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The business decisions that drive IT cost structure

by Mark P. McDonald  |  February 16, 2010  |  2 Comments

What do you think about when you think about the drivers of IT cost?  IT headcount, managed service contracts, the number of servers, the amount of software maintenance, the number of PCs and the like come to mind.  These are all items within the IT budget, but are they the forces that drive these costs?

Too often IT budgets seek to answer the question in terms of what do we need to meet capacity and quality of service requirements.  Surely those issues constitute IT’s resources.  Using this logic the IT budget reflects the need to delivery technical services.

If you are what you measure, then it is easy to see IT as an operating function as IT budgets support operational and performance requirements.  However, IT is more than this but it is hard to see when IT budgets in a functional way.

The IT budget is strategic and therefore needs to be driven by more than just operational requirements.  This means that IT budgets need to dig deeper to connect IT with the business drivers that really influence the IT budget.

Making that connection establishes the business basis for IT.

Here are four drivers that CIOs should think about when considering the business decisions that drive the IT budget.  They will be introduced here and discussed in detail in subsequent posts and links created within this post.

Customers and markets – How you organize to address the market and serve customers determines the structure of your customer sales and service channels, the structure of your systems, who has access to your systems, how you store and retain customer data and a number of other drivers. Changes in your go to market strategy create change and costs for IT beyond just rewriting marketing and customer reports.

Products/Services – The number, complexity and scope of your products and services drives IT costs in terms of the requires support systems, overall system complexity, the duplication of information systems, data and operations.  Product and service needs determine process requirements and therefore systems functionality and performance requirements.  Adding products, increasing variation and enabling customer co-creation drive IT costs and complexity.

Processes – the enterprises approach to business processes in terms of enterprise wide and local processes influences system complexity, proliferation and requirements.  Too often organizations support multiple operating project versions with specific systems implications and costs.

Organizational – the distribution of responsibilities, resources and reporting requirements drive both core transaction and business intelligence requirements.  A change in an organizational structure requires an IT response and a cost structure.

These are the business decisions that drive IT’s cost structure.  They become readily apparent whenever the enterprise changes direction in these areas.  An example is an organization change such as moving from a country/geography structure to a regional/product structure.  This seems a simple issue of drawing a new org chart, but for IT it requires resetting accounts, reports, report distributions, etc because it introduces a new structure.

Connecting these drivers to IT resource requirements reminds the enterprise that IT has a central and strategic role in the enterprise.  Without these connections the IT budget just looks like another operational functional group.  That is a view that is incomplete.  Having a full view of IT requires incorporating business drivers in you expectations and budgets.

Category: budgets  cfo  economy  strategy  

Tags: 2010-planning  cfo  cost-cutting  finance  it-budgets  

Mark P. McDonald
8 years at Gartner
24 years IT industry

Mark McDonald, Ph.D., is a former group vice president and head of research in Gartner Executive Programs. He is the co-author of The Social Organization with Anthony Bradley. Read Full Bio

Thoughts on The business decisions that drive IT cost structure

  1. Mark Kilens says:

    Great tips. Every sales rep should research the company they’re targeting to ensure time is not being wasted and the solution aligns with their business drivers.

    Mark K.

  2. […] from the point of view of the buyer rather than the seller. Mark McDonald highlights the four drivers of IT budget that CIOs consider when making spending decisions on the Gartner Blog—approaching your pitch from […]

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