If You Don’t Govern for Value, You Won’t Get It

I think we’ve all seen situations where everyone’s working hard, where things are getting done, yet it doesn’t seem to make a difference.

Despite all the change being inflicted on others through IT work, this is often one of the parts of an organization that suffers from this.

Indeed, every time I think I’ve got to the bottom of this, I learn even more about just how severely an unmanaged IT portfolio drains budget money in a business.

We’ve known for some time that “sales, general & administrative” (SG&A) expense, where IT costs are tabulated on the income statement, has been rising for the past thirty years, and is now a little over three times what is was in the mid-1970s in the typical publicly-traded corporation in the United States.

Much of this increase is directly or indirectly attributed to the increased use of IT: directly, in terms of installed technology, packages and operating expenses, and indirectly in other work areas who hire staff and commission “off the IT books” solutions to patch around deficiencies in the portfolio, or gaps in what is available.

(Much of the rest of the increases here come from mandates from regulation or legislation.)

Spending money on technology can, of course, be good for the business. The implementation of applications which automated activities, or reduced error correction, clearly have had corresponding cost reductions applied to the business.

Long after these gains have been forgotten — “a cost saving is recognized once, revenue is recognized every year” — the cost of the technology that made it possible continues on the SG&A line.

The growth, therefore, in IT costs — whether you tabulate them centrally or distribute them throughout all the budget centres of the business — has not been unexpected.

They are, in many cases, higher than they need to be, or, to put it another way, the enterprise is leaving opportunity to lie fallow for a lack of resources.

What drives the cost of future change?

Older applications require more cash per function for each change.

Small maintenance projects, then, generally increase the cost of future maintenance and support.

In one organization I studied recently, using historical data for projects done over a ten year period, the average increment across the portfolio was about 10% (or, in other words, if this change cost $10,000, the next would cost $11,000 for the same amount of “change effort”, $12,100 for the one after that, and so on).

By the time of the tenth maintenance effort the cost for the same amount of work had risen to $26,000 — yet small maintenance tasks were still being done.

For older applications where the skills do not exist in house, the acceleration curve is much higher.

One key application at this enterprise was now totally dependent on outside resources, and thus was also dependent upon market availability. There, over a ten year period, the same cycle of small changes had risen to an average cost for the last one of $39,500, or 50% more expensive after ten years than the one with in house support.

How can you start to fix this? At this enterprise, a comprehensive portfolio review was undertaken, which established a new cost baseline.

The limit on minor maintenance was lowered from $50,000 to $15,000, so that many small changes would be deferred for the lack of a business case.

Outside support applications were made a priority for redevelopment, so as to establish a new base; also situations with many manual “bridges” in the business were corrected with “throw away” applications designed to remove costs there in the short run.

The enterprise’s Governing Board is now being asked to confirm policies surrounding application longevity, permanent “small project” limits, and other portfolio tools, all geared to managing an “extended IT” expenditure over time.

Their goal is to stop allowing their portfolio to dictate spending over time. It’s one well worth starting on.


About passionateobserver

I am a passionate observer of our society, the economy, and politics. Mostly I don't like much of what I see, so I write as a concerned citizen. To the fray, I bring a background in the philosophy of history, a lifetime's reading, a work history in information technology management, consulting and education.
This entry was posted in Governance, Project Portfolios and tagged , , . Bookmark the permalink.

3 Responses to If You Don’t Govern for Value, You Won’t Get It

  1. William F. Spaulding says:

    Once again I find myself digging into my arsenal of (limited as they may be) favorite quotes by say,”We must measure what might lose, by what me might gain”. The operative word being “might”. This article helps us identify that risk.

  2. Mark Roman says:

    Absolutely!!! So many organizations don’t measure the real cost of changes and then have no way of comparing year over year growth. Then suddenly one day someone discovers that they are spending 75% of their IT “development” budget on minor maintenance. No major projects to move the business forward have been implemented for years and everyone blames IT for being a deadweight that slows down the whole business model.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s