Productivity is measured by the output created for a particular set of inputs. Productivity ahs been a real sticking point for CFO’s related to IT. Most have sought to ‘raise’ IT productivity by reducing IT resources – the denominator at the expense of the numerator – results.
Concentrating on managing the denominator tells less than half the story, particularly when it comes to IT infrastructure. CFOs and CIOs concentrating on the budget line will not see the true nature of IT productivity because they are looking at only part of the picture.
Anecdotally, CIOs report that the level of IT transactions has grown steadily by 10 – 30% per year for the last few years – despite the recession and decreased sales. This is the capacity gap discussed in on of the early blog postings explains how this can happen.
In the face of rising transaction volumes (data, inquiry, web pages, etc) IT infrastructure expenditures have also gone up. But not to the same degree as transaction volumes. That is the productivity gain that IT infrastructure has given to your enterprise. The real question is how to measure it and that starts with thinking about infrastructure productivity in a new way.
First consider and chart your transaction growth over time, lets say the last five years. You choose the measure, MIPS, web pages, data, just be sure that you are capturing a proxy for the work done on your infrastructure. That should create a curve that looks something like this:
Now look at the average cost of those transactions. A simple calculation in terms of the Infrastructure and Operations Budget divided by the transaction volume. Make the calculation for each of the periods you are using to report transaction growth. If you have been taking advantage of new data center technologies like virtualization, etc, your average cost curve should look something like this:
Now put the two of them together. In other words show the actual relationship between transaction volumes and IT I&O budgets. The bottom line in the figure below is your actual I&O spend. Then go back say three years, and calculate a new curve based on the cost of processing today’s transaction volumes at three-year-old average costs. That is the top curve in the figure below.
The difference is the productivity gains driven off of the IT infrastructure. This represents OPERATING PROFIT PROTECTED by the infrastructure. Its names that way because without your attention to managing I&O costs it is the amount of money you would have had to spend to keep the business running.
The gap shows the extent to which you are delivering greater results (transactions) for the level of I&O spend. This is a graphical representation of actual dollars spend and actual profits preserved by driving scale efficiency.
This figure shows the scale of productivity generated by the IT infrastructure.
This graph and its supporting figures define the scale feature of IT’s production function.
Be sure to measure this scale over time, as that is how IT creates value. Besides at any one point in time, all you tend to focus on is the expenditure-based denominator rather than the results based numerator.
CIOs and CFOs need to pay greater attention to IT infrastructure productivity for the simple reason that it matters to operating margins. Demands for greater information availability, intelligent services and other factors will continue to drive IT transaction volumes. Without recognizing the productivity of IT infrastructure, it is easy to see how increased transaction volumes will compromise operating margins and firm profitability. This is already happening in large financial services organizations.
What are they doing about it?
Well for starters they are recognizing infrastructure productivity, planning for it, and making sure everyone understands the need to continuously invest in infrastructure productivity as it a factor in determining profit or loss.