Technology Business Operations It Administrative Oversight

Technology Business OperationsJustifying the right level of IT administrative oversight for your organization

IT Financial Management forControllers and CFOs Conference

The World of IT Financial Management© 2009ITFMA

April 1, 2009

Diane CarcoChris Herman

TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009Slide1

Chris HermanIT Optimization Practice

Swingtide, Inc.

Who is Swingtide?

• Consultants specializing in Technology Business Operations (TBO)(TBO)– IT Business Center of Excellence– IT Cost Reduction– Outsourcing and Insourcing Advisory– Acquisition and Divestiture Support

• Focus on CIO Business issues– Proven methodologies applied by the people who developed them

A li h d f ti l t f fi t h i l d– Accomplished cross-functional team of finance, technical and contract/sourcing experts


What you will take away from this presentationWhat you will take away from this presentation

An understanding of:g• References for the general cost of administrative oversight• Setting the right level for administrative oversight of IT:

– Using analogies to establish an appropriate cost– Building a rationale from the cost of not managing

f f• A definition of robust IT administrative oversight: Technology Business Operations (TBO)

• A benchmark survey approach for establishing the right level in be c a su ey app oac o estab s g t e g t e eyour organization


HOW MUCH DO PEOPLE PAY FOR ADMINISTRATIVE

OVERSIGHT OUTSIDE OF IT?


The Cost of Administrative Oversight:What can we learn1 3 1 5%

18 5 19 5%

What can we learn from these examples?

10%

1.3 – 1.5%: Mutual Fund Management as % of funds managed

20-30%:Executive

18.5-19.5%: Cost of fund raising as a % of funds raised

10%: G&A expense as % of revenue: Large Company

managed2-4%:Sports agent’s

commission

Search Fees

0% 5% 10% 15% 20% 25%

.03%: Audit

25%: G&A expense as % of

9.5-10.5%: Salary of Orchestra Conductor as % of

Orchestra revenue 10-15%:General

function expense as % of revenue

3-4%: The amount of the annual deal value that Gartner says should dedicated to managing an outsourcing

expense as % of revenue: Small Company

Contractor as % of total

job


a ag g a outsou c gagreement

Observations

• When administrative oversight functions are f d ll thperformed well, they are…

I• When not performed well problems surface as specific

I• When not performed well problems surface as specific

symptoms• Symptoms tend to attract solutions that only address• Symptoms tend to attract solutions that only address

symptoms


ObservationsObservations

• Administrative oversight is required:• Administrative oversight is required:– World experience in many domains shows it’s irresponsible not

to have administrative oversightg– It is necessary because it optimally enables underlying

services being delivered– It allows development of a systemic ‘root cause’ approach for

the proliferation of symptomsIt i th l f ti it t d t “ th f t” ( f t )– It is the only function situated to “see the forest” (or forests)


Using Analogies to Establish the Right Level• Analogy 1: The cost of governance is to the annual cost of an

outsourcing deal as the cost of IT Administrative Oversight is to the cost of IT Service Delivery (3 4%)cost of IT Service Delivery (3 - 4%)

• Analogy 2: G&A Expense is to Corporate Revenue as IT Administrative Oversight Expense is to IT Budget (10 – 20%)g p g ( )

7% to 10% is the Best Answer reasoning from analogies7% to 10% is the Best Answer reasoning from analogies

Decrease since corporate revenue includes a profit

Increase since much administrative oversight is included in the scope


pcomponent

pof the transaction

The Cost of Not ManagingWhat you hear

when you don’t have the right

CFO #1 (w/Internal IT service delivery): “I don’t understand my IT costs; I think we

administrative oversight

don t understand my IT costs; I think we should outsource.”

CFO #2 (w/Outsourcing in place): “Why am I not getting the savings I expected from this outsourcing agreement?; I’m bringing the service back in-house.”

You’re told of the divestiture of a Business Unit and the BU wants to strip away all ‘their’ Oracle licenses. You have no idea whatOracle licenses. You have no idea what licenses might be owned by the BU

Your email storage costs grow without limits; you’re always throwing money at it


you’re always throwing money at it

The cost of not managing wellWhat do you experience without it?

g g

• Lease payments beyond the end-of-term on nonexistent or obsolete assets

• 20% year on year storage cost increases• 20% year-on-year storage cost increases• Repetitive and frequent mainframe upgrades• Aggregate project benefits exceeding your total budget…(i.e.,Aggregate project benefits exceeding your total budget…(i.e.,

overlapping benefit claims that strain credibility)• ARC charges under an outsourcing agreement:

– Assessed based on contested levels of consumption – Exceeding total planned cost for the deal

Penalties from software license audits (or even if no penalties are• Penalties from software license audits (or, even if no penalties are assessed, then unbudgeted capital/expense to pay for undocumented licenses in use)


The cost of not managing wellWhat do you experience without it?The cost of not managing well

• Paying 5X of the revenue generated for a hosted app• Your company does layoffs while there are major unexplored

efficiencies to find in IT hardware maintenance andefficiencies to find in IT hardware maintenance and telecommunications

• Rejected tax deductions for work done in other countries• Pending audit points• Business demand is more variable than IT cost structure

S i ( t th d ki d)• Surprises (not the good kind)• Constant firefighting

Without the right administrative oversight, companies experience up to 20-30% excess cost


How much would you pay for a function that eliminates these exposures?

Cost of running TBO FunctionTBO Function

20-30%TBO and Setting the Right Level of IT Finance Controls: ITFMA 04-01-2009

Slide12

What do we mean by IT Administrative Oversight? T h l B i O ti (TBO)

CIO

Technology Business Operations (TBO):

AMO(Applications)

ITO(Infrastructure) TBO( pp ) ( )

• Asset Management• Budget/Forecasting

Ch b k• Chargeback• Communications• Compliance• Cost Management

C t R l ti hi• Customer Relationship Management

• Governance• Process Improvement

P j t P tf li M t• Project Portfolio Management (PMO)

• Reporting/Dashboards• Technology Sourcing

Thi d P t M t


• Third Party Management• Work Intake

TBO Definition:

WHAT: A cross-functional IT business office that optimally enables the efficient delivery of the core IT function (applications and infrastructure)

WHO: A unified team staffed with subject matter experts in IT Finance, Sourcing, and Technology

RESULTS IN: The best alignment with internal customer business goals matching spend to value


Why is TBO Important Now?

• IT Management has evolved from high-growth

Why is TBO Important Now?

phase to maturity phase– Most IT projects no longer have enormous ROIs. p j g

This, in addition to the difficult economy, require more precision in management and oversight

– Focus is shifting to the overall business of IT– Shift from cost center to profit alignmentShift from cost center to profit alignment– Complexity of task requires new combination of

skillsskills


Why is TBO Important Now?y s O po ta t o• A recent survey indicates that nearly half of

corporate CFOs believe that the alignment of business and IT to be weak or nonexistent

• IT/Finance convergence now seen as necessary for companies to maintain competitive advantage (David Wessels, Wharton School)

• Organizational trends indicate an increasing likelihood that CIO is a straight-line report to CFO

• With the increasing visibility of the IT finance function, CIOs and others will be seeking help to improve TBO effectiveness

• The assimilation of the IT function: “Seven or eight years from now, one of two things will happen: you’ll either see CIOs become more business oriented, or you’ll see IT become such a fabric of business that business leaders become more tech competent.”(Russell Reynolds Associates)


Associates)

Benchmark: Review of the budget numbers of large well-run companies reveals the

following average budgetary split


Benchmark for level of TBO spendBenchmark for level of TBO spend based on survey results

CIO

AMO(Applications)

ITO(Infrastructure) TBOIT Expense (Applications) (Infrastructure) TBO

RTB* 24% 48% 8%

IT Expense Budget

Projects* 20%

*Th b t l d


*These numbers represent average values surveyed

ConclusionPeople accept that there is a cost associated with an administrative• People accept that there is a cost associated with an administrative oversight function. This cost reflects the value of optimally enabling an underlying function

• The most analogous examples to the management of IT are:– The % of G&A to corporate revenue (10%-20%) and;– The % of annual outsourcing deal cost committed to governance (3-4%)– With logical adjustments, these analogies suggest a rate of 7-10%

Th t f t idi th i t d i i t ti i ht• The cost of not providing the appropriate administrative oversight could be as high as 20-30% of IT budget

• On average well run companies spend 8% of their IT expenseOn average, well run companies spend 8% of their IT expense budget on this function

• While it may be tempting for corporations to reduce staffing in TBO areas, now more than ever companies need to continue to commit resources to a TBO approach to managing IT. Correctly implemented, it creates the best alignment with internal customer


p , gbusiness goals, matching spend to value

Thanks!Thanks!Contact me with any questions or comments.

[email protected]@swingtide.com


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Technology Business Operations It Administrative Oversight