Finance folks tend to think in terms of annual budgets, balance sheets, Capital vs. Operations, and cost centers. IT folks think in terms of keeping things running and delivering on requests. Rarely do the two match up, certainly without help.

It is possible to create a view of IT spend that can be used for both managing IT and feeding the Finance and Accounting (F&A) processes. Done correctly, it will also give the company tools to speed decision-making on expenditure and create ownership of consumption, which drives much of IT cost.

In a nutshell, the key points are to:

• Separate Operations and Projects.

• Count everything, regardless of whether the spend occurs in an IT cost center or not.

• Look at Operations as the cost to keep the machine running plus some refresh to maintain the asset value.

• Look at Projects as transactions with a start and a finish, with a clearly defined owner of each.

Once you have this view together, you can allocate it out and slice and dice it any way you want, e.g., Capital vs. OpEx.

The key point, aside from getting all the data together in a complete fashion, is to separate Operations and Projects. They are managed in very different ways, and their costs are justified very differently.

Operations is what it takes to keep the machine running, period. Much of the unit cost of operations is fixed in the sense that there are contracts in place for multiple years, e.g., maintenance, licenses, etc., and if you want to impact cost, you will need to impact units, i.e., by managing consumption. IT doesn’t normally think this way, instead focusing on supplying all consumption requested.

The cost of the basic operational units — network, software, hardware and staff — are all following predictable trends that you should expect to see in your budgets. Hardware pricing is averaging a CAGR of -18%; networks, -20%; software, +10%; and staff, flat to +3%. If you are getting these trends to show up in your purchases, then any expense increase is purely consumption based.

If you are smart, you will build a cost-of-refresh into your operational budget. This covers things like new desktops and phones and upgrading software. If you don’t pave the roads and paint the house, they will, over time, crumble. Not refreshing your IT will result in big-ticket breakdowns in the future. This is a choice, but it is more expensive in the long run.

Not refreshing is a “harvest” strategy, and an acquirer will decrease the accounted asset value if they see it has been done. I have seen acquisitions where the deal would not be closed till the refresh was completed. If this included an ERP system such as SAP, that could mean a two-year delay.

Too many activities are viewed as operational because the staff is already on board or the equipment is a sunk cost. This sort of thinking leads to resource shortages and opportunity costs because there is not a good dialogue about what should be worked on.

Once you have isolated keeping the lights on, Projects become easier to deal with, and more importantly become elective. A business can save money in any given year simply by opting to not do a project. I expect each project to have a demonstrable ROI. Perhaps more importantly, the business “owner” of the project needs to stand up and justify it, as well as their projected operational consumption.

In addition, looking at projects as discrete transactions helps to minimize keeping lots of extra staff around and enables you to look at various sourcing options, thereby taking advantage of market economics.

It is important to not confuse Operations and Projects with OpEx and CapEx. While it is true that there is more OpEx in Operations and more CapEx in Projects, they will each have their own components of both. ###