Broadly speaking, information technology serves three roles in business organizations. First and foremost, IT is a basic utility, similar to water, electricity, or the telephone. The second role of IT is as a source of differentiation and competitive advantage, obtained through the imaginative application of technological innovations. The third role, though not that common, is for IT to be at the very core of business strategy – not merely a differentiator but the very basis of product or service delivery. Amazon.com and eBay come to mind as notable examples.
Before it can serve as a source of competitive advantage, IT must function smoothly as a utility. Unfortunately, the IT utility – no matter how it is defined – still lacks the maturity of more traditional utilities. Very little, if any, organizational time and talent goes into managing electricity or water. The same cannot be said about even the most basic IT functions.
There is a need, then, for the IT utility to be managed properly. And in my view, the approach is different than that required for managing IT for competitive advantage. This article concerns itself with best practices for managing IT as a utility.
When is IT a utility?
If IT is a mere utility, it better function at the lowest possible cost, and preferaby be somebody else’s headache.Akhil Bandari>TextVarious aspects of IT already fit the utility model. For example, e-mail has become a basic utility and arguably Internet access also falls into this category. But what about computerized accounting, order processing, or inventory management? Access to such business applications is no longer a competitive advantage, just like access to the telephone no longer puts you ahead of your competition. Of course, absence of these utilities can be a serious handicap. It is inconceivable today to run any business without some basic computerized transaction processing.
If e-mail, the Internet, word processing and spread sheets, basic transaction processing, and the entire infrastructure that supports these applications can be deemed a utility, then this utility has a long way to go in comparison to other business utilities in terms of reliability, scalability, and cost predictability. Yes, the cost of other utilities can also be volatile in an increasingly deregulated economic environment. However, there are means to hedge those costs. Is there a hedge for IT costs? Can IT deliver consistent quality?
If we agree that the utility functions of IT, however you define them, do not provide any competitive advantage, then the CIO must endeavor to provide these functions at low cost and consistent quality. To do this requires economies of scale and specialization. In the context of IT management, that means standardization, consolidation, and simplification.
The key to managing IT as a utility, then, is to select an appropriate governance model. There are three options: outsourcing, internal shared services, and co-operative shared services. Each of these choices needs to be examined in conjunction with the organization’s overall IT strategy. And each can be implemented in a number of ways. The focus should be on producing economies of scale and specialization in a way that meets the unique needs of a particular organization.
The outsourcing option
Outsourcing should especially appeal to those who do not believe that IT can provide strategic advantage to their organization. If IT is a mere utility, then it better function at the lowest possible cost, and preferably be somebody else’s headache.
Large outsourcing vendors bring economies of scale and specialization to the table and in a reasonably competitive environment they are ideally suited to provide a lower cost alternative. In theory, the service quality and reliability should also improve, IT being the vendor’s core business. But if your business strategy includes plans for IT that go beyond the bare necessities, then the decision becomes tricky. You will worry about losing control and flexibility. IT outsourcing is not an easily reversible decision. The switching costs and the potential disruption are far greater here than in the case of any other type of utility.
Another difficulty is the fact that the strategic functions of IT are often quite intertwined with the more utilitarian aspects of IT. A seemingly simple twist of a common process may turn out to be a winner. Many times it is not a single big idea but a collection of several small ideas that create a competitive edge. The business knowledge that IT people acquire over time often leads to such innovations. So obviously the CIO must be concerned about the creation and protection of intellectual property. In many companies, knowledge capital is concentrated in a few functional areas, IT being one of them. To outsource IT for these companies is to outsource thinking and creativity.
Logic suggests that outsourcing should be even more appealing to small and mid-size organizations. These firms have neither the economies of scale nor the ability to hire specialized staff or to attract IT management savvy. Yet, surprisingly, the outsourcing trend has not caught on in this segment. Perhaps smaller organizations, in addition to sharing all the apprehensions of larger organizations, also fear their own inability to negotiate complex outsourcing contracts.
The shared services option
The concept of shared services sometimes gets an undeserved bad rap. It often evokes images of out-of-control centralized IT departments of the not too distant past, managed as cost centres, always over budget, and littered with failed projects. The shared services model is also sometimes perceived to be monopolistic, unresponsive, and misaligned with business goals. It has also been viewed as hampering agility and impeding M&A activity.
Having managed the shared services business unit of a large and diversified conglomerate, I can say from experience that the key to addressing all these issues is in proper organization structure and the right mandate for this ‘business within a business’. In my particular example, the shared services business unit was carefully organized to be centrally decentralized. We consolidated the infrastructure and created small well-knit support teams along computing platforms. Their mandate was to ensure secure access, consistent response time, high availability, and optimum capacity utilization. Business application support was organized along divisions competing in different industries. The objectives and incentives for these teams were in alignment with those of their internal clients. In another scenario, application support could be organized along process or functional lines. The goal should be to achieve specialization while maintaining responsiveness.
The co-operative shared services option
For economies of scale to materialize, one needs a certain size of organization and a certain level of IT expenditure. If sufficient scale is not available within the organization then one has to look outside. For small and mid-size organizations not ready for outsourcing, an alternate approach could be co-operative shared services. The basis of co-operation has to be the use of similar technology, and the assumption that the participants do not compete directly.
The idea should be of interest to government departments and agencies, public sector, and not-for-profit organizations. The idea is often dismissed out of hand due to the complexity involved in creating and managing a legal entity. In my view, however, the pooling and sharing of resources may not always require the creation of a legal entity. A co-op may be set up with varying degrees of formality, depending upon its objectives.
Best practices for managing IT as a utility
Regardless of the form and flavour of shared services, here are some of the best practices I have found useful in managing IT as a utility.
Business-oriented Service Catalogue. A service catalogue must provide a description of IT services that are easily understood by business managers, and also provide the associated costs in measurable units. Different businesses may value different things. The challenge is to design a catalogue that communicates value to a particular business and at the same time allows benchmarking with the rest of the world. A catalogue also forms the basis for developing meaningful service level agreements (SLAs) and an appropriate costing and budgeting system.
Usage-based Chargeback. The purpose of a usage-based chargeback system is to optimize utilization of assets and skills. A chargeback statement should look like a commercial invoice that shows the services provided and the units consumed. This approach does not preclude delivery of flat-rated services where appropriate; nonetheless, this could create fluctuations in demand by business units and give the IT organization nightmares when it comes to managing its budget. The business units may arbitrarily cut back on IT services to offset cost overruns in other areas. They could also increase demand without reasonable notice. On the other hand, I have seen a variable rate extend the productive hours of expensive computing resources, and an hourly charge for end-user support encourage user training. One way to mitigate demand fluctuation is through bi-lateral SLAs and the use of selective outsourcing.
Bi-lateral SLAs. The concept of SLAs for internal service providers is not new. What is needed to make this instrument bi-lateral in this context is a minimum volume commitment for consumed services, and a suitable notice period for a change in demand by the business units. So, on the one hand, SLAs should contain quality and response time of services with a provision for penalties for disruptions; on the other hand, they require appropriate notice for a decrease or increase in services and a provision for bonuses for exceeding expectations. In order to promote standardization, IT could also charge more for nonstandard systems.
Selective Outsourcing. Even if you are running a very large shared services unit, selective outsourcing can help improve your cost and quality of service. It can help in maintaining service levels during sudden or seasonal surge in demand. It should also be considered for routine commodity tasks, as well as for ‘one-off’ highly specialized tasks.
Use Feedback Surveys. The idea of using surveys is not new; nevertheless they can be a valuable tool. Surveys can be used for better demand forecasting by proactively communicating usage trends to the business units and seeking their input to establish long-term forecast.
Benchmark Utility Services on a Unit Cost Basis. One of the most commonly used benchmarks is total IT expenditure as a percentage of revenue. However, to manage the utility aspect of IT, it is important to segregate the IT expenditure into utility and strategic functions. While strategic projects can be evaluated on ROI or any other such criteria, the utility functions should be benchmarked on a unit cost basis. This requires that the utility service units be defined similarly to those offered in the market place. If certain services can indeed be obtained cheaper externally then selective outsourcing should merit serious consideration. This leaves IT the option of striving to reduce a particular cost component or focussing its resources elsewhere.
Develop a Flexible or Variable Budget. In my view, the IT budget should also be segregated into utility and strategic functions. The utility budget should be unit-cost based. To meet a temporary surge in demand, organizations routinely add shifts, work overtime, and often incur extra cost of utilities as well. IT costs need to be treated the same way. If the change in demand is permanent, the budget must have the flexibility to quickly expand the infrastructure. The strategic part of the budget should be project-based with each project duly ranked and justified by suitable criteria. If the overall IT budget is constrained, the infrastructure should not suffer by default.
Offer Transitional Services to Divested Business Units. To facilitate the M&A strategy of your organization, you must be prepared to offer transitional services to the divested business units at competitive prices. Do ensure that all your licensing agreements allow you not only to reassign the licenses, but also to act as an outsourcer as well as. 057152
Akhil Bhandari is Vice President, Information Technology and Chief Information Officer of CCL Industries Inc., Willowdale, Ont. He can be reached at [email protected]