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Organization: the business decisions that drive IT costs

by Mark P. McDonald  |  February 26, 2010  |  4 Comments

IT is one of the strategic assets shared throughout the enterprise.  This makes IT and its cost structure sensitive to organizational changes in ways that executives may not immediately appreciate.  An organizational structure defines the distribution of responsibilities; resources and reporting requirements drive both core transaction and business intelligence requirements.

How you design the organization

There is a general relationship between your organizational structure and the number, complexity, and cost of IT systems.  More organizational units often means more applications, particularly when those organizational units arise from acquisitions, are based on geographies, or represent different business models.  In each of these cases the need to support ‘unique’ business requirements leads to multiple sets of IT systems and structural cost.

The relationship between organization units and IT structural cost is accretive. The cost structure builds from individual decisions to support organizational specific systems that make sense at the time, particularly in light of go to market/cycle time needs.  This leads companies to do what they think is expedient, just build one for me – I am only one unit – then we will be all set.

This is short-term argument without consideration for the long tail that IT bears.  These individual decisions set the stage for a future ‘unification’ project that eliminates duplication through a massive systems reconciliation and consolidation effort.  Such efforts are expensive, resource intensive and do not necessarily advance the company’s strategy or market position.

When you change the organization structure

A change in an organizational structure requires an IT response and a cost structure.  The response is often in terms of the structure of the company’s accounting and reporting information.  Change the organization and IT has to create new reports, adjust accounts, change directories, distribution lists, security access and the like.  Its low level work, but its expensive and disruptive to the other things that IT has to stop until this work is completed.

A change from a structure based on countries to one based on multi-country regions offers and example.  Companies take such a move to save money in executive staff by increasing spans of control.  The decision to change the org structure was simple.  However, when the CIO presents the bill for implementing the decision it can come as a surprise as the first year organization savings are eaten up by the IT costs to implementation the change.

Like the other drivers of IT cost structure, the implication of organization structure on IT cost surfaces when an organization changes it structure.  Until then the cost of the organization is implied in the structure of IT systems, reports, information and the like.  The cost to change can be contained through how the company manages its ERP, HR and other systems.

IT is a strategic resource that means that its cost structure is determined by the company’s strategic decisions around customers & markets, products & services, processes and organization structure.  Understanding how these decisions set the context for IT’s structural cost raises the visibility of the impact of these decisions rather than leaving IT costs to be a ‘surprise’.

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

Category: leadership  strategy  

Tags: business-strategy  economy  management  operational-leadership  


Thoughts on Organization: the business decisions that drive IT costs


  1. Steve Romero, IT Governance Evangelist says:

    Very interesting and insightful post. I have experienced each of the scenarios you describe and I am certain the trends you cite will continue.

    I loved seeing last sentence of your post, “Understanding how these decisions set the context for IT’s structural cost raises the visibility of the impact of these decisions rather than leaving IT costs to be a ‘surprise’.” My delight was based on my belief that the problem lies in decision-making constructs. More specifically, the reasoned and rational decisions born of sound IT Governance.

    I use a very simple definition when I describe IT Governance: “The processes and relationships that lead to reasoned decision-making in the use of IT.” All organizations (whether they recognize it or not) have IT Governance. It is just that the majority of them rely almost entirely on the “relationship” dimension (organization) because they lack the formal processes to enable sound IT Governance and the resulting reasoned and rational IT decisions.

    Let’s use your example: “The cost structure builds from individual decisions to support organizational specific systems that make sense at the time, particularly in light of go to market/cycle time needs.” An enterprise with sound IT Governance processes such as:
    – Integrated Business/IT Strategic Planning
    – Project and Portfolio Management
    – Enterprise and IT Architecture Management
    – Application Portfolio Management
    – Building and Maintaining Applications Management
    …(to name a few), would have the mechanisms in place to discover and resolve the “short-term arguments” you note. Having enterprise-wide business governance of IT would place these organizational situations in an enterprise context, reducing and even preventing the “surprise IT costs” we see again and again.

    The last thing I will note is in response to your sage characterization of IT as a “strategic asset” (in the first paragraph) and as a “strategic resource” (in the final paragraph). You state these characterizations as a given and I SO wish that enterprises shared your view. I believe much of the problem (if not most strategic IT problems) lies in the reality the IT is predominantly viewed as overhead and a cost-to-be-managed as opposed to a strategic asset leveraged for competitive advantage. I truly believe IT Governance helps foster and enable your accurate characterization of IT.

    Thanks for a great post.

    Steve Romero, IT Governance Evangelist
    http://community.ca.com/blogs/theitgovernanceevangelist/

  2. Social comments and analytics for this post…

    This post was mentioned on Twitter by markpmcdonald: Your organization structure has a big role in the structure of IT costs, some thoughts at http://bit.ly/bmWUSg

  3. […] Organization: the business decisions that drive IT costs IT is one of the strategic assets shared throughout the enterprise.  This makes IT and its cost structure sensitive to organizational changes in ways that executives may not immediately appreciate.  An organizational structure defines the distribut (tags: It organization) […]

  4. […] Organization: the business decisions that drive IT costs by Mark McDonald on The Gartner Blog Network […]



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