A Business Technology Place

The Yin and Yang of Hidden Technology Spend

The spending category with many names.

Not all technology spend within a company originates in the IT group. It’s widely known this behavior exists, but rarely discussed in the context of aggregating all technology spend. Industry writers have many names for it, including shadow IT, hidden IT, business unit technology spend, and rogue technology spend.  Some business managers enjoy the lack of publicity. They don’t want to draw attention to it for fear of losing it or getting into lengthy conversations that will slow down their progress.

Who’s to blame?

Typically, IT is caught in the middle and is often the one blamed for creating the environment that leads business unit managers to go around IT for technology services. Jaikumar Vijayan of Computerworld recently discussed how shadow IT spend with cloud services is growing.

Vijayan quotes a report from PricewaterhouseCoopers (PwC)

The risks from shadow cloud services include issues with data security, transaction integrity, business continuity and regulatory compliance, technology consulting firm PricewaterhouseCoopers (PwC) warned last week.

“The culture of consumerization within the enterprise — having what you want, when you want it, the way you want it, and at the price you want it — coupled with aging technologies and outdated IT models, has propelled cloud computing into favor with business units and individual users,” PwC said in a report.

One of the challenges IT managers have is they are asked to support and enforce regulatory and compliance statements. As an IT professional, I see security audits and questionnaires from current and prospective customers each week. The inquiries are becoming more lengthy and the expectations for security and compliance are growing. It’s expected that organizations have strict policies governing physical and logical security, encrypted data, backups, data retention, and data location. The kicker is that for existing customers, compliance with the regulations is mandatory. For prospective customers, compliance with the regulations could mean the difference between winning new business and losing it.

Here’s the rub. IT doesn’t make the policies, they are asked to enforce them. When IT managers support these regulatory requirements such as not allowing cloud storage, it invites users to find a way a around the policy to conduct business. Remember too, that IT is also constrained by the budget allowance each year for upgrades and is expected to maintain existing equipment with minimal changes to reduce risk of business disruption.

Is this really IT’s biggest nightmare?

I don’t think so. Here’s why. IT isn’t completely innocent of what’s happening. The PwC report quoted by Vijayan captures it well, “coupled with aging technologies and outdated IT models…” there is a growing trend for business unit managers to purchase their own technology.yinyang

I agree with the summary from PwC. But I also believe that in a general sense, we have to be pushed to get better at something. What I mean by this is that we need someone or something to challenge us to think differently, to strive for better results, and to find new opportunities for success. Being pushed is part of the foundation of success.

I think hidden IT spend is in some ways a ying and yang. Can hidden IT spend be complementary to IT spend? Don’t you think that IT leaders would also like to push forward into newer technologies and service models such as SaaS and IaaS? I see the whole debate as a challenge and wake-up call for IT leadership and Business leadership to find ways to advance the technology offerings and services of their company in order to provide better solutions for customers. Policies and regulations are not going away. Why not try to solve the puzzle of mapping technology advances to policy statements?

This can be a yin yang. But the key to success is to do it together. Said another way, the key to success is to do “IT” together. Just think what your business would look like if that happened.

Measuring the cost of IT

How should we measure the cost of IT?

The short answer is that there is no set answer. It depends.

I’m debating this question with myself as I want to deliver meaningful measurements back my stakeholders as well as create a repeatable view to measure progress over time. Ratios are a common evaluation method for financial accounting. So it seems natural to use ratios to measure the cost of IT in an organization as well. The most common ratio I’ve seen is spending as a percentage of company revenue. This gives a macro level picture of the cost of IT to the company. Gartner and other firms publish IT metrics based on industry data they collect. This doesn’t mean there is a right answer, but it allows companies to see how they compare to others in the same industry.

A challenge is consistent and agreed to measures of the factors in the ratio. In my case there are pockets of technology spending outside of the core IT function due to a decentralized alignment in the organization and profit centers of the business. Should I count all areas of technology spend in the company or only those associated with IT? Companies replying to the metrics survey undoubtedly have similar organizational inputs. So the answers in the survey are not an apples-to-apples comparison. But it may be as close as we can get!

But what’s really important?

Examining the ratio in terms of industry comparison may provide clues to help with determining average profit margin makeup for your company. But it seems to me that examining the ratio within the context of our company goals is as important or more.

  • Is the company trying to provide more automation through software? If so, then the technology costs may go higher than average to support this push with an expected offset in labor in other areas.
  • Is the company being positioned for sale? If so then the technology costs may be kept in check to prevent unnecessary open ended investments.
  • Is the company trying to differentiate itself from competitors through technology solutions or people solutions?

 

Change the mindset of IT as a cost center.

Looking at IT solely as a cost center is dangerous. The only way to improve cost centers is reduce costs. IT should be as concerned with creating solutions for productivity and revenue gains. So it’s a two-way street.

Tracking IT metrics should also include revenue gains and automation efficiencies. These metrics have a more favorable feeling to them than straight cost ratio. They represent value. I think value gains are tricky to measure as a attribution back to a technology effort. But it provides the basis for continued investment in a “cost center”.

I haven’t settled on a complete answer yet on how to best measure IT.  Maybe I never will. I suspect introspection and analysis will lead me towards new questions and then a natural course of tweaking and adjusting. Keep the calculator handy and align processes to aid with measurements. Happy computing.

 

Technology profit leaks

Managing a technology budget for an IT group is an activity that is full of opportunity to help the bottom line of a business. It’s a cost center, not a profit center. But while the game may not be about maximizing top line revenue, any money removed from the IT budget directly impacts the bottom line or the overall profit of the company. Unlike the revenue equation which is reduced by variable and fixed costs, the expenses in the IT budget affect the net income bottom line dollar-for-dollar.

 What’s in your budget?

The IT budget is often bloated with expenses that become forgotten. A prime example is maintenance contracts for equipment and software. Providers love the maintenance contracts which often account for 20% of the original sales price of a product. Do the math. If the lifespan of the product is five years then the provider has doubled their income. The danger for the IT budget is when the product is retired from service but the maintenance agreement is not cancelled. This is a prime example of a profit leak!

Another example of a profit leak is an agreement for a recurring service that could be renegotiated for better rates. Cell phone bills, data lines, data center services are services with ongoing recurring charges. Just like we can often negotiate a better price or find a better price in the open market for home services, these types of business services present the same opportunity.

 The capital expense game.

Capitalizing expenses is another way to help the bottom line for a reporting period. The isn’t quite the same as reducing costs since capitalizing is spreading the cost of a product or service over time. I often think of this as a game since the finance group has choices if they want to expense or capitalize an item as long as they stay within accounting rules.

 Recouping costs.

Another key way to reduce expenses is to recoup costs by charging for value-added services. For example, if the IT programmers are creating a service for a client that provides value such as reducing internal costs (for the client) then the IT services may be billable. The expense of the programming effort can be reclassified as cost of goods sold. The cost still factors into the bottom line, but the top line revenue increases to offset the overall expense.

Play the game.

So as a technology leader, there is ability to influence the bottom line results by controlling expenses. It’s the game of business. The game of profits.

Business planning for the simple minded

We plan with good intentions.

Every year business teams go through planning and budgeting for the upcoming year. It’s a time consuming process. Middle and upper management work and rework presentations to present to executive management possibly board members. Budgets are submitted, then slashed, then reworked, and submitted again. Hours upon hours of work.

and then……….business happens.

New clients are signed that need to be on-boarded. Expected sales fall through or don’t materialize. Competitors upgrade their offering and drop their prices. Technology advances in a new direction.

Suddenly all that planning seems like a distant memory. Is anyone looking at the business objectives and roadmap that was planned for the current year nine months ago? My experience is that the plans are often forgotten and overruled by the tactical maneuvers of the current day.

Let’s not over complicate the matter.

Strategic plans are well intentioned. We have to plan to reach a goal or as the saying goes, “If you aim at nothing, you’ll hit it every time.” One way to help soften the risk of changing course due to changing market conditions is to plan smaller for a reduced time horizon. Instead of trying to plan for 12 months of work 15-18 months in advance, try planning six months of work nine months in advance. Don’t set 10 strategic goals, instead set 3-4 strategic goals and so that the organization can begin at the start of the measurement period.

It’s a similar concept to sprints in an agile development methodology for software development. Why not setup sprints for business objectives. Then remain more nimble to change as needed to match market conditions.

For technology teams one bit of advice is to first see the direction of the business (sales, marketing operations) and then align to help support those goals. In this way the plan will represent the core foundation (operations) of the business as well as the growth area (sales).

 

 

 

 

Find me the money. Some practical thoughts on ROI.

Long before Jerry Maguire stated “show me the money” marketers have scrambled to show a return on investment, advertising, and marketing activities. But how well are marketers showing their stakeholders the money? It’s not a primary component of the marketing budget process according a survey review by Jack Neff of Ad Age. In fact, according to the survey, more CMOs rely on historical spending to set budgets than projected ROI.

But I don’t think that is necessarily a bad thing. A budget after all is just a plan for spending. The amount of spend required for services related to marketing is generally known by way of existing contracts, published price schedules, and yes historical spend.Geek and Poke ROI

So where does projected ROI fit into the budgeting equation? The answer is that the budget can be considered more than an exercise to control costs and plan to spend. It should also consider spend for *return as with capital projects.

Tracking and projecting returns on marketing efforts is not always easy and I’ll argue shouldn’t always be necessary. If the marketing activity is an ongoing event, then there should be some level of tracking available whether by electronic means or post sale surveys. Tracking helps forecast returns. New activities are more difficult because there is no baseline of activity from which to compare.

But digital and social media have muddied the waters on ROI calculations. In part because there is an abundance of data that can be measured and tracked and that creates noise to what is really important. But additionally because digital and social media create a web of consumer touch points that may lead up to a sale. Just how many times does a customer touch your marketing messages before they purchase? So analytics solution providers are increasing their ability to track Channel attribution as the technology creates more touch points before a sale.

So how does a marketer justify spend on activities for advertising, marketing, and engagement? First there needs to be an agreement that a component of marketing is trial and learning.  Sure marketers must eventually get to sound ROI and solid business decisions. But to get there requires some level of test and learn which could mean a negative ROI.

A typical marketing budget should contain three high level items: Advertising and Operations, Labor and Administration, and Trial and Measure (aka R&D).

Advertising in this case is for activities related to existing products and services. These activities are held to stricter standards for producing a return and marketers should use measurement tactics to justify the spend. It’s part of the run-the-business and go-to-market tactics used by the company to meet strategic goals.

Trial and Measure for the marketing department isn’t so much about the expense to develop new products and services for the company. That’s research and development (R&D) in the products area. Trial and measure allows marketers a chance to experiment, measure, learn, and adjust. It’s an important part of marketing and feeds larger money spend in the advertising area. It also helps to create forecast models for larger advertising investments. It’s the trial and measure area where marketers need a bit of freedom from all the pressures of ROI.

A great example of this is usability tests on eCommerce sites. Marketers can see big changes in key metrics by changing words, colors, or button locations on a web page. It requires programming time and thus an investment. But it’s usually these types of simple changes that find a respectable pay-off because they make purchasing easier for the customer.

Another example is merchandising techniques such as image location, image rotation, product reviews, etc. What works for Amazon may not work for everyone. It has to be tested with the specific products and services in the store.

So yes. Show me the money is a solid business principal. But let’s allow marketers to find the money first.