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Many companies do not have the luxury of providing dedicated financial support to their Information Technology (IT) organizations, which often results in a struggle to understand IT cost drivers and savings opportunities. This struggle has become more evident as companies increasingly rely upon effective IT to drive operational efficiencies while simultaneously expecting IT units to reduce operating costs. This paradigm often results in the CIO seeking a liaison between IT and corporate finance in order to help provide transparency of technology costs as well as to identify the value proposition of all IT services. Identifying meaningful savings and efficiencies in your IT environment begins with a partnership between the technology and financial support units. Preparing for these conversations requires an understanding of how to build a successful partnership between IT and corporate finance – the foundation for which begins with three related key practices:
Applying traditional financial management practices with the IT disciplines of vendor and asset management.
FINANCIAL MANAGEMENT:
The key to world-class IT financial management is coupling financial processes to your technology infrastructure and the organization’s strategic technology roadmaps. Effective financial management ensures the IT infrastructure is obtained at the most cost-effective price, while providing the organization with a deep understanding of its IT services costs. In many instances however, the most cost-effective price may not necessarily mean the lowest price; depending upon availability requirements and other demands placed on technology. Financial transparency must therefore exist in order for the business to understand the tradeoffs between price and performance.
VENDOR MANAGEMENT
This price and performance tradeoff was painfully evident following one organization’s switch to a well-known personal computer supplier, which was initially calculated to save the organization millions of dollars. Not surprisingly, the finance organization was quick to identify how the new agreement would reduce expenses in the following year’s budget. However, those savings quickly evaporated after the supplier experienced a 20% failure rate on over 100,000 devices, which had been in service for less than a year. Obviously, managing your suppliers not only includes obtaining the best price but also monitoring the quality of the product or service being provided. This is why continually monitoring your relationships and agreements with suppliers (and including your finance organization in this process) is often your first and best opportunity to identify operational inefficiencies and IT cost savings. The end result will not only mean achieving better price performance from your technology assets, but also will improve the reputation of your IT organization to provide a quality product at an explainable and predictable cost.
ASSET MANAGEMENT:
Keeping your technology assets current also requires active management of these assets: An effective asset strategy not only tracks the asset but takes into account the lifecycle of the product from procurement to eventual disposition. For example, leasing is a common asset and treasury strategy found in IT because it frees up cash flow associated with large capital purchases. I’ve witnessed on numerous occasions leases being subsequently bought out because the technology owner was not made aware of the lease and was not prepared to replace the technology at end of term. These pitfalls can be easily avoided by linking asset strategies with technology roadmaps and the organization’s budgeting process.
These three practices may appear straightforward, but in order to be successful they require the constant collaboration between your finance and technology organizations. The application of financial, vendor, and asset management methodologies will keep your IT organization on track to realizing operating efficiencies while also optimizing operating costs.
Stay tuned: Our next few posts, we (my fellow Datacenter Trust teammates and I) will delve deeper into each of these key three areas as well as other topics on IT finance.