As enterprises finalize their annual budgets, some clients use the terms "spending" and "cost" interchangeably. This highlights a challenge in the financial management of IT.

Findings

· IT costs are created as a result of spending on IT products and services, but many of these costs are not incurred during the current financial year. CFOs who are driving spending cuts this year may even be increasing IT costs.

· IT budget cuts do not necessarily cut business demand for IT services if business units can source services externally or even run their own. Emergency spending cuts can also increase the cost of service delivery by shifting costs into other budgets or years.

· As soon as an organization commits to IT products and services, it commits to the cost of operating them. Ongoing spending on structural costs cannot be contained by capital cuts that prevent restructuring projects from reducing costs.

· Costs can only be restructured as a result of coordinated enterprise IT strategy, sourcing and procurement activity. Instead of requiring a business case only for new projects, enterprises should review the business case for all costs to avoid making hasty decisions.

Analysis

Spending is often controlled by project and operating budgets, but few organizations track or control IT-related costs as effectively. The reasons include:

· Business planning horizons can be shorter than IT life cycles.

· Cost planning and accounting are expensive.

· No IT product does everything.

· Competing priorities affect budget planning.

Such excuses offer no comfort to investors. IT is typically 2% to 12% of operating costs (see "IT Spending and Staffing Report, 2008"), and cash-flow challenges include software at around 20% and storage at approximately 8% of the IT budget. Tough times require better financial controls and prompt organizations to rethink the cost of IT.

Panic spending cuts are unlikely to be sustained. Even if emergency spending cuts are necessary, review ongoing costs. A few clients are even starting to optimize IT supply chains for the new economy in case the recovery does not restore previous market conditions.

What You Need to Know

IT spending is only the visible extent of IT costs. Not all related IT spending is in the current IT budget. The facilities group, and not the IT organization, could pay for power and cooling, for example. Many costs have yet to be planned: Life cycle cost management is essential for assets and services.

IT organizations are under competitive pressure to steer a course close to these cost icebergs at full speed (see Figure 1). The right navigational aids, such as IT asset management, are essential to avoid the largest but least-visible part of the iceberg — unbudgeted cost, such as the invoice that follows a software audit. Any hole in cash flow can sink an enterprise. Focus on the most dangerous part of the cost iceberg below the surface, not just the visible spending.

Figure 1. Cost Icebergs

Source: Gartner (February 2009)

Highly compartmentalized, independent budgets create a false sense of security, while causing "everyone for themselves" behaviors that shift cost between silos and financial years. Use central cost planning and reporting to build consensus on sustainable savings, and avoid panic cuts that only make matters worse.

Inaction also creates cost. Some capacity and maintenance cost increases cannot be avoided with aging assets. Review life cycle costs as part of your total cost of ownership. Even with IT asset and cost management systems, traditional business skills are needed to plot a course to safety. Reassign project managers from postponed projects to review current operational cost structures to create sustainable spending.

External source: http://www.gartner.com/resources/165100/165142/findings_from_inquiries_it_s_165142.pdf

/Dennis