Paying for value rather than activity

Since the 1980s the costs associated with functions that are shared have been increasingly allocated to business units in such a way as to drive accountability.

For information technology this was relatively easy in the late 1980s as the majority of costs were associated with the expense of infrastructure or processing.  Typically the cost of the mainframe was allocated based on usage.  Through the 1990s, costs moved increasingly to a project focus with a model that encouraged good project governance and the allocation of infrastructure based on functions delivered.

Arguably, the unfortunate side effect of the allocation of project costs has been that many business units see information technology as being unnecessarily expensive – whereas many of the costs are really just reflecting the sheer complexity of business technology (see my previous post: CIOs need to measure the right things).  Such an approach to cost allocation has allowed business units to execute projects of increasing sophistication; however it may not be ensuring that information technology is being used in the way that will achieve the greatest possible strategic impact.

The other problem with the project-focused approach to cost recovery is that the CIO’s role is diminished to being that of a service provider.  In some organisations this has gone so far as to result in the CIO seeing external service providers as competitors.

Refocusing the cost recovery to the value achieved has the potential to deal the CIO back into the strategic debate.  As I’ve said before, information technology is extremely complex and requires experience and insight in order to identify the real opportunities to use it effectively to support and differentiate any business.  During the next decade, we are likely to see the continued blurring of the lines between internal business technology, joint ventures and the products that consumers use.  For instance, joint venture partners expect to see detailed financial reports across boundaries and consumers are used to helping themselves through the same interfaces that were previously restricted to call centre operators.

Recently on the web there has been some discussion on whether information should be valued.  At the same time there has been good progress in the development of techniques to value information assets (for instance, see the MIKE2.0 article on Information Economics).  The value of information is a very good way of predicting likely business value, even when the way that value will be realised has not yet been determined.  The disruption to previously stable businesses, such as retail, telecommunications and manufacturing, are very good examples of why it is important to understand value beyond the horizon of current revenue models.

Allocating at least some of the cost of an effective information technology department based on value focuses the budget debate on the development of revenue earning products that will leverage these new capabilities.  It also ensures that those units receiving the greatest potential value are motivated to realise it.  Finally, the move away from a largely activity-based approach to measuring cost reduces the tendency to continually cut project scopes to keep within defined budget.