What Does IT Really Cost?

With the ever-increasing reliance of businesses upon their Information Technology (IT) systems and electronically stored business data comes an equivalent increase in management’s  scrutiny of the associated IT costs.

Many organizations spend a considerable amount of time trying to figure out how to reduce their IT costs.  What if, instead of looking at IT simply as a cost, we instead look at it as means of increasing profits?  Instead of classifying it as a cost why not look at it as an investment and focus our efforts on maximizing that investment?

A Management Tools and Trends survey revealed that nine of 10 executives agreed that information technology could create significant competitive advantages. However, only 6 of 10 agreed that their organization’s IT spending was completely aligned with its business strategy.   The fact is, most companies focus on reducing the cost of IT rather than maximizing its potential to create value.

If IT is properly aligned with business strategy, the following results should be realized.

  • Increased productivity
  • Increased output
  • Increased sales
  • Increased profitability

In order to affectively measure results it is best to focus on the two outputs of IT.  Internal outputs focus on productivity, quality, time savings, and overall cost reduction.  External outputs  focus instead on customer acquisition, satisfaction and loyalty.  The objective should be to establish an IT strategy that maximizes both types of outputs.

A simple but effective measurement of internal output is labor cost (hours of downtime x employee cost/hr).  External output is easily measure by calculating lost income (hrs of downtime x sales/employee/hr).  While these two measurement will apply in almost all situations, it is important to consider the unique aspects of your company. Other factors to consider are the actual cost of repairs, effect of downtime in peak periods, and decreased customer satisfaction.

Most small businesses do not have the luxury of having well trained IT staff.  Frequently, business will assign poorly qualified internal staff to manage IT or work with an outside firm on a time and material (T&M)basis.  I would suggest that neither of these solutions creates any real IT value. The best solution for creating IT value is the use of a managed IT services firm.   The benefits of managed IT services are as follows:

  • IT is their full time job.  Unlike most internal staff whose training and expertise is in something other than IT.
  • Their staff is routinely trained and IT is all they do.
  • New problems are only new for the managed services firm one time.  What is new in most business will not be new to them.  Instead of spending hours of downtime trying to fix a new problem, let a professional  who is already familiar with the problem quickly fix it.
  • Provides for known costs. 
  • Managed services firms charge based on a flat monthly fee.  This allows for easier budgeting and cash flow planning.  No more financial surprises due to unexpected problems.
  • With managed services, the emphasis is for the service provider to prevent problems or fix them so that they don’t reoccur.  In a T&M situation, the service provider actually benefits from reoccurring problems.
  • Because the business is not charged on a time and material basis there is no reason to not report problems.  With a T&M relationship, companies are often reluctant to deal with problems or will spend hours trying to fix the problem before consulting with a professional.

IT represents so much more than cost.  Please take the time to examine the IT function in your business.  If IT is not providing value, it may indicate a need to seek outside assistance.

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