Running IT as a business requires new accounting models

The idea that an IT department should function more like an outside service provider is not new, but it’s not only gaining ground, it’s becoming critical as businesses look to consume third-party platforms in the cloud and embrace digital transformation.

In a recent webinar, Initiatives-Based IT: Running IT as a Service Business, research firm IDC Corp. presented an essential component of making this necessary shift: the financial management. Bill Keyworth, vice president of research for IDC’s IDC IT executive programs, said IT has traditionally been operated as a large business overhead, but now CIOs and IT managers need to answer some pointed questions: Are we expensive? are we competitive? How can we fund innovation?

“IT needs to be funded as a viable service in its own right,” he said, and it needs to be able to compete at every service level. This means IT must strengthen their financial management, and the resulting transformation will enable them to address these key questions with answers backed by strong financial arguments.

Most have a long way to go, said Keyworth, if IDC’s Maturityscape is any indication, which shows that 50 per cent of organizations are still in the ad hoc phase, where IT is treated as a cost overhead and services are not well defined, and as a result, their cost and value are unclear. Just under 20 per cent are in the opportunistic phase, he said, where the foundation of a new service-based IT financial model is in place.

Keyworth said the second stage and the third stage, the “repeatable” phase, where the cost of each IT service is optimized around IT efficiency and effectiveness, are important steps in the Maturityscape. “Once they are achieved, the most advanced professional stages are natural progressions.” The fourth stage, “managed”, means IT departments understand consumption-based costs, with the cost of each IT service driven by competitive market solutions. The final “optimized” stage means the cost and value of the entire IT service portfolio are optimized around its contribution to the business.

It’s important to understand what running IT as service business entails, said Bob Multhaup, an adjunct advisor for IDC’s IT executive programs. “Managerial accounting requires more sophisticated modeling and aligning to service portfolios. IT departments need to start by answering the following:

  • What services does IT provide to its customers?
  • What does each service cost?
  • How is each service being consumed by its customers?
  • What is the service value proposition?

IT also needs to be able to measure service performance and contribution, he said. All of this is necessary to develop the critical managerial accounting required to run IT as service business, which enables better measure of IT cost performance and initiatives-based financial management, that can free up funds to invest in innovation, and communicate and market IT performance and metrics.

Ultimately, Multhaup said, this allows IT to demonstrate proof to stakeholders that it is cost effective and supports collaboration with executive management to drive improvements.

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Gary Hilson
Gary Hilson
Gary Hilson is a Toronto-based freelance writer who has written thousands of words for print and pixel in publications across North America. His areas of interest and expertise include software, enterprise and networking technology, memory systems, green energy, sustainable transportation, and research and education. His articles have been published by EE Times, SolarEnergy.Net, Network Computing, InformationWeek, Computing Canada, Computer Dealer News, Toronto Business Times and the Ottawa Citizen, among others.

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