Mark McDonald

A member of the Gartner Blog Network

Mark P. McDonald
GVP EXP
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

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Processes: the business decisions that drive IT costs

by Mark P. McDonald  |  February 24, 2010  |  1 Comment

If IT is strategic, then the IT budget should be driven by more than operational needs.  So what are the drivers of IT resource and budget requirements? Process is perhaps the single greatest force shaping the structure of IT costs.  In fact according to the 2010 CIO survey “Improving business process” is a top 5 business expectation of IT at more than 58% of companies.

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 versions of process complete with specific systems and their implied costs.

Process is a significant driver of IT cost structures for the simple reason that just about every major business process is supported by one or more IT systems.  Anecdotal surveys of CIOs indicate that IT systems support between 80% and 250% of their core processes.  The CIO with the 250% figure explained that they had grown by acquisitions and now had at least three ERP systems.  The reason it was not 300% was that one of the ERPs only did about half the job!

The influence of process decisions on IT cost structures rests in the application of IT to business process automation.  While this sounds straightforward, the interactions are often not the first thing you think of when you think of in terms of explain the IT cost structure.  Here are some observations:

Process proliferation creates duplicate systems and cost structures.  Proliferation happens from two directions.  First is historical as individual decisions over time create multiple versions of essentially the same process.  This is an accretive cost structure on IT, as the cost of standardization, particularly of non-critical process/applications never seems to be cost justified – particularly when you take business disruption into account.  This has the result of building a growing structural cost basis in IT supporting areas that do not matter much to performance.

Executives proliferate processes based on the idea that in order to be competitive I have to be unique within my company.  You can see this in many projects where local products or processes need to be ‘different’ because I am different.  Many of these differences exist for internal reasons (preventing consolidation) rather than market making differences.  Remember the only difference that matters is a difference that the customer sees relative to their other options in their market – not differences between operating units within the same company.  CEMEX and others have shown that there are ways to get global process scale and local market uniqueness—it is done through process execution and organization not by setting local unique requirements in silicon.

Complex processes require complex and costly IT systems.  Complexity here can be measured in the number of exceptions and conditions the process handles, the permutations of process executions, the number of decisions and business rules applied during the execution of the workflow.  While many of these factors arise because of product or customer requests, they manifest themselves in process requirements that translate into IT costs.  All factor in complexity and all raise the acquisition/installation and operational costs in IT.  Cutting process complexity can have a significant multi-million dollar impact on enterprise and IT operational costs.

Addressing process driven IT costs requires the entire business to be more pragmatic and open in terms of how they realize change and operate the enterprise.  The first thing that needs to happen is connecting IT functionality with the business issue you are trying to address.  There are some business issues that no amount of technology will solve.  Its better solved by changing the way we work than changing systems.  Charging ahead and building IT that cannot possibly address the issue is a foolish path to higher cost structures and lower performance.

The second issue is that process execution and flexibility are probably better handled through more flexible assets than IT such as job design, organizational changes, changes in performance measurement and management.  It is much easier to change and adjust these tools than laying down business rules in systems.  But, that requires executive leadership to actively manage the way you work rather than passively fund and IT project.

Business process and IT are linked in the minds of many executives.  Unfortunately that link often creates unnecessary structural costs in IT that can be addressed by taking a deeper look at the business process structure.

This is the third post in a series.  The main post can be found here (link).

1 Comment »

Category: Lean Thinking Strategy     Tags: , , ,

1 response so far ↓

  • 1 BabbleWare   February 24, 2010 at 11:54 pm

    Mark,

    You have identified the challenge of IT/ERP/Business. The consolidation of processes accommodated historically by IT/ERP is out of step with business. Regardless of the reason the process is askew to IT: it is. The architecture and complexity of existing systems, which we call Enterprise 1.0 (think current ERP, Homegrown and Best of Breed solutions), is their downfall.

    As you stated the number of decisions, exceptions and processes that an E1.0 solution controls prohibits meaningful change. While I agree that different processes just to be different is foolish, too often the Operations group is frustrated by the inflexibility/rigidity of the E1.0 system to keep pace with their business.

    Instead, what needs to happen is that process, data and technology changes need to be facilitated external to E1.0 systems. The command, control and centralization of E1.0 systems remains intact while the business and the operation can flourish in response to regulations, compliance, competition and good old fashion “better mousetrap” thinking.

    The recent political debate in the U.S. as identified a party of No. Similarly, for decades, IT has been viewed as the Department of No. Absent an alternative approach in either case, both “No’s” are reasonable.

    As the protectors of the sacred E1.0 IT cannot accommodate what they see as every whimsy of the business given they have a full plate of projects on which they are behind, a limited and likely decreasing budget, and a hot mess of complex, rigid E1.0 systems that take an army to support and enhance along with months of time.

    This doesn’t have to be the case anymore. Technology exists (guess from whom) that can accelerate process innovation without requiring any change to the E1.0 systems. In 5 days a new process can be conceived, prototyped, measured for effectiveness and either adjusted or abandoned without touching a single hair on the head of E1.0. We’ve done it ourselves for the largest automotive company. The results were a 290% increase in productivity, an increase in accuracy from 4 errors per thousand to 4 errors per million, and not one blink of disturbance to their existing E1.0 systems.

    Hopefully gone are the days of IT blaming Operations and vice versa. It is astounding to hear E1.0 vendors and SI’s complain about the customer not using the system properly. What they are really saying is that E1.0 systems are not made to change or adapt in a reasonable way. When a customer requires these systems to change to adopt to their business they are committing unintentional suicide. Recently CIO.com ran an excellent article about this very problem: http://www.cio.com/article/526213/ERP_How_and_Why_You_Need_to_Manage_It_Differently