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CIO Upfront: Why accounting for IT is as important as calling IT to account

CIO Upfront: Why accounting for IT is as important as calling IT to account

By understanding the rationale for how IT costs are managed and reported through the management hiearchy, we will be better placed to understand why many business leaders continue to regard enterprise IT as a ‘service’.

Many established organisations still regard IT as a ‘service*’ function to the business. IT as a ‘service*’ – makes good sense from an organisational design perspective, right?

Maybe no longer. The world of enterprise IT is substantially different to that of a decade ago. The changing IT landscape has been reshaped by factors such as the democratisation of technology, massive reduction in compute and storage costs, cloud computing, mobility, analytics, cybercrime or never-ending data breaches – all in a hyper-connected, globalised world.

Established businesses need to be keeping a careful eye on the ongoing disruption of whole industries due to the uptake of new, innovative technologies. Far cry from the focus of most IT departments being on owning, running and maintaining in-house systems of a earlier decades, where changes occurred at a far slower pace.

Let me explain my rationale for challenging this legacy approach of treating IT as a ‘service’.

Why understanding how IT costs are reported is important

Firstly, I would like to take a minor diversion into the exciting world of company accounting. By understanding the rationale for how IT costs are managed and reported through the management hiearchy, we will be better placed to understand why many business leaders continue to regard enterprise IT as a ‘service’.

For diverse, multidivisional organisations, IT departments are often tucked under a centralised ‘shared services’ division, alongside together enterprise service functions such as human resources, finance and accounting, administration support, legal and so on.

This helps segregate the direct costs from the indirect costs (also referred to as ‘overheads’), which fits in nicely with conventional accounting practice.

Who cares about direct and indirect costs, really?

Direct direct cost because you’re using more raw materials – but your indirect cost may remain the same. This approach lies at the heart of the so-called ‘break-even’ point. That is, the point beyond which your organisation’s costs or expenses and revenue are equal. Once your organisation has recovered the costs of its ‘overheads’, and from that point on, any additional revenue past the breakeven point is highly ‘profitable’. That’s why running a ‘low overhead’ business is good business sense. Minimising the indirect costs then becomes an ongoing focus for business leaders.

Now, through the lens of financial reporting, if enterprise IT is regarded primarily as an indirect cost, these are to be minimised. Put another way, if the business value of IT is not directly related to its cost, IT cost minimisation will most likely be the default managerial response, not value maximisation.

Now that we’ve got a handle on the perception of IT costs, what about the value of IT?

The world of enterprise IT has changed. Has yours?

For those senior executives who came through the university education system in the 1990s and early 2000s, and/or worked their way up through the ranks, may not have had the first-hand experience in fully exploiting the opportunities that the latest digital technologies offer. The then-prevailing model of IT Departments were mostly based on the need to have IT (or even their outsourced IT provider) keep their hardware and software running and ensuring the organisation’s transactional systems (ie: the ‘life blood’ of the organisation) operated as intended.

Enterprise IT delivered the platform on which the organisation could run its various internal business functions such as warehousing, supply chain, order entry, payments processing, invoicing, financial and accounts reporting, and so on. Given that, for the most part, enterprise IT costs were largely constant, it was logical to treat IT as an indirect cost. These IT costs were then associated with the ‘overhead’ of the organisation. Additionally, the purchase of IT infrastructure and software licenses was typically on a ‘buy and depreciate’ basis. Hardware and software financing was also part of the mix. All contributing to the comparative inflexibility of IT costs, further reinforcing the fact that IT should be seen as an indirect cost, and grouped in with the other overheads of the business.

The line-of-business could then get on with the real job of ‘running the business’ – such as finding new customers, markets and business opportunities, expanding sales, developing new products, and so on. The costs associated with these activities could (for the most part) be are associated with the ‘value’ part of the organisation, and therefore treated as a direct cost.

Question is: Is this model for investing in IT still appropriate for your organisation in today’s globalised, technology enabled environment?

Read more: The future of cybersecurity

The case for not treating IT as a ‘service*’ department

If IT bears the cost, how is the value defined and where is the value accrued? Is the IT investment related to the realisable value in the business?

Consider the following in the context of your organisation.

If your organisation’s IT department:

• supports all aspects of your business (i.e. cuts across all business units and functional silos.); and

• manages systems, which, if were unavailable , would have an immediate impact on the business where it hurts the most. This could include aspects such as cash flow, brand and reputation damage, loss of business or even threaten the viability of the business; and

• has a detailed understanding of the interdependencies between your various business processes andsystems (not technologies) across the entire business; and

Read more: Primed for change

• has a clear understanding of the information taxonomies across your business; and

• has the trust of the key business stakeholders in helping them meet their business objectives by optimising the use of current or new technologies; and, lastly

• is treated as an indirect cost …..

then ……

• how best can IT drive enterprise-wide improvements to drastically lower business operating cost (even though this may require an increase in IT spend!) , streamline business processes, increase the speed and accuracy of business decisions, and/or incubate and underpin business innovation by using technology?

Irrespective whether these systems are internally owned and managed, outsourced, in the cloud, managed as a facility by a third party, the bottom line is that where the centralised IT department has an intimate understanding and broad oversight on how, where, when and why various systems are used – not to forget how new innovative technologies could be used – it should be capable of leveraging this unique vantage point to deliver real value to the business as a whole.

Can you see past the ‘IT-business alignment’?

Read more: CIO Upfront: How to lead through technology fuelled disruption

To what extent are innovation, technology and intrepreneurship (not to be confused with entrepreneurship) in evidence across your organisation?

If the need for innovation has been explicitly identified in your organisation’s strategic plans or is already in evidence in your organisation (i.e. more than merely platitudinal statements of intent), then it may be worth reading my earlier article Shifting from broken IT services to Innovation broker.

Backed by a well-informed, company-wide perspective on where, and how technology could be optimally used, a well run, adaptable and engaged IT department should be able to positively challenge and guide business strategies and decisions with a technology dependency to deliver real, tangible business value.

If the majority of the resources and activities of your IT department is associated with the creation and retention of value then these shouldnot be regarded as an indirect cost.

See the value in IT, or just the cost?

Irrespective whether the total IT expenditure is centrally managed through IT or federated across the various divisions of departments, the key determinant remains:

If IT bears the cost, how is the value defined and where is the value accrued? Is the IT investment related to the realisable value in the business?

If your business owners or executives cannot answer this question, then your IT department’s life is likely to continue being regarded as an indirect cost, or an overhead – with the primary focus on cost minimisation. Problem is, who else in your industry or competitor ecosystem is seeing how to treat IT differently? If you cannot identify, exploit and optimise the real value from enterprise IT, then chances are your competitors are already doing so.

Read more: Movers and shakers: David Kennedy, Ashley Mudford, Edwina Mistry and John Ruthven

Put another way, IT department – Who’s your daddy? Or are you being treated as a fully grown adult?

Author’s note: Being a ‘service’ function to the business should not to be confused with the ‘-as-a-Service’ paradigm which underpins the cloud computing business model (or any other demand-based delivery or revenue model, for that matter).

Cloud security consultant, Rob Livingstone.
Cloud security consultant, Rob Livingstone.

Rob Livingstone (rob@rob-livingstone.com) is a mentor, consultant, and industry advisor. He is the author of <i>Direction through Disruption</i> and Navigating through the Cloud. He is a fellow of the University of Technology, Sydney’s Faculty of Engineering and IT, where he lectures to higher-degree students on leadership, strategy and innovation.

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