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Article – Business Management

Chapter 8

Unique

Common

Standardized

Commoditized

Utility

Figure 8.1 Maturity for IT Function Delivery

Unique:
A unique IT function is one that provides strategic
(perhaps even proprietary) advantage and benefit.

Common:
This type of IT function caters to common (i.e.,
universal) organizational needs. It has little to
differentiate the business, but it provides a necessary
component (e.g., HR, financial system).

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Standardized:
An IT function that not only provides common
tasks/activities but also adhere to a set of standards
developed and governed by external agencies.

Commoditized:
These functions are considered commodities similar to
oil and gas. Once attributes are stipulated, functions are
interchangeable and indistinguishable (e.g., ASPs,
network services, server farms, backup services).

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Utility:
A utility function is a commodity (such as electricity)
delivered by a centralized and consolidated source (e.g.,
ISPs, other telecommunication services such as
bandwidth on demand).

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Figure 8.2 IT Functions Ranked by Maturity Stage

In-house

Insource

Outsource

Partnership

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Figure 8.3 Delivery Options for IT Functions

1. Flexibility:
Response time (i.e., how quickly IT functionality can be
delivered).

Capability (i.e., the range of IT functionality).

2. Control:
Delivery (i.e., ensuring that the delivered IT function
complies with requirements).

Security (i.e., protecting intellectual assets).

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1. Knowledge Enhancement:
Behind many sourcing decisions is the need to either
capture knowledge or retain it.

2. Business Exigency:
Unforeseen business opportunities arise periodically, and
firms with the ability to respond do so. That is, a quick
decision is made to seize the opportunity, and normal
decision criteria are jettisoned in order to be responsive
to the business.

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Identify your core IT functions.

Create a “function sourcing” profile.

Evolve full-time IT personnel.

Encourage exploration on the whole range

of sourcing options.

Combine sourcing options strategically.

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Core Function? IT Function In-house Insource Outsource Partnership

Yes Business analysis

Systems analysis

In Future Strategy and planning

In Future Data management

Yes Project management

Yes Architecture

Application development

QA and testing

Now but not in

future

Networking

Operating systems and services

Yes Application support

Data center operations

Application software

Hardware

Table 8.3 Sample Function Delivery Profile

Develop a sourcing strategy
Use a decision framework to identify what’s core and
what’s not.

Develop a risk mitigation strategy
Ideally, an outsourcing relationship should be structured
to ensure shared risk so both parties are incented to
make it work.

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Understand the cost structures
If you can’t compete in-house, you should outsource.

Ongoing cost comparisons are effective as they motivate
both parties to do their best and most cost-effective
work.

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Sourcing has become an integral part of
many organizations.
IT managers have an incredible range of
available options in terms of how they
choose to source and deliver IT functions.
Based on the framework proposed,
organizations can develop more strategic,
nuanced, and methodological approaches
to IT function sourcing and management.

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Chapter 9

Takes too long.

Process may be disconnected from the
business objectives.

Rigid adherence to annual plans may
inhibit responsibility for performance.

May inhibit the business needs to be
flexible.

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Organizational budgeting practice
emerged in the 1920s as a tool for
managing costs and cash flows.

Present-day annual fixed plans and
budgets were established in the 1970s to
drive performance improvements.

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Fiscal IT budget (i.e., those prepared
for the CFO):

— Capital expenditures – consist of large
expenses spread over multiple years.

— Operating Expenses – consist of the
annual costs of running the business.

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Capital budgets
IT Expenditures that may be capitalized
include:

— Project development
— Infrastructure
— Consulting fees
— Major technology purchases

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Functional IT budgets

Used by IT managers as spending plans
and are based on:

— Operations costs

— Strategic investment

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Operations costs:

— Costs to “Keep the Lights On”.

— Includes maintenance costs, computing
and peripheral functions, in-house
support and outsourced support.

— May include operating and capital
costs.

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Strategic investment:

— Consists of “New” technology spending.
— May include business improvement

initiatives, business-enabling
initiatives to transform company
operations or new technology business
opportunity projects.

— May be classified as capital or operating
costs.

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Cost allocation:

— The process of allocating IT costs to
others’ budgets.

— Allocation may be based upon a
formula using factors such as size of
business unit, prior year spending, or
percentage of use of IT services.

— May lead to artificiality in allocating
development resources.

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1. Fiscal Discipline

2. Strategy Implementation

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“IT Costs too Much”.
Demonstrating the realities of business
finance has become a significant part of
IT leadership.
IT budgets may be used to limit or
manage demand.
Used to hold IT leadership accountable for
what it spends.

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Budgets link long-term goals to short-term
execution through the allocation of
resources.
Where IT dollars are spent can impact
corporate performance.
How discretionary IT dollars are spent
impacts project outcomes.
The budget process reinforces strategic
decision making.

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Figure 9.1 A Generic IT Planning and Budgeting Process

Corporate processes:

— Establish corporate fiscal policy.

— Establish strategic goals.

— Set IT spending levels.

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Factors that Affect IT Spending Levels

Number of competitors

Uncertainty

Diversification of products and services

Affordability

Growth

Previous year’s spending

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Set functional IT budget – determine
what is spent on IT operations and
strategic investment.

Set the fiscal IT budget – transform
the functional IT budget into operating
and capital spending categories.

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1. Appoint an IT finance specialist

2. Use budgeting tools and methodologies

3. Separate operations from innovation

4. Adopt enterprise funding models

5. Adopt rolling budget cycles

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1. IT finance specialist:

— Understand IT costs and drivers.

— Can manage the translation between
the IT functional and fiscal budget.

— Can develop business cases for new
projects.

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2. Use budgeting tools and
methodologies

— Link IT Budgets to IT Plans.
— Link IT Budgets to Corporate Strategic

Plans.
— Link IT Budgets to Resource Strategies.
— Link IT Budgets to Performance

Metrics.

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3. Separate operations from
innovation:

— Split operations costs from new project
development costs.

— Provide visibility to business unit
managers to better understand true
costs to deliver and service new
systems and ongoing services.

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4. Adopt enterprise funding models:

— Separates centralized core IT services
from decentralized business unit
services.

— Used to develop IT operations budgets
at an enterprise level.

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5. Adopt rolling budget cycles:

— IT Plans and budgets need updating
more than once per year.

— Quarterly eighteen month rolling plans
enable new projects to be funded more
quickly.

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The IT budget process can be a critical
lynchpin between many different
stakeholders: finance, business units,
corporate strategy, and IT.

IT budgets play a key role in
implementing strategy and controlling
costs.

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