IT Cost Efficiency: How to Turn Costs into Investments

In a context of rising costs and stringent regulatory requirements, effective management of IT economics is becoming a key success factor for any modern organization. But how can this be achieved if even mature companies struggle to achieve cost effectiveness in their IT spending? Is IT truly a "black box" from which predictable and manageable results are difficult to extract? The answer to this question can transform a business's approach to IT management and increase profitability.

Authors: Konstantin Vasiliev, Alexey Mosin, Senior Managers of the Infrastructure Consulting and Information Security Practice at Axenix

The market has exacerbated issues of IT efficiency

Over the past few years, the environment in which Russian businesses operate has changed dramatically. Many familiar Western tools and solutions have disappeared from the market, or their use has been restricted. At the same time, prices for affordable IT equipment, software, and services have skyrocketed. For example, according to a recent study by the Center for Macroeconomic Analysis and Short-Term Forecasting, Russian business spending on software and databases has increased by 89% over the past five years. Regulatory requirements, including those related to import substitution, have also significantly tightened, often impacting the scope of work required to customize IT solutions to meet client requirements.

At the same time, the level of digitalization of the Russian economy continues to grow. Businesses strive to grow and generate profits, and this raises acute strategic questions about the economic efficiency of IT.

Here are just a few of them:

• How are IT development scenarios related to the organization's business strategy?
• Does the current IT project portfolio support business objectives?
• How to determine the financial impact of IT initiatives and make investment decisions?
• How to monitor the achievement of economic effects of IT projects?

Beyond strategic issues, effective IT financial management requires addressing numerous operational and tactical questions. For example, how can we reduce the time and effort required to prepare an IT budget? How can we determine the full cost of IT projects and products?

The resolution of all these issues determines whether IT will remain a "black box" with an unclear economic return or become predictable, manageable, and profitable for organizations. For industries with a high share of IT expenses, this has become critical.

From Chaos to Order: Transparency in the IT Economy in Concrete Steps

However, despite the requirements and challenges described above, the overall market picture remains as follows: most Russian companies are still addressing IT financial performance management in a fragmented manner. Mature companies have begun to view IT as a fully-fledged investment opportunity, but often struggle to accurately assess the effectiveness of their IT projects, forecast their returns, and, crucially, establish links between business goals and IT initiatives. As a result, the impact of IT projects is not tied to business objectives and does not contribute to their achievement. There is no practice of assessing the economic effectiveness of IT initiatives, and IT costs are not allocated across business units. Overcoming these barriers requires a proven, holistic approach.

Modern, effective IT economic management is an integrated model that consists of specific processes and tools and engages the necessary roles within the organization. We formulate this model as a lifecycle based on the Deming cycle—Plan, Do, Check, Act (PDCA).

Each stage is linked to the previous one, and subsequent stages contain the necessary tools and approaches for managing IT economics in alignment with business objectives. For example, the Plan stage analyzes IT development scenarios based on the strategic business goals, and initiatives and the IT budget are determined based on these scenarios; the Do stage implements initiatives and conducts ongoing operational management; the Check stage regularly analyzes the effectiveness of operational IT costs and investments; and the Act stage makes decisions to update the strategy within the Plan stage of the next cycle.

Many organizations structure their IT activities into Operations, Development, and Innovation. This feature is taken into account in the model, and its elements are aligned with these areas.

The integrated IT financial management model is a kind of "summary of experience" from project work across eight areas. Their development is key for organizations seeking to improve the efficiency of their IT.

However, a legitimate question arises here: is it worthwhile to focus on all areas at once, or should we start with the IT efficiency improvement areas that will yield the greatest impact in the shortest time?

Business Priorities or Where to Start Making Changes

Where to begin working to improve economic efficiency depends on the maturity and current dynamics of the organization. Let's consider some common scenarios:

1. If an organization is actively growing, introducing new products to the market, and launching large-scale transformation programs, their financial analysis becomes critical. At the planning stage, it's important to understand the product's cost and how long it will take to achieve breakeven. Prioritization and investment efficiency assessment tools, as well as tools for monitoring the achievement of economic benefits, are used here. This allows for data-driven management of the new product line and increases the speed of decision-making by 30%. (Areas 3, 4, 6 of the model)
2. In mature companies, it's important to clearly understand how IT costs are allocated across business areas and the potential IT development scenarios. Cost accounting and allocation tools allow for the distribution of actual IT costs across business areas and a more accurate assessment of the profitability of each. Scenario analysis provides an economic assessment of various IT development options, enabling informed management decisions. Furthermore, preparing the necessary analytics will require 20% less labor. (Area 1, 5 of the model)
3. In recent years, many large companies have created dedicated IT functions within their business functions, parallel to centralized IT. This has provided flexibility, but also reduced cost transparency. It's important for such organizations to clearly understand the cost of business and IT services using automated analytics. This will both reduce TCO (a 15% reduction) and improve team efficiency (by 20%). (Areas 5, 7, and 8 of the model)

IT cost-effectiveness practices should be implemented in stages, starting with those most relevant to the organization. For some, budgeting will be a priority, for others, reviewing the IT initiative portfolio, and still others will focus on reducing TCO. The model's modular approach allows for the rapid implementation of the most critical elements and gradual expansion, achieving greater returns.

It's also worth considering that, in addition to tools and processes, a critical component in the transition to cost-effective IT is people—the coordinated work of various teams and specialists distributed throughout the organization.

Read more materials on this topic in Compass CIO

Team: who and how will ensure results?

Improving IT's economic efficiency requires the serious involvement and buy-in of employees at all levels—from organizational leadership to field specialists. Here are some examples of active engagement:

• The organization's management must participate in the decomposition of the organization's strategic goals into departmental KPIs and monitor their implementation using dashboards.
• Business line representatives must begin to consider the IT costs allocated to their departments and make decisions based on their availability.
• Project managers, product owners, and finance teams must identify and monitor the achievement of economic impact using visual, automated business analytics.
• On-site contractors should strictly account for the time spent working on a given project and reflect the actual labor costs and costs of the projects.

Only in this way can an organization achieve maximum benefit from the new approach to IT financial management.

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For modern organizations, improving IT economic efficiency has become a matter of survival and success. The presented integrated IT economic lifecycle model has already proven its effectiveness. Its practices today ensure predictability and manageability of IT investments and create a competitive advantage for a number of Russian organizations, increasing their profitability.