Friday, June 26, 2009

IT Financial Management Provides Required Visibility into Operations to Reduce Total IT Costs

Transcript of a BriefingsDirect podcast on how IT departments should look deeply in the mirror to determine and measure their costs and how they bring value to the enterprise.

Listen to the podcast. Download the podcast. Find it on iTunes/iPod and Podcast.com. Learn more. Sponsor: Hewlett-Packard.

Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you’re listening to BriefingsDirect.

Today, we present a sponsored podcast discussion on bringing improved financial management capabilities to enterprise IT departments. The global economic downturn has accelerated the need to reduce total IT cost through identification and elimination of wasteful operations and practices. At the same time, IT departments need to better define and implement streamlined processes for operations and also for proving how new projects begin and unfold.

Knowing the true cost and benefits of complex and often sprawling IT portfolios quickly helps improve the financial performance of how to quantify IT operations. Gaining real-time visibility into dynamic IT cost structures provides a powerful tool for reducing cost, while also maintaining and improving overall performance. Holistic visibility across an entire IT portfolio also develops the visual analytics that can help better probe for cost improvements and uncover waste.

Here to help us understand the relationship between IT, financial management, and doing more for less in tough times are two executives from Hewlett-Packard (HP). Please help me welcome Ken Cheney, director of product marketing for IT Financial Management at HP Software and Solutions. Welcome, Ken.

Ken Cheney: Thanks, Dana, I appreciate the opportunity.

Gardner: We’re also joined by John Wills. He’s a practice leader for the Business Intelligence Solutions Group at HP Software and Solutions. Welcome, John.

John Wills: Hi, thank you, Dana.

Gardner: Ken, let’s start with you. We’ve heard for quite sometime that IT needs to run itself more like a business, to do more with less, and provide better visibility for the bean counters. But, now that we’re in a tough economic climate, this is perhaps a more pressing concern. Give me a sense of what’s different about running IT as an organization and a business now versus two years ago.

Cheney: Dana, the economy has definitely changed the game in terms of how IT executives are operating. I and the others within HP are hearing consistently from IT executives that cost-optimization, cost-containment, and cost-reduction initiatives are the top priority being driven from the business down to IT.

IT organizations, as such, have really shifted the focus from one of a lot of new initiatives that are driving innovation to one of dealing with situations such as how to manage merger and acquisition (M&A) processes, how to deleverage existing IT assets, and how to provide better decision-making capabilities in order to effectively control cost.

The landscape has changed in such a way that IT executives are being asked to be much more accountable about how they’re operating their business to drive down the cost of IT significantly. As such, they're having to put in place new processes and tools in order to effectively make those types of decisions.

Gardner: Now, John, tell me about the need for better visibility. It seems that you can’t accomplish what Ken's describing, if you don’t know what you have.

Wills: Right, Dana. That’s absolutely correct. If all of your information

Historical data is a prerequisite for knowing how to go forward and to look at a project’s cost . . .

is scattered around the IT organization and IT functions, and it’s difficult to get your arms around, then you’re exactly right. You certainly can’t do a good job managing going forward.

A lot of that has to do with being able to look back and to have historical data. Historical data is a prerequisite for knowing how to go forward and to look at a project’s cost and where you can optimize cost or take cost down and where you have risk in the organization. So, visibility is absolutely the key.

Gardner: It’s almost ironic that the IT department has been helping other elements of the enterprise do the exact same thing -- to have a better sense of their data and backwards visibility into process and trends. Business intelligence (BI) was something that IT has taken to the business and now has to take back to itself.

Wills: It is ironic, because IT has spent probably the last 15 years taking tools and technologies out into the lines of business, helping people integrate their data, helping lines of business integrate their data, and answering business questions to help optimize, to capture more customers, reduce churn in certain industries, and to optimize cost. Now, it’s time for them to look inward and do that for themselves.

Gardner: When we start to take that inward look, I suppose it’s rather daunting. Ken, tell us a little bit about how one gets started. What is the problem that you need to address in order to start getting this visibility that can then provide the analytics and allow for a better approach to cost containment?

From managed to siloed

Cheney: If you look at the situation IT is in, businesses actually had better management systems in place in the 1980s than the management systems in place today. The visibility and control across the investment lifecycle were there for the business in the 1980s with the likes of enterprise resource planning (ERP) and corporate performance management capabilities. Today, IT operates in a very siloed manner, where the organization does not have a holistic view across all the activities.

In terms of the processes that it’s driving in a consistent manner, they’re often ad hoc. The reporting methods are growing up through these silos and, as such, the data tends to be worked within a manual process and tends to be error-prone. There's a tremendous amount of latency there.

The challenge for IT is how to develop a common set of processes that are driving data in a consistent manner that allows for effective control over the execution of the work going on in IT as well as the decision control, meaning the right kind of information that the executives can take action on.

Gardner: John, in getting to understand what’s going on across these silos in IT, is this a problem that’s about technology, process, people, or all three? What is the stumbling block to automating some of that?

Wills: That’s a great question. It’s really a combination of the three. Just to be a little bit more specific, when you look at any IT organization, you really see a lot of the cost is around people and around labor. But, then there is a set of physical assets -- servers, routers, all the physical assets that's involved in what IT does for the business. There is a financial component that cuts across both of those two major areas of spend.

As Ken said, when you look back in time and see how IT has been maturing as an organization and as a business, you have a functional part of the organization that manages the physical assets, a functional part that manages the people, manages the projects, and manages the operation. Each one of those has been maturing its capability operationally in terms of capturing their data over time.

Industry standards like the Information Technology Infrastructure Library (ITIL)

IT organizations are going to be starting in multiple places to address this problem. The industry is in a good position to address this problem.

have been driving IT organizations to mature. They have an opportunity, as they mature, to take advantage and take it to the next level of extracting that information, and then synthesizing it to make it more useful to drive and manage IT on an ongoing basis.

Gardner: Ken, you can’t just address new technology at this juncture. You can’t just say, "We’re going to change our processes." You can’t just start ripping people out. So, how do you approach this methodologically? Where do you start on all three?

Cheney: IT organizations are going to be starting in multiple places to address this problem. The industry is in a good position to address this problem. Number one, as John mentioned, process standardization has occurred. Organizations are adopting standards like ITIL to help improve the processes. Number two, the technology has actually matured to the point where it’s there for IT organizations to deploy and get the type of financial information they need.

We can automate processes. We can drive the data that they need for effective decision-making. Then, there is also the will there in terms of the pressure to better control cost. IT spend these days composes about 2 to 12 percent of most organizations’ total revenue, a sizable component.

Gardner: I suppose there also has to be a change in thinking here at a certain level. If you're going to start to finding cost and behaving like a business rather than a cost center, you have to make a rationale for each expenditure, both operationally and on a capital expenditure basis. That requires a cultural shift. Can you get into that a little bit?

Speaking the language of business

Cheney: It sure does. IT traditionally has done a very good job communicating with the business in the language of IT. It can tell the business how much a server costs or how much a particular desktop costs. But it has a very difficult time putting the cost of IT in the language of the business -- being able to explain to the business the cost of a particular service that the business unit is consuming.

For example, quote to cash. How much is a particular line of business spending on quote to cash or how much does email cost based on actual usage per employee. These are some of the questions that the business would love to know, because they're trying to drive business initiatives, and these days, the business IT initiative is really part of a business initiative.

In order to effectively asses the value of a particular business initiative, it’s important to know the actual cost of that particular initiative or process that they are supporting. IT needs to step up in order for you to be able to provide that information, so that the business as a whole can make better investment decisions.

Gardner: I suppose business services are increasingly becoming the coin of the realm and defining things such as a processor, number of cores, license per user/seat, and that sort of thing doesn’t really translate into what a business service costs. John, how does BI come onto the scene here and help gather all of the different aspects of the service so that it could be accounted for?

Wills: It all ties together very strongly. Listening to what Ken was saying

That’s one of the keys in helping IT shift from just being a cost center to being an innovator to help drive the business.

about tying to the investment options and providing that visibility ties directly to what you are asking about BI. One of the things that BI can help with at this point is to identify the gaps in the data that’s being captured at an operational level and then tie that to the business decision that you want to make.

So again, Dana, back to one of your earlier questions about whether it's a people, process or technology issue, my answer would be that it's really all of the above. BI comes along and says, "Well, gee, maybe you’re not capturing enough detailed information about business justification on future projects, on future maintenance activity, or on asset acquisition or the depreciation of assets."

BI is going to help you collect that and then aggregate that into the answers to the central question that a CIO or senior IT management may ask. As Ken said, it’s very important that BI, at the end of that chain or sequence of activities, helps communicate that back in terms that business can understand so they can do an apples-to-apples comparison of where they would like IT to satisfy their needs with a given budget at hand. Dana, that goes back to again one of your earlier questions. That’s one of the keys in helping IT shift from just being a cost center to being an innovator to help drive the business.

Gardner: I suppose that as we move from manual processes in IT toward these visualization analytical tools, there's also a cultural shift. A print out might work well in the IT department. If you take that to your decision maker on the business side, they're going to say, "Where's my dashboard? Where are my dials?" What’s the opportunity here to make this into more of a visual benefit in terms of understanding what’s going on in IT and in cost? Why don’t we take that to Ken?

Getting IT's house in order

Cheney: In terms of the opportunity, it’s really around helping IT get its own house in order. We look at the opportunity as being one of helping IT organizations put in place the processes in such a way that they are leveraging best practices, that they're leveraging the automation capabilities that we can bring to the table to make those processes repeatable and reliable, and that we can drive good solid data for good decision-making. At least, that’s the hope.

By doing so, IT organizations will, in effect, cut through a lot of the silo mentality, the manual error-prone processes, and they'll begin operating much more as a business that will get actionable cost information. They can directly look at how they can contribute better to driving better business outcomes. So, the end goal is to provide that capability to let IT partner better with the business.

Gardner: Tell me a little bit more about the solutions and services that you'll be announcing at HP’s Software Universe event?

Cheney: At Software Universe this year, we rolled out a new solution to help customers with IT financial management. For quite some time, we’ve been in the business of doing project portfolio management (PPM) with HP Project Portfolio Management Center, as well as in the business of helping organizations better manage their IT assets with HP Asset Manager.

We have large customer bases that are leveraging those tools. With our

This product effectively allows IT organizations to consolidate their budgets, as well as their costs. It can allocate the cost as appropriate to who they view as actually consuming those particular services that IT is delivering.

customers who are using the PPM product as well as the Asset Management product from HP we can effectively capture the labor cost. If you look at PPM, it really tracks what people are working on, effectively managing the resources and capturing the time and cost associated with what those resources are doing, as well as the non-labor. It's all of the assets out there -- physical, logical, and virtual. We're talking about servers and software so that we can pull that together to understand the total cost of ownership.

We’ve brought together what we’re doing within PPM as well as within Asset Management with a new product called HP Financial Planning and Analysis. This product effectively allows IT organizations to consolidate their budgets, as well as their costs. It can allocate the cost as appropriate to who they view as actually consuming those particular services that IT is delivering.

Then, we provide the analytic reporting capabilities on top of that to allow IT organizations to better communicate with the business, better control, optimize, make decision making around cost. They can effectively drive the decision making right down to the execution of the work that’s occurring within the various processes of IT. That’s a big part of what we are delivering with our IT financial management capability.

Gardner: So, tell us about the products and solutions that are coming into the market?

Cheney: We have a new solution that we’re announcing as part of the HP Financial Planning and Analysis offerings.

Gardner: Does that have several modules, or are there certain elements to it -- or more details on how that is rolling out?

Service-based perspective

Cheney: The HP Financial Planning Analysis product allows organizations to understand costs from a service-based perspective. We're providing a common extract transform load (ETL) capability, so that we can pull information from data sources. We can pull from our PPM product, our asset management product, but we also understand the customers are going to have other data sources out there.

They may have other PPM products they’ve deployed. They may have ERP tools that they're using. They may have Excel spreadsheets that they need to pull information from. We'll use the ETL capabilities to pull that information into a common data warehouse where we can then go through this process of allocating cost and doing the analytics.

Gardner: So, John, going back to that BI comparison. It sounds a lot like what people have been doing with trying to get single view of a customer in terms of application data.

Wills: It really is. It’s a single view, except in this case we're getting single view of cost across many different dimensions. It’s really important, as Ken said, that we really want to formalize the way they're bringing cost data in from all of these Excel spreadsheets and Access databases that sit under somebody’s desk. Somebody keeps the monthly numbers in their own spreadsheets in a different department and they are spread around in all of these different systems. We really want to formalize that.

As to your previous question about visualization, it’s not only about formalizing it and pulling it altogether. It’s about offering very powerful visualization tools to be able to get more value and to be able to see immediately where you could take advantage of cost opportunities in the organization.

Part of Financial Planning and Analysis is Cost Explorer, a very traditional BI capability in terms of visualizing data that’s applied to IT cost, while you search through the data and look at it from many different dimensions, color coding, looking at variants, and having this information pop out of you.

Gardner: It’s one thing to be able to gather, visualize, and put all this

. . . once you are able to actively price your services, you're able to charge back for the consumption of those services.

information in the context of a cost item or a service, but the larger payback comes from actually being able to associate that cost with the user or some organization that’s consuming these services at some level or another. How do we get from the position of visibility and analytics to a chargeback mechanism?

Cheney: Most customers that I talk to these days are very keen on jumping immediately to the charge back and value side of the equation. I like to say, "Let’s start by walking before we run," with the full understanding that the end goal really is being able to show the value that IT is delivering and be able to charge back for the services that are actually being consumed.

Most organizations haven’t even put in place these processes that they need, which is why, when we talk about what we are doing with IT financial management, we want to make sure customers understand that it’s a complete solution, where we view the underlying processes being the end goal of understanding of the value doing charge back. To get to that nirvana of understanding the value of IT, customers need to put in place those processes around capturing labor cost and non-labor assets and effectively managing the IT investment lifecycle end-to-end.

On top of that, by doing the cost aggregation and the analytics that we are doing with the Financial Planning and Analysis offering, you get the cost visibility. Once you understand the cost, you can then go through the process of pricing out what your services are. At that point, once you are able to actively price your services, you're able to charge back for the consumption of those services.

IT underappreciated

Gardner: Over the years, I've heard from a number of IT folks about their frustration at not being appreciated. People don’t understand what goes into being able to provide these services. This perhaps opens up an opportunity or a door for the IT department to explain itself better and perhaps be better appreciated. Does that bear fruit in some of the uses that you’ve come across so far?

Cheney: Absolutely. That is really what we are driving for -- to help IT organizations be much more credible in front of the business, for business to understand what it is that they are actually paying for, and for IT to react much more nimbly to the requests that are coming in from the business.

Wills: You are certainly being more transparent. Put the question of charge back to the side for a moment. Without question, you're able to be more transparent in what the costs are. You're able to use the same terminology, very consistent terminology, that the business understands, which is a huge leap forward for most organizations. When you have that transparency, when you have a common set of terminology in the way that you communicate things, it’s a huge boost for IT to be able to justify how they are spending their budget money.

Gardner: Let me ask an interesting question. Who in IT is responsible for this? Is there a "chief visibility officer," if you will, within the IT department? Who is generally the sign-off on the purchase order for these sorts of products?

Wills: The chief sign-off officer, the chief visibility officer, is the CIO. There is no question. The CIO is the one. It’s really interesting. When we talk to accounts, the one who has the burning issues, the one who is most often in front of the business, justifying what IT does, is the CIO --at the highest level obviously.

That's always interesting, because the CIO has the most immediate pain. Often times, people one or two levels beneath him are grinding through manually pulling data together month after month and sending that data upstairs, so to speak. They don’t have the same levels of interaction with the end customers to have that acute pain, but the CIO is definitely the chief one who sees that on a daily basis. Would you agree, Ken?

Cheney: I would. Many CIOs have created essentially an IT finance arm and they may have a role, such as a CFO for IT or IT finance, which is taking all that information rolling up from those folks that are lower down in the organization and trying to make sense of it. This is a manual, very error-prone process these days. So, for that particular organization charged with making sense of IT finances and associating the actual cost of IT to the services consumed it is a big challenge. As such, it makes the job of the CIO very difficult when it comes to going out and communicating with the business.

Gardner: Let’s see if we can quickly identify some examples. Do you

. . . we found that, on average, that strategic portfolio work that our customers would do could save 2 to15 percent of their total IT budget.

have case studies or customers that you can describe for us who have undertaken some of this, and what have they found? Did they get actual significant savings? Did they see an improvement in their trust and sense of validation before the business or perhaps are they looking more for efficiency and are improving the productivity of their IT departments? Any metrics of success for how these products are being used?

Cheney: In terms of how customers are being successful, we’ve seen customers these days who are very focused on quick results, meaning that when they deploy what we are bringing to the table, they are doing it in a very targeted manner. We recommend that customers actually do that. That they want to make sure they’re tackling this problem in what I call bite-size chunks, where they want to get a win within a few months maximum. We have customers who will start, for example, with a base level of control over their IT processes.

One great starting point would be strategic portfolio management. We recently did a survey of about 200 IT executives and found that 43 percent of those executives said they have no form of portfolio rigor in place today. We did a benchmark study with a group of our customers with an organization called the Gantry Group, a third-party group that does return on investment (ROI) analysis and we found that, on average, that strategic portfolio work that our customers would do could save 2 to15 percent of their total IT budget. That's an area where we can have a very quick impactful win, and it's a good example.

Another area would be asset, inventory, and utilization, where we have customers who will get started just understanding what they have out there in terms of their services and desktop software and getting a grip on that. There are immediate savings to be had with that type of initiative as well.

A look at the future

Gardner: That brings up looking at the future. We've heard a lot about virtual desktop infrastructure (VDI), bringing a lot of what was done locally back to the data center, but with cost issues being top of mind around that. Then, we're also hearing quite a bit about cloud computing. It seems to me that we're going to have to start doing some really serious cost benefit analysis about what is the cost to maintain my current client distribution architecture versus going to a VDI or a desktop-as-a-service (DaaS) approach.

I am also going to need to start comparing and contrasting cloud-based services, applications and/or infrastructure against what it costs and what we're doing internally. Do you see some trends in the field, some future outlook, in terms of what the role of IT is going to move into in terms of being able to do these financial justifications?

Cheney: Absolutely. This is an area that we're seeing customers having to grapple with on a consistent basis, and it’s all about making effective sourcing decisions. In many respects, cloud computing, software as a service (SaaS), and virtualization all present great opportunities to effectively leverage capital. IT organizations really need to look at it through the lens of what the intended business objectives are and how they can best leverage the capital that they have available to invest.

Gardner: John, something further to offer?

Wills: There is a huge inflection point right now. Virtual computing, cloud computing, and some of these trends that we see really point towards the time being now for IT organizations to get their hands around cost at a detailed level and to have a process in place for capturing those cost. The world, going forward, obviously doesn’t get simpler. It only gets more complex. IT organizations are really looked at for using capital wisely. They're really looked at as the decision makers for where to allocate that capital, and some of it’s going to be outside the four walls.

We've seen that on the people side of the business with outsourcing for quite some time. Now, it’s happening with the hardware and software side of the business as well. But these decisions are very strategic for the enterprise overall. The percentage of spend, the IT spend-to-revenue, for a lot of these organizations is very large. So, it’s absolutely critical for the enterprise that they get their hands around a process for capturing cost and analyzing cost, if they're going to be able to adapt and evolve as this market continues to change so rapidly.

Gardner: If an outside provider can walk in and say this application or this infrastructure is going to cost this much per employee per month, that’s pretty concrete. If the business decision maker goes back to the IT department and says, "How much is that going to cost from your perspective," they have got to have an answer, right?

Wills: Right. You'd better have an answer for what your fully loaded costs are across every dimension of your business and you'd better understand things like your direct cost, indirect cost, fixed cost, and variable cost. It’s really about looking into the future and predicting not only risk, but opportunity, advising the board and CEO, and saying, "These are our choices and this is the best use of capital."

Gardner: I was just having a chat about cloud computing with Frank Gillett of Forrester Research a few weeks ago. He was saying that when you take a hard look at these costs, in many cases, doing it on-premises internally is actually quite a bit more attractive than going to the cloud but you have to come up with the numbers to actually justify that.

Wills: You have to be able to justify it. There is also the dimension of

You'd better have an answer for what your fully loaded costs are across every dimension of your business and you'd better understand things like your direct cost, indirect cost, fixed cost, and variable cost.

customer satisfaction. You talk about service-level agreements (SLA), and you must factor that in. So, you start to get into some of the soft aspects of costing things out and looking at opportunity cost, but you have to factor those in as well. It does show some of the complexity here with the problem that’s at hand.

We really believe this is the time for the organizations to seriously get their arms around this.

Gardner: Well, I'm afraid we are about out of time but we have been learning more about how improved financial management capabilities can help reduce total IT cost through identification and elimination of wasteful operation, but also gaining visibility into actual IT cost structures can certainly help our organizations justify themselves to the business, find the right balance in budgets and future projects, and, as we have seen for the future, being in a good position to compare and contrast against virtualization, and cloud computing, and some of the other new opportunities for IT acquisition.

I want to thank our panel for getting deeply into this conversation. It’s really been fun. I also want to thank our sponsor for today’s discussion, HP Software and Solutions, for underwriting its production. We've been joined by Ken Cheney, director of product marketing for IT Financial Management at HP software. Thanks, Ken.

Cheney: Great. Thank you.

Gardner: And also, John Wills, practice Leader for the Business Intelligence Solutions Group at HP software. I appreciate your input, John.

Wills: Thank you, Dana.

Gardner: This is Dana Gardner, principal analyst at Interarbor Solutions. Thanks for listening and come back next time.

Listen to the podcast. Download the podcast. Find it on iTunes/iPod and Podcast.com. Learn more. Sponsor: Hewlett-Packard.

Transcript of a BriefingsDirect podcast on how IT departments should look deeply in the mirror to determine and measure their costs and how they bring value to the enterprise. Copyright Interarbor Solutions, LLC, 2005-2009. All rights reserved.