Wednesday, September 30, 2009

Experts on cost/benefit analysis: "Huh?"

I'm looking at a recently published deck from an organization called CIO Executive Board. (Despite its high-falutin' name, it's really just another consultancy.) I thought the study's title, "Rethinking IT Funding Models" would be of interest to readers of this blog.

But on the slide headlined, "Decision rules for enhancing cost/benefit transparency," they lost me. The whole presentation became, to me, an excuse to rail against all the fuzzy thinking that sidetracks any quantitative approach to understanding IT as a business. Basically, CIO Executive Board suggests you ask four questions:

  1. Do we understand the costs of the IT services we deliver?
  2. To what extent is the cost of a specific IT service variable in the near term (within one year)?
  3. Where can cost-transparency [sic] change behavior?
  4. What is the most efficient means of providing cost transparency?

Now, what's wrong with this picture? A lot.

First, It's a sad state of affairs if a CIO doesn't understand his or her service delivery costs. OK, so it's a sad state of affairs. But am I the only one bothered that this question even has to be asked? I don't accept the premise that this is a useful yes/no question. What might be more helpful would be, "What is it about the costs of the IT services we deliver that we don't understand? Maybe you understand servers and storage in intricate detail, but your network costs leave you stymied. Maybe you know to the penny how much you're spending in each domain, but you'd be hard-pressed to map it to the production and sales functions in your overall enterprise.

As for the second question, I like to assume that anyone I talk to whose title begins with the letter C knows the definition of "short term". I also like to think they know what "variable" means, but I'm not sure whoever wrote this slide ever had a job starting with C (unless maybe custodian, and not in the financial sense). Examples of variability drivers given in sub-bullets include tiering labor, rationalizing procurement, outsourcing and stretching refresh cycles. No, Charlie. That's not what "variable" means. These are things you can do to drive down your current year's costs, true. And I'm not saying we shouldn't be thinking about these things. But "variable" to me (and most other Accounting 101 veterans) suggests the amount of money accreted or decreted if the unit of workload changes. If you have to add another database instance, how much more will that cost you? Alternately, if you can drive down the number of database instances by 1, how much does that save you? There can be some stickiness -- it's possible that incremental costs of adding workload would be realized this year, but it might take until next year to realize the savings if that unit of workload went away. The beauty of cloud is that it helps move hitherto fixed costs into the variable realm, so you can then control costs by controlling your workload.

But that leads to another problem with the CIO Executive Board report: There's nothing in there about quantifying benefits. Nothing. At all. And you can't explore "cost/benefit transparency" unless you can suggest some visibility into the benefit side of the vinculum. (By the way, and this is just a nit: I hyphenate rather than slash "cost-benefit" because, if we were to be mathematically pure, we'd be calling it "benefit/cost". That's the ratio we're really trying to identify.)

The slide's last two questions, though, are spot on: How do we use our knowledge of costs to drive behavior, and how do we make sure these costs are comprehensible to the users? These are going to be huge issues as we move to the cloud. The provider that can meter services best -- and by "best" I mean translated into service catalog items to which line-of-business executives can relate -- will be the provider that succeeds.

To that end, I look forward to the CIO Conference Board's October 29 presentation on Business-Focused Metrics of IT Value. I trust it'll be more informative.

Have a better day,

Bill

PS: If you haven't seen it yet, please check out the IBM Global CIO Study. I'll be blogging on that later this week.

2 comments:

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