A Chief Information Officer's ever-present challenge to reduce costs & risk while still maintaining or even increasing service levels is not getting any easier. Ever increasing IT complexity, the drive for continual business expansion, both organic as well as through mergers & acquisitions, and myriad legislative compliance demands (such as Sarbanes-Oxley) make for a highly complex role. This article focuses on the challenges of the CIO’s role and the core leadership characteristics needed to negotiate the rapidly changing business landscape.

With Information Technologies heavily intertwined in business processes, the CIO needs to play a key strategic role in the growth of the overall organization. While a CIO’s day-to-day responsibilities (e.g., data centre virtualization) can  reduce operational costs and make the organization ‘lean’, achieving business efficiencies through re-engineering and process automation requires the CIO to also be a strategist, identifying the opportunities to grow the business.

CIO STRATEGIES

CIO strategies to benefit an organization can range from directly handling people, setting plans, managing risks and handling the financial aspects of the IT operations. Most importantly though, a CIO needs to change the mindset of the IT organization from being technology-centric and siloed to becoming a reliable, service oriented organization. The following are some ways a CIO achieves this:

• Reshape IT’s mindset from a technology business unit to a people focussed service business. An example of such change is to ensure the budgetary emphasis is on servicing rather than the traditional asset counts of PCs/laptops and software license.
• Reporting on IT services provided for each business unit and empowering these business units to manage their demand. This would include periodic agreements with business to forecast their IT services demand and then reconcilling these projections with actual consumption.
• Challenging the unilateral handing down of reduction targets by the CEO (e.g. a 15% reduction in costs across the company with same service levels) and instead promoting a conversation with the CEO to discuss the required service levels to bring about meaningful reduction in targets.
• Calculating the “cost of IT services” as against the traditional “IT costs”. Although this change may appear subtle, the distinction changes the mindset and causes a rethink of the traditional IT Business model. For example, all hardware, software licensing, support and IT staff costs in relation to the General Ledger system will now be treated as the “Cost of IT services” incurred on behalf of the business.
• Enhancing People skills – a CIO needs to develop and maintain relationship with key business leaders. Generating trust and using the art of influencing, negotiating and persuasion is vital in developing trust that goes beyond IT. “..a great IT leader must be able to trust and be trusted. Trust cannot develop unless both parties invest in the relationship.”
• Monitoring technological advances, not only in technologies such as cloud computing, SOA etc. for their own sake, rather in terms of their impact on business, such as improvements to service level agreements.

IT COSTS & SERVICES

As argued above, pure IT costs, as a separate entity, are a misnomer. In fact, these "costs” are incurred by IT for the business. Therefore, IT strategies need to be incorporated into and aligned with business strategies as the business acts to grow and prosper. Mergers and acquisitions exacerbate this challenge as now data, information and processes from separate IT systems need to be brought together without impacting the external views of the systems.

A CIO’s typical & established response to the cost cutting call is to re-negotiate contracts and review head count. Typically such an approach may deliver up to 10% (if lucky) reduction in the IT Budget. Further reductions impact on service levels and are not acceptable to the business. Such cost cuttings deliver limited benefits for a short period (usually until the crisis has passed). Then the costs creep up to the pre-crisis levels and the cycle continues. The CIO needs to move away from this defensive mechanism and be pro-active in avoiding the “cutback hell”. An approach that delivers savings on a sustained basis while at the same time avoiding the standoff with the business is based on two vital principles that I have steadfastly followed in my work: cost transparency and demand management.

COST TRANSPARENCY

“Many companies see IT as a black box that generates significant costs. Few business managers know exactly what they are paying for and why their outlays keep rising.” 

IT costs are a function and effect of business demand (consumption) cause. Accountability for costs due to consumption of IT services must lie with the business units consuming these services. Similarly, large business actions, such as M&A, should incorporate IT costs as part of those actions. IT can price these services internally but, at the same time, can use external benchmarks and even third party audits. This governance issue relates to standards such as ITIL or CoBIT.

Advent of cloud computing and other “IT as a service” also need to be recognised by a CIO as opportunities that pave the path in transforming existing internal IT into a cost transparent, service delivery business unit. This change initially implies transforming the mindset of the IT team, which is followed by change in the mindset of the business through its processes. In addition, eventually, there is the matter of the cost of IT services being held within the IT Business unit, which should really and rightfully be seen as the costs incurred by the business. Cost transparency principle brings this IT element of cost of business out in the open.

DEMAND MANAGEMENT

IT is often seen as inflexible and rigid when it should be flexible and agile. I believe the principal reason for this relates to the traditional below the line charging mechanisms for IT services. The business wants its demand fulfilled in a consumerist real time model whereas IT costs are held in the socialist model. I feel this is akin to having a Capitalist consumption with Socialist charging mechanism. This does not work. For a business that has “capitalist” fulfilment expectations the charging must also be aligned with the capitalist model. This means re-charging above the line. IT costs then become transparent to the business. This is a brave new world for IT, as implemented by organizations I know, where IT has to justify all its costs and is often benchmark against external IT suppliers.

Due to the specialised nature of IT services, the IT business unit then becomes the custodian, manager and reporter of IT services delivery and management. At the Executive, level the discussion moves away from IT budgets to consumption of IT services by the business. This, as I have personally experienced, has seen a dramatic reduction of 35% in the overall  IT Budget. In fact, up to 80% reduction was seen in the usage of certain services when they were reported based on business unit consumption to their respective unit heads.

CONCLUSIONS

One benchmark of IT’s emancipation is achieved when the CEO asks business units  to cut down on consumption of IT services as against asking IT to reduce costs. This is the core message of this article and the CIO’s role and the principles of cost transparency and demand management discussed are strategies to support this proposition. In summary:

• Get the CEO (or CFO/COO) to sponsor IT projects at the executive level. This will ensure executive buy-in and leadership and send the right message to the organisation
• Get the Finance team to own, manage & report on the project.  Finance own & lead the budgeting & cost reporting process and their buy-in in crucial to the success of the project as they have right of veto over any such change.
• Align it with the Budget process and preferably include it with the Budget pack. This is when the BU is open to change. This will ensure least resistance from business units.
• Transforming mindsets of both IT and business people through negotiations and ongoing discussions. This will result in an organization wide shared vision.

REFERENCES

Bauer, Martin, “Cultivating Leadership: It's About the People”, Cutter IT Journal , April 2010
http://news.cnet.com/Unraveling-the-mystery-of-IT-costs/2030-1069_3-5841812.html