruthOf the types of data we need, we have one essential source of truth: our corporate financial data. We must begin with this data for several reasons, including:

• Unlike most other data on which we rely, corporate financial data is maintained independently and under a set of internal controls. It’s not our data; it’s our company’s data.

• Corporate accounting policies and principals are fairly standardized in every industry. This allows us to compare our IT financial metrics to those of other companies, especially when similar IT cost models are used.

• Since corporate financial data measures our corporate performance, decisions using our models should be reflected in our corporate financials. This maintains a link between our decisions and business outcomes.

Financial sources often include more than just our general ledger. Certain available sub-ledgers such as fixed assets and payroll provide more granular information. Better granularity improves the allocations we can make.

Once we have our financial data, we use the other types of data to allocate and report our true costs. Our technology data often comes from within our own technology organization. It is created by the tools we use to manage our infrastructures, applications, people and projects. Sources often include asset inventories, help desk or service desk applications (for tickets and requests for changes), monitoring or metering tools and other management systems depending on our needs.

Service data includes our service catalog (if we have one) or a list of our technology and business services. We also need data for mapping technologies to services, such as a configuration management database (CMDB). This data is essential for creating service-oriented perspectives.

Project data includes the time and expense for our projects. These are normally maintained by our project management tools or time tracking systems and are important for creating granular change-the-business perspectives.

Finally, business data may include business transaction volumes, business unit revenues, headcount and other data, both historical and projected.

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Sourcing Data from VendorsThe data needed for our cost models is often owned or managed by our vendors and outsourcers. Third parties often maintain asset lists, produce utilization and consumption data, track project hours and manage support tickets – all of which may be needed for consumption-based modeling.

Despite our own efforts to create transparency (the subject of our next chapter), our vendors often fail to be transparent with us. They obscure true perspectives by delivering bills (financial data) separate from asset, utilization and consumption reporting, hindering any meaningful analysis of cost and performance.

As a result, it is imperative that we include contract provisions for obtaining source data from our vendors. We must hold our vendors accountable for providing data on a timely basis, such that it becomes a routine, monthly deliverable.

This is not an academic exercise. Only by creating transparency into our vendor’s services and technologies can we negotiate cost-effective contracts and hold vendors accountable for performance.

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Video 3.3 Sourcing Data from Vendors Starts with Contract Negotiation

Start by Creating Your Cost ModelIntroduced in the last chapter, our value chain model for a technology-enabled business process provides a good reference for modeling our costs. In that model (see Figure 3.2 at right), we illustrate how value is built in layers: our resources, technology services, business services and business capabilities.

Naturally, our cost model works the same way. We build it in layers, starting with the costs from our financial data sources. We allocate costs and other resources up through the model, layer by layer. In this way we can analyze our costs and consumption at each layer of the model.

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Note:  TBM  Cost  Model  is  provided  by  App5o,  Inc.

Figure 3.2 Value Chain and Cost Model

We recommend allocating first to cost pools. While not a layer of our value chain model, cost pools make cost allocations easier. Instead of allocating costs for each and every general ledger account and cost center combination, we create cost pools such as hardware, software, employee labor, contract labor and outside services. We can then allocate upwards based on fewer, more generalized rules.

Cost pools also enhance our reporting because they can be traced through the model to reveal the composition of our costs. They are like chemical elements: no matter what compound you have, you can always express its composition in elemental terms. Water is H20. Caffeine is C8H10N4O2.

Similarly, an application might cost $48 per user per month in labor, $72 for software, $36 for hardware, $15 for facilities and $12 for outside services. We can compare this composition to that of another application or

another business unit or another geography, as illustrated in Figure 3.3.

From these pools we allocate our costs to our resources. You may think of these as technology towers such as applications, server/compute, networks, databases, middleware and storage. They also include things like IT management, service desk or help desk, project

management, security and compliance and other such categories of overhead.

Our resources form the building blocks — the compounds, if you will —to both build and support services. Therefore, we allocate some of our resources to our projects based on how projects consume hours of labor, outside services and othersiv. We allocate the rest to our services,

representing the cost to run them.

Figure 3.3 Cost Pools can be Traced to Technologies and Services, Helping Compare Cost Composition

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Finally, our services are consumed in delivering business capabilities such as global business processes or lines of business. We allocate our service costs to them accordingly, creating a clear picture of how we are investing in our business.

To better understand how a cost model works, open and explore the conceptual cost model in Interactive 3.6.

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Interactive 3.6 The Conceptual Cost Model Explains Each Layer

Choose the Right Allocation MethodsAllocating costs and other resources is the most difficult aspect of our modeling. In a perfect world, we would have high-quality consumption data by which we could allocate from one layer to the next. This would include time tracking for all of our employees, metering for our software, monitoring data for our assets and ticket data for our service desk.

Unfortunately, we rarely have all of this data. Furthermore, most of our data is far from perfect (see data quality discussion later in this chapter). For this reason, our model must also support allocations that are not based on consumption data. These include approximations for resource consumption (e.g., equipment power ratings), informed estimations or even-spread allocations.

Our choice of allocation methods affects the quality of our decision making. If we allocate a cost pool based on high-quality consumption data, our reporting will give us better levers for more precisely controlling those costs.

For example, if we allocate power and cooling costs for our data center based on actual consumption of power (using data from power distribution units or hardware monitoring tools), we can be confident in how our decisions will affect those costs. We can target our least efficient servers and even identify applications that are driving the greatest power consumption. Using a less sophisticated method, such as spreading costs evenly, robs us of this lever.

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Employing Activity-Based Costing In Our Cost Models

Sometimes our decision-making needs justify the extra effort required, but sometimes they don’t. How can we tell when we need to invest in better allocations? The following guidelines help us determine when to invest in improving consumption data and allocation methods:

1. Do we expect consumption of resources in the pool to vary significantly from one cost objectV to the next? If we have a data center filled with the same model of servers whose loads are highly balanced, an even spread allocation will probably work fine.

2. Is the cost being allocated material? If it’s a small amount that provides little room for cost optimization, do not spend too much time and effort on a more sophisticated allocation.

3. Is it a limited capacity resource such that exceeding capacity forces us to invest in new capacity? Running out of power and cooling capacity, for example, forces us to upgrade or build a new data center. Precise allocations help us optimize consumption and delay investments in capacity.

To better understand how our choice of allocation methods and data sources affect our decision-making capabilities, open and explore Interactive 3.7.

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Interactive 3.7 Allocation Choices Affect Decision-Making Quality

Include All of Your CostsYou have a choice about what costs you include in your model. We recommend that you include all of your costs in your model to create a true total cost perspective. That said, certain costs warrant special consideration.

The first is depreciation and amortizationvi. Barring the disposition of assets or write-offs of their remaining book value, these costs are uncontrollable. Furthermore, technology leaders often don’t agree with the useful lives used for depreciation. For these reasons, some organizations exclude them from their cost models.

In spite of these limitations, we believe you should include depreciation and amortization. Excluding them artificially lowers your costs, distorting comparisons against external benchmarks and against service provider prices. Our planning decisions should be based on an appreciation of total costs. If your model excludes depreciation and amortization, your planning assumptions will be wrong.

Capital expenditures such as software development and asset purchases also warrant special consideration. They are often excluded from the model as well. We disagree with this approach. These should be reflected in your model and reported at each layer. This way, technology and business service owners can see the amount of capital being invested in their services along with their true operating costs. Your

capital and operating expenditures should be reported side by side as separate amounts.

Finally, consider the time horizon of your cost data. You should include not only your actual costs but also your forecasted and budget costs. These allow you to produce budget-to-actual and budget-to-forecast reports at each model layer, helping you execute against our financial plan.

Incorporate Service Performance for a Balanced PerspectiveWith our cost model, we can now create reports, dashboards and other outputs to give our people a true cost perspective of what they own. Service owners can see the total cost of their services; portfolio managers can see the total investments they’re making; and we can see how we’re investing in our business capabilities.

As we discussed in the first chapter, cost is only one part of the picture. Performance is the other part. Performance comprises attributes such as responsiveness, fault tolerance, ability to recover from a disaster and security of our technologies, services and data. These attributes help ensure our services meet business expectations under both normal circumstances and more extreme circumstances (e.g., after a

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disaster, during a cyber-attack or under peak business volumes).

We can incorporate service performance into our reporting in several ways. First, we can expose the achievement of our service-level agreements, operational level agreements and other specifications in our cost reporting. In a dashboard that shows the cost of our services, for example, we can also show how well we delivered those services by reporting SLA achievement.

Second, we can report customer satisfaction levels for our services. Do you perform surveys of your end users or your business partners? If so, include the results in your service cost reports.

Third, we can report the amount we’re investing in performance. For each service, how much cost is comprised of our disaster recovery site, the allocation of security equipment and services, and the consumption of fault tolerance?

Finally, we may be able to report the cost of any outages or disruptions. This is often difficult (or impossible) to measure, but some organizations create an assumed rate for outages of mission critical services. By multiplying the minutes of service outage by the assumed cost per minute, a cost of downtime can be shown.

In providing a service performance perspective we empower our people to see the potential need for changes. Do we need

to invest more in fault tolerance? Have we cut spare capacity too far, resulting in unforeseen outages? Did our recent reduction in support costs cause us to miss SLAs in time to provision new services? These kinds of insights are important when making investment-related decisions.

Create Other Important PerspectivesBy creating our cost model, we begin to understand what drives the consumption of resources. With the right system (discussed later in this chapter) we can use our cost model to allocate other metrics such as power or bandwidth consumption. But we sometimes build other models using our cost model as a template. When do we need other models? One example is when we set rates for our services instead of using actual costs. We often do this to create a rates-driven bill of IT so that our business partners have better predictability into the costs they are billed. In this case, we model business consumption using our published rates, starting at the services layer.

This doesn’t mean we stop modeling our actual costs. With a rates-driven bill of IT, we still need to understand our true costs. But by having both models and both perspectives, we can compare the amounts we recover using rates to the actual costs we incur. This becomes our services P&L statement. We will discuss this in chapter four.

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We may also need a different model for what-if scenarios. Here, we introduce new cost objects or different financial data to compare our original scenario to a new one. We may want to compare our historical service costs against those using new sources of consumption data. In this case, we would probably build the new model based on the current model, using as much of the data from our original model as possible.

Finally, making major sourcing changes is another good reason to create a new model. Here, we often introduce major new sources of financial and consumption data such as outsourcer bills and statements. Vendors often provide these separately, requiring a model to create a consolidated perspective of cost and consumption.

Overcome Data Quality ChallengesObtaining good data is the most common roadblock to building a good model. Missing or low-quality data often impedes accurate allocations, degrades our reporting and impairs trust in our model.

We often struggle with a variety of data quality challenges. We may have trouble getting good data in a timely manner. This is often true when we first create our model or change it; after we have sourced new data for the first time, it is often easily repeated. In contrast, getting complete datasets with referential integrity tends to be a more persistent problem.

Incomplete data is often caused by having disparate technology centers where our management processes and tools are different. For example, one data center may have a good handle on their assets while another does not.

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Video 3.4 TBM Data Quality Is a Journey of Continuous Improvement

On the other hand, a lack of naming standards and other data quality controls often contributes to poor referential integrity. This prevents us from relating datasets to one another, such as matching server names in our fixed assets sub-ledger with the servers in our asset management system. Referential integrity is essential for using data to drive allocations.

To address these challenges, we recommend a four-step approach:

1. Use tools to transform and clean data of obvious errors and inconsistencies. Tools may be able to correct things like improper formatting without requiring data source fixes. This often addresses a large portion of your errors.

2. Use the model to help identify errors. Load the data into your model and use (or create) reports to reveal how much of your costs cannot be allocated due to referential integrity issues and gaps in your data. The right system will provide data quality reporting.

3. Fill gaps by using generalized allocation rules. For example, if your data allows you to accurately allocate 80% of a cost pool, spread the remaining 20% using weights inferred from the allocated amounts.

4. Fix source data quality problems over time by working with data source owners. This should include not only one time fixes but also setting standards and procedures to prevent data quality problems from recurring.

Taking these steps to address our data quality challenges depends on our system and processes. But it’s important that we model the data we have and work towards better data. For one thing, it will never be perfect. But more importantly, the very act of modeling and using our data will lead to quality improvements.

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Benchmark Cost and PerformanceBenchmarking technology and service costs is a powerful tool. It can help you identify inefficiencies in your service delivery. It can help you substantiate your unit costs to your business partners who may be comparing your costs to cheaper, consumer technologies. Benchmarking can also help you identify data quality problems.

Despite these benefits, benchmarking is fraught with challenges. Chief among these is finding comparable benchmarks. It is very difficult to find peer-based unit costs and other metrics that have been measured the same way you measure your own.

There are several reasons why your unit costs will differ from those of your peers. Your peers often employ accounting policies, define TCO and measure their units of service differently than you do. They deliver different levels of service performance based on their unique business needs. These factors make perfect apples-to-apples comparisons impossible.

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Manufacturer Uses Continuous Improvement to Improve Data Quality and Costing In early 2009, a Fortune 500 manufacturer implemented a cost model for more than 1,800 business applications and services supported by 3,000 servers in ten data centers. The model uses data from a number of sources to identify the costs to provide applications to the company’s business units.

One of the initial challenges was data quality. At the start, the IT finance director discovered that approximately 20% of their total costs could not be allocated to applications due to data issues. To address this, he implemented a two-pronged approach:

1. work with the IT operations teams to make educated assumptions for allocating costs

2. use exception reporting to identify and fix the source data

With this approach, the company established a complete and reliable costing model from the beginning while improving source data over time. In just three monthly cycles, the director was able to reduce the exceptions from 20% to about 7.5%. While the data will never be perfect, this has provided the company with brand new insights into their service costs.

This does not mean benchmarking is meaningless. Instead of foregoing benchmarking, take extra care in defining your peer group, sourcing benchmarking data and interpreting the comparisons.

To allow meaningful comparisons, start by choosing a peer group that properly represents your industry, size, complexity and other factors. Then consider your business’s position in your peer group. For example, if your business is an early adopter of new technology (i.e., an innovator), as opposed to a fast follower, your spending should be greater than that of your peer group.

Spend time to compare how the benchmarks of your peer group were calculated. Make any necessary adjustments to your own unit costs to allow for more meaningful comparisons.

Keep comparisons in proper perspective. Rather than comparing each service or technology on an individual basis, look for significant variances. Then dig deeper into them. Sometimes the variance stems from a real cost problem; sometimes it is caused by poor data or by the types of

differences described earlier.

Finally, recognize that your best comparisons may come from within your organization. Perform internal benchmarking by monitoring unit costs over time and comparing the unit costs of your internal providers (e.g., one data center against another), external vendors (e.g., Dell vs. HP) and even by your consumers (e.g., unit costs to provide similar services to different business units). Since your accounting policies, units of measure and other factors are held constant, these internal benchmarks are often the most meaningful of all.

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Video 3.5 Start Wide With Benchmarking to Understand Your Aggregate Environment

Create Trust in Your ModelsAny accounting model is judged first on whether or not it fairly and accurately represents what it purports to represent. In other words, can it be trusted? Trust in your accounting model is difficult to earn and depends on many factors. It’s not simply a matter of accuracy.

This is especially true when you’re changing your accounting model or the way in which it’s used. For example, are you changing how the performance of your managers is evaluated? Are you modifying how you allocate costs to business units whose leaders are compensated according to their P&L? Your accounting model affects livelihoods, so trust in it is essential.

For this reason, your accounting model must be transparent and easy to explain. Allocations must be logical and fair. Where possible, it must provide levers for decision making and those levers must affect the primary outcomes reported by your model.

Take the following measures to build trust in your models:

• Beta test any new model or major model changes with a trusted business partner. When the beta is successful, employ the business partner to help articulate the benefits of the model.

• Prove your model accounts for every dollar. For every dollar in, there is a dollar out.

• Explain how the majority of your costs are allocated through a plain-language, one-page document. Illustrate allocations with a simple conceptual model. This also comes in handy with auditors who need to review or test your allocations.

• Ensure your report consumers understand how the costs were allocated, how to interpret the reports, and what changes they can make. Resolve any concerns or objections they have.

• Provide drill downs in your reporting. Empower your consumers to see what makes up their costs so they can verify them. Are their costs allocated based on the right number of servers, users or transaction volumes?

Do not overlook the importance of trust in your models. Trust is essential for not only driving adoption of the model but also for building commitment to your program

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Most of us have at times created transparency of our costs to support decision making. But arguably few of us have built sustainable transparency programs. Instead, many of us have built cost models to make point-in-time decisions such as whether or not to outsource our infrastructure services or if we should invest in a new platform. Some of us benchmark our costs once every couple of years, often at a considerable expense. Not only are these efforts expensive, they often slow down our decision making while we wait on gathering data, manipulating spreadsheets or other tools, correcting errors and building reports.

The modeling and perspectives we have discussed mean little if we can’t support and maintain them on an ongoing basis. They should be a routine element of our decision making processes, much like the enterprise resource planning (ERP) reports used by production leaders and finance officers.

In this section, we will discuss how to build a sustainable transparency program to support our optimization decisions. We will discuss the key attributes of a transparency system, some of the essential reports for our decision makers, and the skillsets required to build and manage it all.

Section 4

Make Transparency Sustainable and Scalable

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Sustainable and Scalable

Define the Essential Elements for Your Transparency SystemThere are many tools with which you can build your system of transparency. These include everything from spreadsheets and business intelligence software to custom developed software and purpose-built packages. But before determining how you want to build it, you should define your requirements. We will discuss several essential requirements here.

The first requirement is the ability to create, support and process your cost model and any other models you will need. The allocation of numerical data using other tables, lists or rule sets as weighting criteria is at the core of our models. Since our models and the amount of data can be both very large and very complex, our modeling software must be scalable. This is even more important as we build and use additional models.

We also believe modeling should be flexible. The conceptual cost model in this chapter is just that: a conceptual model. The models you build will vary based on your business, especially things like your service taxonomy and the data you have. They will also evolve over time.

Next, our system must be able to extract, transform and load data from other tools. It should do this automatically so that the system is easily maintained. The system must work well with imperfect data because that is what we’re likely to have, especially in the beginning. It should also allow us to easily upgrade our datasets so that as our source data matures or our needs evolve, we can integrate new data without a significant amount of rework.

Our system must provide the reports, dashboards and analyses our people need. We will discuss some of these later in this chapter. But recognize that we cannot predict all of our reporting needs. For this reason, the ability for our report consumers to access and manipulate data and create their own reports is also essential.

Finally, our system must be secure. Our models often integrate a lot of sensitive data such as asset lists, payroll data, transaction volumes and more. When sensitive fields are not needed, they should be excluded from the system. Since sensitive data is often required in our model, we must have good security, including the ability to redact information from reports.

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Deliver the Fundamental Reports for Transparency and OptimizationWith the right system and approach to modeling, we can build reports that reveal every layer of our model. This is useful because we have decision makers such as business and technology service owners, resource owners and project owners. These managers are responsible for a different layer represented by our model. To meet the needs of these managers, we recommend providing six key types of reports.

Service Reports

Service reports reveal the total cost of providing each of our services plus OpEx and CapEx splits, cost pool splits, unit cost measurements and other metrics. They compare actual and forecasted service costs to our budgets to provide variance reporting. They should also include performance measurements for our services. Prior period amounts and sparklines highlight cost trends.

These reports include consumption volumes (e.g., numbers of subscribed users, active users and transactions) and trends. Cost recovery amounts should also be included if rates are used for your bill of IT instead of actual costs. If so, these reports provide the equivalent of a services income statement.

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Service Cost Variances: Service-oriented cost reports reveal the fully burdened cost of a service and other information needed to judge the financial performance of a service. For example, this report compares service costs against prior periods and highlights those with the greatest variances.

Gallery 3.1 Service Reports Empower Service Owners and Portfolio Managers to Make Informed Decisions

Finally, these reports should allow for drill down into the technology services and resources (see next section), showing how each service consumes resources such as applications, server/compute, storage and labor.

Our service owners use these reports to assess service efficiency. They work with business relationship managers to evaluate business value and to review under-recovery or over-recovery. They also rely on these reports to help set or adjust rates (or prices).

Service portfolio managers use these reports to populate their service portfolio matrix or other tools for making portfolio optimizations.

Resource Reports

Resource reports provide details into the cost, consumption and performance of your resources such as applications, infrastructure technologies, labor and outside services. Like service reports, they should provide useful metrics for understanding cost composition, trends and comparisons against any targets or other thresholds.

There are several resource report types worth discussing. The first is application TCO. These reports provide the true total cost and per-user costs to deliver applications, including the amortization of purchase or development costs and ongoing maintenance and support costs.

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Server Unit Costs: Resource-level reports help assess the cost of delivering towers such as servers, storage, application software and others. By reviewing unit costs, such as the server unit costs above, technology owners can identify outliers such as data centers with abnormally high costs per server.

Gallery 3.2 Resource Reports Provide Levers for Our Technologies, Labor, Outside Services and Other Resources

Since applications drive the majority of infrastructure consumption, application TCO reports should list the consumption of servers, storage, databases, middleware and other costly resources.

The ability to compare application costs by using cost pool splits, per user costs and other metrics can help drive smart application rationalization decisions.

Tower TCO reports (e.g., for servers, storage and networking) are often vital for managing a large amount of our spending. Many of us take actions to optimize the consumption of these resources without any such reporting. For example, we employ tools such as virtualization to improve asset utilization. This means additional optimizations are often harder to find and, when we do find them, are more expensive to execute. Having granular TCO reporting can help us find and justify those additional optimizations

Vendor and contract spend reports help us track consumption of third-party resources. These help us meet minimum contract commitments and know when to expect adjustments (i.e., credits or charges). Like our

service reports, these reports should incorporate performance information to provide context for our contract spending. Not only must we monitor how much we spend on our vendors, but we also need to know how they’re performing.

Finally, labor reports help us analyze our labor costs. These summarize our costs by job function, geography, department and other factors. They provide per unit costs (e.g., cost per hour of labor) and other useful measures, such as full-time versus contract labor.

Once again, providing context for cost information is important for making good decisions. We recommend pairing labor costs with performance metrics (e.g., numbers of software defects, incidents and uptime/downtime) for our major functions. Productivity metrics (e.g., lines of code, functions points, support tickets) can also help us optimize our labor costs, especially decisions such as wage arbitrage.

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Project Reporting

Project reports should track the total investment in our projects, including both capital and operating expenditures. They should show the historical costs and the forecasts that reflect the increasingly accurate estimates of the latest iterations or release.

Other project metrics are also useful. Internal versus external costs and project status indicators (e.g., financial/budget, risk or schedule) often factor into our investment decisions.

Cost Recovery Reports

Our service reports (right) should include the amounts recovered through chargeback or revealed through our bills of IT. But having special reports for cost recovery is also useful. These should be produced from two perspectives. First, we should list our services and the amounts that are recovered by each major line of business.

Second, we should list our lines of business and show the actual costs they drove through consumption and the amounts we have recovered. In providing both perspectives, these reports allow us to see at a glance how well we are recovering

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Investment by Portfolio Swimlane: This report discloses the headcount investment (by headcount) for application development by swimlane (e.g., small enhancements, sustain, regulatory) from month-to-month and by business unit for the current month. This helps executives maintain a balanced portfolio.

Gallery 3.3 Project Reporting Tracks Our Project Investments

our costs, where we have variances and who or what is driving them. We will discuss how to produce bills of IT in chapter four.

General Ledger Reporting

Even when we have more advanced cost reporting, general ledger reporting enables us to manage spending against our budgets for our cost centers and general ledger accounts. This helps corporate finance understand the relationship between our cost models and our corporate accounting.

We can enhance our GL-based reporting with better insights into what is consuming our GL-based costs. This information can help us understand the cause of variances.

For example, an increase in our support contract labor might be explained by consumption reports that reveal a spike in support costs related to a new (perhaps unbudgeted) business application. In other

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Service Cost Recovery: When performing chargeback or shadow billing (showback), it’s important to compare the costs recovered (or shown) to the actual costs for each service. This will show where recovery does not equal actual costs, highlighting billing rates that may need to be adjusted.

Gallery 3.4 General Ledger Reporting, Helps to Comply with Corporate Financial Processes

words, our cost model provides better insights into our financial accounting.

Executive Dashboards

Executive dashboards should be produced to summarize each layer of our model as well. Our dashboards should allow our service owners, portfolio managers, resource owners and others to include annotations to explain things like significant trends, budget variances, benchmark comparisons or key performance indicators. These help our executives make better sense of the reports.

We also recommend reports that reveal our investments in business capabilities. These are useful in executive steering committee reviews and help us collaborate on major investment portfolio tradeoffs.

Staff the Right Skillsets and Experience to Manage Your SystemAs described in chapter two, Technology Business Management depends on foundational roles such as

service owners, business relationship managers and others. These are the consumers of transparency, responsible for making decisions to improve cost for performance. But what about the roles we need to create and sustain transparency?

TBM Analysts

The TBM analyst is pivotal to the success of the program. At its most basic level, the TBM analyst manages our models and data, builds reports, administers TBM user accounts and trains those users on the TBM solution. This role may also be called a TBM administrator.

For most organizations, even large ones, a single headcount or less may be all that is needed for the TBM analyst role. While experience varies, a January 2013 discussion in the TBM Council LinkedIn forum on this topic revealed companies as large as 12,000 employees had only a single TBM analyst (often less than full-time). If your system is highly automated, integrated with your data sources and provides for self-service analytics and reporting, a single analyst (or less) is often sufficient.

If your users are adept at using TBM data, this basic TBM analyst role may be sufficient for enabling them. But many times a business or operations analyst is also assigned to enable users to make better decisions. This analyst

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should understand both finance and enterprise technology and work closely with your TBM analyst to create meaningful reports, help users understand those reports and facilitate deeper analysis.

TBM analysts typically have at least five years of experience in a business or technical analyst role. They should have earned a four-year degree in computer science, finance, engineering, MIS or equivalent. A blend of finance, accounting and technical skills proves useful. Since modeling is a core component, experience with your modeling tools or similar technologies is important.

What exactly will your TBM analyst (or analysts) do? His or her duties will include:

• building and maintaining all models including allocation rules and logic;

• documenting your models and explaining them to IT and business stakeholders;

• building reports for consumers and defining access control rules for those reports;

• working with source data owners to obtain, clean and integrate data;

• resolving issues related to your models, source data and reports; and

• supporting IT financial management processes such as budgeting, forecasting and billing.

We recommend staffing the TBM analyst role from within your organization if possible. It helps to have someone that understands your business, people and technologies. Fortunately, the TBM analyst job is often seen as an exciting new role, one that is key to improving value or reducing costs and therefore essential to the organization’s success. It often appeals to employees who are looking for a challenge and a way to expand their knowledge. For this reason, it is often easy to find good, interested candidates from within.

TBM Program Director

Just as important to the success of our TBM program is the director we put in charge of it. Many times, our TBM program director is our IT finance leader (the CFO of IT, as discussed in the previous chapter). This makes sense when the IT finance leader reports into our organization, possesses the right leadership qualities and is able to build and manage relationships with our key stakeholders. If not, another executive should be assigned or hired for the job.

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Our TBM program director should be included in the office of the CIO or be part of our IT governance organization. Elevating the TBM program to this level helps ensure we continue to operate transparently and that we use data to drive important decisions at all levels of our organization.

Executive Sponsorship

Creating new perspectives is transformative and cannot be done in a silo. These perspectives depend on data from many parts of our business and their value depends on people being held accountable to the insights they reveal. These critical success factors are not possible without executive sponsorship.

For most companies, the CIO and corporate CFO should sponsor the TBM program. They must partner to create and execute a roadmap for transparency that often includes changes to our corporate accounting model, such as how we charge back or hold our business leaders accountable.

Our Management System Is OverdueWe often say that CIOs are like the cobblers whose children have no shoes. We are adept at building resource management systems for our business partners. Many of

us have invested millions of dollars in ERP systems, human resource management software, supply chain management, financial packages and business intelligence while limiting ourselves and our Technology Business Management to spreadsheets.

This is understandable. Business outcomes, not IT improvements, should be our top priority. That’s why TBM is about more than financial transparency. It’s about linking our decisions with business outcomes like innovation, competitiveness, operating efficiency and agility.

We shouldn’t think of our system as an IT investment. It is an investment in our business. It helps us improve value and not just run technology better. In our experience, systematically managing our finite resources is exactly what our business partners expect from us.

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Most Technology Business Management journeys take the important step of understanding true cost and performance before creating a bill of IT, but not all. In rare cases, technology leaders begin by attempting to influence demand. This is understandable. Unrestrained demand often leads to unaccountable consumption by our business partners. To address this, we are tempted to create a bill of IT with what data we have, including unrefined estimates of our true service or technology costs.

This approach is dangerous. Without clear and defensible insights into our true costs, our business partners will view our charges with skepticism. Instead of encouraging accountability, it can have the opposite effect: we risk encouraging business owners to consume more than their fair share of technology services. It can also cause us to engage in counterproductive conversations with our business partners about our spending.

Building transparency by using defensible models and allocations is the best approach. Fortunately, this approach quickly prepares us for driving alignment of our investments. Cost transparency helps us understand our true unit costs, helping us set rates for recovering our costs through a defensible bill of IT.

Section 5

Prepare for the Next Step: Improving Alignment

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Chapter 3Section 5 Prepare for the Next Step:

Improving Alignment

With accurate rates, we can collaborate with our business partners on their demand. Because they understand their true costs and have confidence in them, they are prone to work with us to balance cost, performance and value. They help us shape our investment portfolio, knowing we are in control of our expenditures.

This is what the next two chapters are about. In chapter four, we will discuss how to use a bill of IT for chargeback or showback, giving our business partners better levers for controlling their (and our) technology costs. We will also share how to empower conversations regarding our overall investment portfolio. Then in chapter five, we will discuss how to model business demand and create financial, resource, project and purchasing plans that cost-effectively meet the future needs of our business.

In the meantime, use the tools in this chapter to assess your cost and performance perspectives. Identify your gaps and define your approach for modeling your costs and resource consumption and delivering the reports and analysis your people need.

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Credits

Credits and Endnotes

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We are greatly appreciative to all those who generously provided their time and input into creating this book.  Special thanks to these contributors who made this publication possible:

The TBM Board of DirectorsMike Benson, CIO, DIRECTV

Tim Campos, CIO, Facebook

Don Duet, Global COO, Technology Division, Goldman Sachs

Chris Furst, CIO, Univision

Larry Godec, CIO, First American

Sunny Gupta, CEO, Apptio

Rebecca Jacoby, CIO, Cisco

Greg Morrison, CIO, Cox Enterprises

Tom Murphy, CIO, University of Pennsylvania

Jim Scholefield, CTO, The Coca Cola Company

Phuong Tram, CIO, DuPont

Robert Webb, *CIO, Hilton

Carol Zierhoffer, CIO, Xerox

TBM Principal MembersTony Bishop, *MD, Global head of Datacenter Ops, Morgan Stanley

Susan Blew, Senior Business Leader, IT Portfolio Mgmt & Gov., Visa

Larry Bonfante, CIO, United States Tennis Association

Mike Brady, SVP Infrastructure, Kaiser Permanente

John Donnarumma, CIO, GroupM

Tony Farah, *CTO, Price Chopper

Julie Flaschenriem, CIO, Park Nicollet Health

Diane Gelman, Chief IT Bus. Manager, TIAA-CREF

Chris Gibbons, VP, Head of Tech & Ops, Prudential Financial

Jerry Hermes, CIO, Navy Federal Credit Union

Dennis Hodges, CIO, Inteva Products

Simon Hudson, CIO, Indwe Broker Holdings

Jeffrey Hurley, CIO, Canadian Pension Plan Investment Board

Majid Iqbal, Founder, Design#code LLC

Matthew Kellerhals, GM/CFO of IT, Microsoft

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Credits

ContributorsChristine O’Brien, CAO and Interim CTO, ACE Group

Michael Brady, SVP Infrastructure, Kaiser Permanente

Robert Handfield, PhD, NC State University

Sean Worthington, VP of IT, Cisco

Glenn Siegmund, VP, IT Planning, Prudential Annuities

TBM Principal members (cont.)Chris Levitt, CFO of IT, Con-way

Joel Manfredo, *CTO, County of Orange

Diana McKenzie, CIO, Amgen

Robert Meilen, CIO, Hunter Douglas

John Miles, CTO, Catalina

Randall Pfeifer, VP, US Bank

Kenneth Piddington, CIO, Global Partners

Joe Rafter, VP, Global Transformation, hibu

Paul Rein, CFO, HCA Information Technology & Services

Paul Rockefeller, VP of IT Finance, Xerox

Richard Spalding, Corporate CFO, Nomura

Joshua Sparaga, VP, Technical Accounts, NBCUniversal

Carl Stumpf, MD & IT Controller,  Chicago Mercantile Exchange

Suzette Unger, CFO of IT, Goldman Sachs

*Former

Throughout this book we use the term business partners to refer to our line of business leaders and other internal, and sometimes external, customers. Partnership is operative here, as it implies working together to achieve common goals.

According to Forrester, IT operating and capital budgets fell from 2008 to 2009 by 3% each in North America and similarly in all other regions, except emerging Asia. There, operating budgets grew by a modest 2% and capital budgets were flat. (See: Belissent, Jennifer et al. “The State Of Global Enterprise IT Budgets: 2009 To 2010.” Forrester, 18 Nov. 2009.)

Dix, John. "Bang for Your IT Buck." Network World. 9 Jan. 2012. Web. 29 Mar. 2012. <http://www.networkworld.com/columnists/2012/010912-editorial.html>.

Cooper, James C. "Why Business Is Spending But Not Hiring." The Fiscal Times. The Fiscal Times, 31 Oct. 2011. Web. 29 Mar. 2012. <http://www.thefiscaltimes.com/Columns/2011/10/31/Why-Business-Is-Spending-But-Not-Hiring.aspx>.

Moore’s law, from Intel co-founder Gordon Moore, states that the number of transistors that can be placed on an integrated circuit doubles approximately every two years. This does not mean the cost of compute power halves every two years. In fact, the doubling of transistors comes at a cost: according to (Arthur)

Rock’s law, the cost of a semiconductor chip fabrication plant doubles every four years. This partially offsets the gains in chip power.

Koomey’s law, by Dr. Jon Koomey, refers to a stable trend since the 1950’s where the number of computations per joule of energy consumed doubles about every 1.57 years

Bell’s law, by Gordon Bell, postulates that a lower priced class of computes evolves in performance to disrupt an existing class about every 10 years. It applies well to computer clusters, which have become the most affordable mode of supercomputing today.

One of the most difficult decisions for IT leaders is when to perform hardware refreshes. The end of a depreciation cycle is rarely the right time to refresh. A refresh is often justified earlier in light of the total cost of ownership (including power, cooling, and administration expenses) in relation to hardware vendors, models, ages, and other factors. We discuss such decisions in chapters six and seven.

The fact that demand growth keeps pace with efficiency gains is evident through a quick analysis of industry trends: both the run-the-business percentage of IT budgets and the IT spend as a percent of revenue has remained relatively flat over the past decade.

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Rubin, Howard. Technology Economics: Rubin’s Law and Why Your IT Spending Is About to Hit the Wall. Rep. Rubin Worldwide, 3 Feb. 2012. Web. 30 Mar. 2012. <http://www.rubinworldwide.com/files/Rubins_Law.pdf>.

The Kaiser Permanente Research Program on Genes, Environment, and Health (RPGEH) is dedicated to unraveling medical mysteries through data-driven research. The Program’s Health through Understanding of Genetics and Environment (HUGE) Project is working to gather and analyze genetic and environmental data from 500,000 volunteers.

Westerman, George, Saby Mitra, and Vallabh Sambamurthy. Taking Charge of the IT Value Conversation. Volume X, Number 2. MIT Sloan School of Management Center for Information Systems Research, 18 Feb. 2010.

IT Infrastructure Library (v3) defines value as comprising two primary elements: utility and warranty. Utility describes the degree to which a service enables the desired business outcomes. Warranty describes the degree to which the service is reliable and secure. We find these are interrelated: as the utility (impact on business outcomes) of a service goes up, the need for warranty increases as well. In general, we use the term “quality” to imply the qualities of utility.

It’s important to understand that this collaboration is difficult. Just getting our IT finance people and our infrastructure, operations, applications and other IT teams on the same page can be challenging. They often speak in different terms. Then getting our people and those of our business partners on the same page is similarly difficult.

Increased complexity of our portfolios appears to be a natural consequence, much like the entropy of physical systems. It often stems from siloed decision making, an ineffective enterprise architecture, and simply developing new services and applications. It also stems from business decisions, such as mergers, acquisitions, joint ventures and market expansions.

Activity-based costing (ABC) and activity-based management (ABM) are essential tools for transforming data into meaningful perspectives. These techniques go beyond cost-analysis and are used to understand the value-chain of our services. For example, they can help us to understand how applications and services consume resources such as power, cooling, and floor space. While cost is often the principle focus of our work, initiatives such as “green IT” may require that we understand consumption by metrics other than cost.

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Cost, quality and demand go hand-in-hand. Cost, for example, depends on the number of units we provide. If demand goes up, the resulting increase in services delivered can drive our unit costs down. However, increased demand may also drive our unit costs higher if we’re forced to make a significant investment in fixed capacity, such as a new data center. In other words, our perspective of costs and quality is relevant within a particular demand horizon.

Note that investments in technologies that are directly used in selling and delivering goods or services are rarely classified as COGS or Cost of Sales, but they are often described as COGS by technology leaders due to their relevance to revenue. COGS generally includes only the direct purchase price or manufacturing costs for goods that are placed into inventory and subsequently sold.

Many classifications may be applied (simultaneously) to your organization. Your operating models may be described as centralized, decentralized or federated (per Gartner). Your delivery models may be asset-, process-, service- or value-optimizing (also per Gartner). Your provisioning model may be described as managed services, shared services, or utility-based provisioning (per ITIL). Where pertinent, we discuss the implication of each model.

For our purposes, we will refer to three types of business strategies — product leadership, operational excellence (or cost leadership), and customer intimacy — as defined in the seminal work by Michael Treacy and Frederik Wiersema’s on corporate strategy: The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market. Reading, MA: Addison-Wesley Pub., 1995. Print.

Our recommendation to work with your chief marketing officer is a serious one. Not only can your CMO help you define a clear and unique value proposition for your organization, he or she should be intimately familiar with your company’s unique value proposition. Furthermore, your CMO is a big spender on IT. According to Gartner, CMOs may outspend CIOs (See: McLellan, Laura. "By 2017 the CMO Will Spend More on IT Than the CIO." Webinar. Gartner, 03 Jan. 2012. Web. 21 Aug. 2012. http://goo.gl/RFmaZ.)

For a discussion of the VRIO framework by its creators, see: Barney, Jay B., and William S. Hesterly. Strategic Management and Competitive Advantage: Concepts. Upper Saddle River, NJ: Pearson Education, 2010. 68-86. Print. A more concise but still effective discussion of the VRIO framework can be found in: Sellani, Sandra. What's Your BQ?: Learn How 35 Companies Add

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Customers, Subtract Competitors, and Multiply Profits with Brand Quotient. El Monte, CA: W Business, 2007. 41-53. Print.

Smith, Michael and Kurt Potter. “Determining the Right Level of IT Operational Spending” Rep. no. G00239147. Gartner, 1 Oct. 2012.

The CTO of a business driver organization is different than a CTO of other organizations. With a business driver model, the CTO is responsible for delivering the technology-enabled business capabilities that drive revenue. In most others, the CTO is responsible for the technology services, the infrastructure and/or the technology standards.

For example, the County of Orange (CA) IT Service Delivery organization delivers services to the county’s agencies as well as the City of Los Angeles, an independent entity, on a fee-for-services basis.

We assume you are already familiar with IT service management frameworks such as IT Infrastructure Library or Microsoft Operations Framework.

A distinguishing characteristic between professional services and business process automation is in who owns the technology asset (i.e., the application). When delivering professional services, such as application development, to our business partners, they

often own the resulting business application. After all, they likely paid us for its development. However, when delivering business process automation, our technology organization likely owns the application and often funds enhancements as part of the overall price we charge (or show) to our business partners.

Costing your services will be discussed in chapter 3, “Understanding and Benchmarking Your True Costs” and pricing your services will be covered in chapter 4, “Provide Transparency to Link Service Delivery with Business Outcomes.”

Demand assessment and planning will be discussed in chapter 5, “Execute Demand-Based Planning to Gain Greater Efficiencies and Alignment.”

As noted in the first chapter, the MIT Center for Information Systems Research defines value as “delivering performance on a dimension that stakeholders find important. (See: Westerman, George, Saby Mitra, and Vallabh Sambamurthy. Taking Charge of the IT Value Conversation. Volume X, Number 2. MIT Sloan School of Management Center for Information Systems Research, 18 Feb. 2010.) The dimension that is most important

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Service owner is sometimes called product manager or service manager. For example, the ITIL v3 Service Strategy book refers to this role as product manager, while other ITIL v3 books (e.g., Service Transition, Continual Service Improvement) refer to service owners. The terms can be used interchangeably, although there may be subtle differences in their definitions from source to source.

For those interested in understanding what software product managers do, we recommend the Pragmatic Marketing framework (see: http://www.pragmaticmarketing.com/about-us/framework). The top half of the framework model is typically reserved for the product manager role, the bottom half for product marketing. While many activities in the framework are not applicable to an internal provider of technology services, it serves as a useful tool for understanding how the service owners of a Business Driver organization would work.

Creating a service-oriented view of performance, costs, budget and other factors will be discussed in Chapter 3. Chargeback, showback and other methods of financial transparency will be discussed in Chapter 4.

Business relationship managers do not circumvent our incident management and problem management processes or our service desks. Instead, they work within our service management

framework but work at a more strategic level with our business partners.

Chapter 3

Lean manufacturing later spawned its own accounting methodology called Lean Accounting. This method is arguably simpler than ABC, and proponents of Lean Accounting often criticize ABC as impractical.

If you recall from chapter one, we define quality as the combination of performance and risk. Performance means how well a service meets expectations. Risk is the likelihood of a service failing to meet those expectations.

ARC (additional resource charges) and RRC (reduced resource credits) refer to contract terms that specify how a vendor charges for its customer consuming more or less (respectively) than specified volumes of services.

In many organizations, a process exists for capitalizing expenses such as project labor and outside services. As a result, the financial data from our GL may already reflect the allocation of such costs to capital assets. But to create the proper perspectives of our project spending, we should model those capital expenditures as well.

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A cost object refers to an element of our model for which the cost is being measured, such as an application, a server, a unit of storage and a project.

Depreciation and amortization represent the allocation of the cost of our assets to the accounting periods (of time) to which they provide value. They are needed when following an accrual basis of accounting to properly match our expenses to our revenues. For IT, our assets include hardware, software and facilities that we buy, build or improve and are depreciated (for tangible assets such as hardware) or amortized (for intangible assets such as software) according to our corporate accounting policies.

* In one example, a financial services firm required 700 employees to submit monthly timecards and consumed 14 full-time accountants to produce monthly reports. (Kaplan, Robert S., and Steven R. Anderson. Time-driven Activity-based Costing: A Simpler and More Powerful Path to Higher Profits. Boston: Harvard Business School, 2007. 3. Print.)

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