20 June 2016

Financial comparison of IT services delivery models

Preparation

All details and related context should be taken in consideration before any comparison takes place. If you do not have the experience and in order to avoid incorrect evaluation, it is better to hire
independent business and IT consultants. Some documents ought to be created or if they are in place, to be updated, before you start the process. The consultants will help you to finalise the documents in the required depth and scope.

1. Business Strategy. Every business has a development plan. However small business managers keep that plan only in their heads. While managers combine multiple roles and juggle with various operational activities or they simply under-valuate the importance of the business plan, it will be fated not to be a structured document. Its purpose is to describe development intentions and expected changes in the business model and organisation. Most of the companies maintain a 3 years’ plan.
It is recommended to revise it every 3 months, to find out what has been achieved in that time, the lessons that have been learned, what the further plan will be and set priorities.
Just remember! There is no consultant who can look directly into your mind and extract your business strategy from there. What would happen if you try just to story tell it in brief? Are you sure that a key piece of information won’t be missed?
It is even more dangerous to accept unquestioningly the best practices for your sector from well-reputed consultancy, as they will provide common and widely adopted practices which will lead to average results. Do not sow the common unless you are happy to reap the average. The example with the stock market index is indicative – it is a measurement of the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). I am sure you are looking for more than average, aren’t you?

2. Business Services Catalogue. It includes functions (think of it as departments) and their activities. There is a description for each service, required activities, availability, disaster recovery, recovery time and point objective and underpinning services. Business services are split in two main categories – vital and underpinning. Small business usually outsource accountancy, unless the small business is not an accountancy practice itself. It is the same with the other business services. The old rule is to keep vital business functions and activities within the organisation. You can easily recognise them – they generate income. All the rest of the business services can be outsourced and it is a question of analysis and informed decision to do so.

3. IT Strategy. This is a plan with all current and those in the pipeline IT services. It ought to have an expert selection of all known and at the same time potentially beneficial for the business organisation technologies processes and systems. There are two approaches. The first is a rear-view, where IT strategy follows Business strategy. While there is nothing wrong with it, the approach is passive. The active approach is constantly looking for positive impact of the business by implementing new technologies, even if the business model should be changed. The “fancy” word is Digital Transformation and the idea behind is technology and IT specialists to participate actively in business model development in order to achieve competitive advantages, market share extension, or even entering new markets. The digital age assumes that IT specialists have to be engaged actively in business planning and strategy discussions. The managers, who do not do this, have to read Charles Darwin’s “The origin of species” theory as soon as possible. It’s applicable to companies too.
Why not even Digital Disruption? The constantly emerging and evolving technologies could transform the business model in a way, where the whole sector can be turned upside down, making new joiners the leaders. Is it hard to imagine? Ask Uber or Airbnb.

4. IT Services Catalogue. It should dynamically keep information about all IT services as description, SLR (Service Level Requirements), SLA (Service Level Agreement), context and relationships between services. One IT service can be consumed by more than one user group. This would dictate to have different SLRs and SLAs, urgency and impact on the business. If there is an inconsistency in the documentation it is easy to conduct internal interviews and to fulfil the gaps. Your IT specialist would be of great help when putting in order all the documents.

Cost models

Every single IT service can be provided internally or externally or a mixture of both. There is a need of a unified comparison model of all available proposals.

1. Invoicing. As this is the only one viable model applicable to external IT organisations, it can be applied to the internal one, only if it is split from the mother company. This approach would lead to new external IT organisation even though it is owned by the mother company. The finances are under strict control, the customer is fully aware about expenditures and the details depend on preparation quality. The incomes of newly formed IT organisation are coming mainly from the parent company. In rare cases more customers are being attracted and this finishes the transformation of the internal to external IT provider. The disadvantage for the business is that it has invested in the development of IT provider and has to use his services, regardless of price and quality. Instead of a quick change of the provider, additional investment in marketing, sales and all other business functions is required. In case of growth, saving due scale could be expected, which lead to a more competitive price and better quality. In theory at least.

2. Chargeback. It is analogical to the invoicing. However the invoices are dummy and the IT organisation remains internal. The model is handy to the business management in order to keep an eye on the IT expenditures and to be able to compare with alternative providers. Presumably the vital IT services for the business remain in-sourced, while the rest are seeking the best quality and price from both, internal, external or a mixture of providers. The reasons are described in the "Why small business outsource IT services?“ post. The dummy invoices are provided from the internal IT organisation and usually this is new activity. It consumes significant resource and time, moreover in the case in which there is only one IT specialist within IT organisation.

Cost components

The price usually is based on time. Unfortunately the service is not something material and it cannot be produced, packaged and left on the shelf, waiting for a customer. The consumers’ expectations are to have it when they need it. Instant delivery on demand. All conditions have to be in place as availability, reliability, fault tolerance and disaster recovery.
What is necessary to be taken into account to provide IT services internally?

1. IT specialist(s)
- Hire costs, HR management, leave costs
- Salary, social and health insurance, indemnity, bonuses, company shares, etc.
- Annual leave
- Sick off, time off, etc.
- Substitution
- Learning (Induction period, knowledge development)
- Contractors hire to supplement headcount in peak times or simply to expertise

2. Workspace
- Rent/mortgage interest (4 to 5 sq.m/per person on average)
- Workplace utilities costs (electricity, heating, cooling, water, etc.)
- Equipment and tools
- Licenses
- Office consumables and office maintenance

Your financial department can provide you with the information about the components mentioned above. Usually the report covers a period of one year. All expenses are divided by the effective working days (all working days without the annual leave and all other time-offs). The result is the price of the IT organisation per hour. In case where more than one specialist is present, the result is divided by the number of specialists. Let’s assume that all IT professionals have the same cost for the purpose of analysis simplification. In practice all of them have different levels of skills, experience and knowledge and costs differently to the all others.

 (IT specialist costs per year + Workspace costs per year)/(Effective work days per year)/7.5 hours per day = Total cost of and IT specialist per hour

What portion of the time your IT specialist is utilised? What tasks is he charged with? Are they within his responsibilities? Is he/she too expensive for some tasks?

In order to have the correct assessment, we have to know in quantitative and qualitative terms the demand for every single IT service and task. The ticket system is widely used. For every single request for IT services a ticket has to be raised. The ticket itself is a record in an information system, which provides an interface to IT users, IT specialists and business managers. Once the IT specialist is notified he will start the work on the ticket, based on the priority. All parties kept communication in the same information system until the resolution and closure of the ticket. No work is allowed to be carried out without track of record in the system.

Business management will benefit from consolidated reports from all or filtered incidents, user requests, resolutions, recommendations, workarounds, etc. It is easy to analyse which are the most frequent incidents, the ones with most negative impact and where IT budgets are spent.
The IT specialist will rely on the information system for prioritisation on all raised requests when it comes to prove why he/she decided to work on one task while put on hold another. It is useful to show evidence of how efficiently and effectively he/she used his/her time, and competence. Business management would be surprised how positive IT specialists are about implementing a ticket system.
The current post describes just the rough outlines of the picture for wise IT governance, based on informed choices and decisions. You cannot manage without control and you cannot control without measurement.

In case you have met the problems described in "One man as an IT department", it’s likely you have asked yourself about your current model. Is it the right fit for you? Does it require some changes?
Do not forget the internal IT specialists work within the organisational frame created by the business management and that any change should be initiated by the management.

Back to the title – Have you switched off the autopilot for IT services management in your organisation?

1 comment:

  1. This blog provide great disaster recovery for business. I really appreciate disaster recovery business. Thanks for sharing

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