The Internal Economy for Investing in IT Services and Projects

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All organizations are resource constrained. Therefore, their leaders must choose where best to invest these limited resources. With the growing use of information technologies across the enterprise, IT's share of the pie may be increasing. Nevertheless, this too has its limits, requiring planning and prioritization in line with the needs of the greater enterprise. To effectively and efficiently manage IT resources, one must understand the full scope of the demands driving the prioritization of these IT investments.

At the most fundamental level, organizations invest in technology in compliance with mandated legal and accounting requirements, such as those set forth by federal and state taxation authorities, government legislation, regulatory statutes, and the like. At the next level, an enterprise expends resources to maintain its existing base of information technology assets, including hardware and software maintenance; system licenses and upgrades; security services; and desktop, storage, and printer expansions and replacements. These investments are meant to "keep the lights on" and the business going, and therefore are not discretionary. Neither are these costs stagnant. They go up with inflation and as new workers are added or as the network and related IT infrastructures grow alongside the enterprise. Furthermore, as new IT services are introduced, they become, over time, part of the enterprise's embedded base of IT, expanding the nondiscretionary spending on technology.

Because none of these information technology products and services runs on its own or functions flawlessly, the IT organization must also provide significant and costly end-user, operations, and production support and troubleshooting. Similarly, because neither the requirements of the IT customer nor the evolution of information technology products themselves is static, there is a constant need to enhance existing IT products and services and to invest strategically in new IT capabilities. Thus, day-to-day delivery must balance ongoing services — typically running twenty-four hours a day, seven days a week (24/7) — with a wide range of service and system enhancements and new project work. Often, IT project delivery resources overlap with those focused on service delivery for the simple reason that the development team must understand the current state of the enterprise's business requirements and IT capabilities if it is to deliver requested improvements. Furthermore, it is a good practice to ensure that those maintaining an IT service have a hand in its creation or, at the very least, thoroughly understand its IT underpinnings. Thus, a balanced IT organization requires a work force dedicated to 24/7 service delivery and ongoing infrastructure maintenance, overlapping a core group focused on technological innovation, development, and systems migrations and integrations. In smaller IT shops, these teams will comprise the same people; in larger organizations, these teams may coexist as separate entities and may even compete against one another for scarce resources.

Taken together, these various layers of IT investment establish the boundaries of the IT organization's internal economy or what I like to refer to as the total cost of IT ownership. My model groups information technology expenditures into two large buckets: nondiscretionary costs that support existing IT investments and discretionary costs that fund new initiatives, including major system enhancements and new IT projects. Often, IT organizations will establish service level agreements (SLAs) to codify the annualized terms, conditions, and resource allocations associated with these nondiscretionary services. (See Chapter 4 for a detailed discussion of this process.) By contrast, discretionary costs may be treated on a discrete one-time basis and are typically governed by a project plan, detailing the time, people, and financial resources associated with delivery. (See Chapter 5 for a structured management approach to these matters.)

Note that the model depicted in Exhibit 1 comprehends all of the enterprise's information technology expenditures, including internal labor (IT staff) and external vendor, consulting, and contractor costs. Furthermore, some organizations wisely set aside a reserve each year in anticipation of related but unexpected costs, such as project overruns, emerging technology investments, and IT organization responses to changes in the enterprise's business plans. This IT investment reserve may serve as a contingency fund for both discretionary and nondiscretionary cost overruns, as well as unplanned initiatives. Driven by the number of users and the extent of services, nondiscretionary costs will typically consume at least 60 percent of the annual IT budget and, if not carefully managed, may preclude the opportunity for more strategic IT (project-based) investments. Put another way, the total sum devoted to IT expenditure by the enterprise is rarely elastic. If nondiscretionary costs run out of control, there will be little left for project work. If the business' leadership envisions major new IT investments, these may only come at the expense (if possible) of existing IT services or through enlarging the overall IT allocation. [1] See Exhibit 1. [2]

Exhibit 1: The Internal Economy of IT Product and Service Delivery

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Not surprisingly, the enterprise's leaders usually want it both ways: namely, they expect the IT organization to keep the total cost of its operations steady while taking on new initiatives. For this reason, IT leaders must manage their commitments with great care through a rigorous process of project prioritization, customer expectation management, and resource alignment. To succeed in this endeavor, the information technology organization must keep it simple and keep it collaborative. More specifically, the organization should employ an investment-funding model along the lines mentioned above. It should separate and manage recurring (nondiscretionary) activity through SLAs. [3] Similarly, it should manage projects through a separate but connected commitment synchronization process. [4]

Throughout these labors, IT management should employ metrics that measure value to the business and not merely the activity of IT personnel. Last but not least, although IT management should take ownership of the actual technology solutions, it must also ensure that the proper business sponsors, typically line-of-business executive management, take ownership of and responsibility for project delivery and any associated business process changes in partnership with IT counterparts. The remaining sections of this chapter will consider in broad outline the areas of service and project delivery management.

[1]One of the primary justifications for service level (see Chapter 4) and commitment management (see Chapter 5) is to address the all-too-familiar phenomenon whereby business leaders commit the enterprise to IT investments without fully appreciating the total cost of ownership associated with their choices. Without proper planning, such a course of action can tie the hands of the IT organization for years to come and expose the enterprise to technological obsolescence.

[2]For an electronic version of the IT internal economy stack and additional guidelines on differentiating SLA work from project work on a cost basis, see The Hands-On Project Office,, chpt1~1~internal economy model.

[3]SLAs are created through an annual process to address work on existing IT assets, including all nondiscretionary (maintenance and support) IT costs, such as vendor-based software licensing and maintenance fees, and the discretionary costs associated with system enhancements below some threshold amount (e.g., $10,000 per enhancement effort). Typically, SLA work will at times entail the upgrade costs of system/ or Web site hardware and software, as well as internal and external labor costs, license renewals, and so forth.

[4]The project commitment process governs the system development life cycle for a particular project, encompassing all new IT asset project work, as well as those few systems or Web site enhancements that are greater than the SLA threshold project value. Typically, project work will entail the purchase costs of new system or Web site hardware and software, internal and external labor costs, initial product licensing, and so on. Once a project deliverable is in production, its ongoing cost is added to the appropriate SLA for the coming year of service delivery.

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The Hands-On Project Office(c) Guaranteeing ROI and On-Time Delivery
E-Commerce Security: Advice from Experts (IT Solutions series)
EAN: 2147483647
Year: 2006
Pages: 132 © 2008-2017.
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