IT departments have traditionally been weak at controlling IT spend, let alone be able to explain the cost in the first instance to the business. So why is it so difficult to manage IT spend?
Typically this is due to:
- The fragmented nature of IT. Spend is often incurred in many departments and business units with a varying degree of central control. This is often further exacerbated by spurious IT recharges.
- An ever expanding IT environment. Demands on IT grow continuously. This results in increased cost. However, businesses often fail to distinguish what is a real cost increase (unit price), versus expansion of the IT environment (volume).
- Lack of financial skills. Typically, IT staff lack finance understanding and they are unable to talk the language of the accountants.
As a result many businesses feel that IT is not properly managed. Businesses respond by cutting or freezing IT spend.
This leads to frustration in the IT department, and equal annoyance on the business side, as the business feels that they need to "watch" the IT function as the "techies" cannot be trusted to make managerial and cost effectiveness decisions.
In this article we outline how StarBev, a leading Central Eastern European brewer, operating in seven countries, has managed to bridge this gulf between the business and IT and how they successfully control IT spend.
How to solve the IT cost control problem
Establish a robust framework
In order to manage spend, a strong framework was established which captures the total IT cost at StarBev.
This framework was developed by finance and IT staff to ensure that standard accounting practices were adhered to but also to make sure that costs drivers were captured to allow the IT team to analyse operations effectively.
The cost framework distinguishes between operating spend and capital investments.
The IT operating spend is divided into "packages" such as hardware maintenance, software maintenance, application support etc. and with further drill-down into "blocks" for different suppliers and technical areas, as shown in figure 1.
The framework is consistently used by all the countries within StarBev Group. This makes consolidation of IT spend and comparison between the countries straightforward.
In addition, the framework distinguishes between one off, ongoing as well as business growth spend. This allows the IT team to present a true picture of the baseline and extraordinary activities as well as expansionary costs. This is particularly helpful during the annual budget cycle to justify why spend varies from one year to another.
IT spend is measured "at cost" and no artificial or inflated recharges are made between the countries and central IT. This prevents debates between central and local IT teams about fairness and allocation keys.
IT spend, which is capitalised, is divided into two broad categories: Infrastructure (mandatory) and business initiatives (discretionary), with several sub categories:
Infrastructure initiatives, e.g. hardware refresh
This type of IT investments is managed directly by the IT department with limited business involvement. Typically, it is difficult to justify this spend on a normal return on investment basis. Thus, instead of making unrealistic business cases, the IT team develops an annual plan which is approved during the budget process. Once approved it is up the IT team to manage this type of investment.
Business IT initiatives, e.g. application developments
This type of spend is based on business priorities. During the budget cycle a number of meetings between the business and the IT team take place. A wishlist of projects is drawn up and capital allocated. The amount in the budget will not cover all projects. So during the year, projects will be launched inline with business priorities and once a business case is developed.
The business IT initiatives are managed as a portfolio of projects and there is no equal allocation between the countries. Instead, IT investments are channelled to the countries and business functions where the largest return can be realised.
The success of our approach
Detailed follow up and information-based decisionmaking
The key for successfully controlling the IT spend at StarBev is the ongoing follow up. On a monthly basis the actual spend is captured and tracked against budget.
A summary is presented on a one page financial scorecard. This balance scorecard is shared with all IT staff to ensure everyone understands the financial position. The balance scorecard is also presented to the senior executive team. There is only a single picture as far as IT spend goes.
Furthermore, on a quarterly basis an IT steering committee meets to discuss and prioritize the IT investments for the forthcoming quarter and remaining part of the year. This steering committee includes the senior leaders of the business, including the CEO, CFO together with CIO and Project Portfolio Director.
The IT steering committee reviews the business IT initiatives as well as how over or under-spend in previous months will impact proposed future projects. The aim is to ensure that the total annual budget is adhered to.
The key lessons learned from implementing the cost control framework and managing the IT costs successfully at StarBev comes down to a few simple rules:
- Use an IT cost framework that adheres to common accounting standards and captures all the relevant IT cost drivers.
- Capture and analyse IT costs on a consistent basis every month.
- Share IT spend information with all IT staff (central and local teams) as well as to the senior management team to ensure there is a single view of the cost.
- Use the IT cost information to make the right business decision.