22 January 2013

You can't avoid the IT Laws of Nature

I recently read an interview with Catherine Bessant, CIO of Bank of America (a quick and simple registration on CIO.com is required). Catherine comes across as an impressive CIO role model. She has taken an unusual path to the role and has an unusual approach to some of the challenges which we can all learn from.

For this post I have picked out one of Catherine's key areas of focus. She describes herself as "freakishly focused on simplification." Given the intricate and fast moving nature of IT, you might think this focus is incompatible with the CIO's role but it should be near the top of every CIO's agenda.

The Law of IT Spending


Although it is slightly tongue-in-cheek I have put together a formula for IT spending. Like the Laws of Nature it captures, in a simple way, some of the fundamental principles which apply in all situations and cannot be negotiated away or worked-around.

S = U x D x C2

My Law of IT Spending says that the total amount spent on IT (S) rises in proportion with unit prices (U) and demand for services (D) and rises exponentially with complexity (C). If you want to think about what value you can achieve for a given IT budget the same formula can be re-organised to give the answer. Delivered services (D) will rise in line with the budget (B) but will fall as unit prices (U) increase and fall exponentially with complexity (C). Here is the alternative formula from my Law of IT Spending.

D = B / (U x C2)

If this Law holds then Catherine Bessant's focus on simplicity makes perfect sense. Whether you are focused on hitting a budget, cutting IT costs or maximising the return on IT investments then keeping things simple is the most productive strategy for the CIO.

Here are some examples of the many situations where I have used the Law to help stakeholders understand why they are facing difficulties and how they can improve.


Computers keep getting cheaper so why does IT always want more money?


Everyone has heard of Moore's law and will have experienced how the price of computing power keeps falling. Although you might argue that some of this potential value is wasted on cosmetic improvements, especially in the consumer market place, the unit prices of purchased or rented IT resources has been dropping for decades and has continued to drop in the last few years. Why, then, do IT departments keep demanding more money? Falling unit prices have changed the IT spending calculation but increases in the other terms can more than offset this.

One aspect is rising demand for IT services. Only a few years ago back-office requirements dominated the demand for IT. In many organisations services to the front-office or direct to consumers have already become the main area of demand and may soon be eclipsed by real-time analytics or some other new requirement. In general rising demand is a good thing. Assuming the demand is justified and services are delivered efficiently there will be a net benefit to the organisation.

The same is not true for the remaining term: complexity. Complexity has a corrosive effect. It increases costs without providing any value to the organisation and undermines the business case for otherwise attractive new services. Investments to reduce complexity can offer good returns but, better still, take action to avoid complexity building up in the first instance.

IT outsourcing suppliers have competed vigorously for our business but there are very few savings to show for it


Most people have stories about how one IT supplier or another has exploited a naive customer and extracted large revenues in service, licence or equipment fees in exchange for little or no business value. These stories are fun and I am sure most are based upon real experience but most miss out a key element. Yes, large revenues were transferred and the customer got poor value for their business but, except on rare occasions, the supplier also got very little value (profits or follow on business) out of the transaction. It is usually far from certain that an alternative supplier would have delivered a significantly better result for the customer.

Most sectors of the IT market are intensely competitive and basic good practice in procurement and delivery management is all that customers need to exploit this. Unfortunately, this only influences one term in the IT spending formula: unit prices. In competitive parts of the IT market the difference between basic and world class procurement practices may amount to a few percentage points in unit prices. Some organisations may be better off taking a hard look at the unit prices of their procurement and sourcing consultants!  Worse, in extracting keen prices, customers can establish operating models which drive up the complexity of delivery and overall costs. Saving 10% on day rates is not a good deal if the inefficient way you operate increases the effort needed by 20% or results in delay. In many of the organisations where I have gone in to help post-transaction the inefficiency has been even worse than this.

Don't spend too much attention on unit prices - competitive markets will leave very little room for improvement. Instead your sourcing strategy (and good sourcing consultants) should be focused less on the procurement transaction and more on the operation after the deal has been signed. Taking away complexity will have a much bigger positive impact on overall costs and the value of your outsourced IT services.

Using the Law of IT Spending


So, if you are persuaded to follow Catherine Bessant and become "freakishly focused on simplification" or you want to apply my Law of IT Spending, what should you do? The answer is not complex.

  • Unit prices: Apply basic good practice in procurement.
  • Demand: Insist that all IT demand is backed by appropriate business justification.
  • Complexity: Ask, "Is there a simpler alternative?" then ask again, then ask again.

That's it. Simple!

Related blog post: The hidden cost of complexity by Yammer's Kris Gale (thanks to @Jezhumble for the link)

4 comments:

  1. Richard,

    At the sake of being a pedant C squared isn't exponential that would be e to the power C!

    Away from that I like the casting of the problem in terms of a thermodynamics equation that lets people form an understanding of the argument and get you to the recommendations

    Tony

    ReplyDelete
    Replies
    1. Tony,

      You are right. I should have used "quadratically" or perhaps the description is closer to reality and I should change my formula?

      Richard

      Delete
    2. It all depends on whether or not you remember the word quadratically!

      Delete
  2. Do you have a view on how much of the cost of IT is fixed costs (assets such as hardware that do deliver more for less over time) and variable (such as wage bills that tend to rise over time).

    How commoditisable is the whole stack e.g. database licenses, middleware, enterprise management...

    ReplyDelete

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