Censeo Principal Daniel Hae-Dong Lee makes the case for spend visibility, and aligning cost allocation with agency mission and objectives, in his article for FOSE.
Everyone thinks they are on top of their spend visibility. If you ask a CIO how well they track their spend, they’ll often respond by saying something along the lines of, “We have great visibility. We know this much money goes to this vendor, and we spend that much money on data centers every month.”
But if you ask them, “How much money do you spend on your agency’s mission? How much money are you allocating to your top three business goals?” you’ll often receive a much different answer (or no answer at all). That’s because the way we often use spend visibility is as essentially another accounting tool. But when it’s done in a different manner—structured to reveal how much of your spend is actually aligned with achieving your missions—you get a much different view of things. Instead of focusing on what you’re buying or who you’re buying it from, you can see how well you’re spending it. This allows agencies to get a much clearer picture of their IT spend efficiency.
Problems with the Old Way
By reporting on costs at cost type, it’s difficult to determine how much each type of cost actually contributes to the agency’s goals. For example, if we know we spend 25 percent on hardware, and 28 percent on permanent staff, that may tell us something about where our money is going, but it tells us little about whether we’re spending it effectively.
And if we break down our spend via large investments, then we may gain insights into our management of these projects, and the risks they pose, but it also invites an “apples to oranges” comparison.
Neither of these approaches tells us much about how our portfolio is helping us achieve our mission, which is why we think it’s important to look at our spend in a new way, to gain new “visibility.”
Discretionary vs. Non-Discretionary Spend
By aligning our spend with our mission or business goals—securing the border, for instance, or increasing commerce between states—it allows us to reprioritize our spend. Often, we break down a client’s spend in this way, the clients are astounded, and realize they need to shift their portfolio to ensure they are meeting their agency’s goals.
This also allows us to break down spending in what we call discretionary and non-discretionary buckets. Discretionary spending we can think of as building its portfolio for the future: looking at what the agency might need five, ten years down the road in terms of furthering its mission, and what capabilities need to be improved to help the agency meet its goals. Non-discretionary spending can be thought of as mandatory spending, money that needs to be spent to “keep the lights on.” So this is your operational budget, powering the data centers, etc.
We’ve found that viewed in this manner, we gain key insights into how an agency’s portfolio is performing. Are we spending enough to prepare the agency for the future, or are we simply just putting our fires, keeping the lights on? In our experience, we’ve found that roughly a 35/65 split between discretionary and non-discretionary spend* is a key success factor in ensuring a strong portfolio.
Further benefits of structuring our spend visibility in this manner includes providing a much clearer snapshot for the executive level. Also, by reporting our spend this way, we integrate our business processes with our IT capabilities, ensuring all stakeholders are on the same board, with the same information.
The following chart helps illustrate how we can view our spend in terms of mission objectives:
Moving Toward a New Visibility
To begin to restructure your spend in terms of discretionary and non-discretionary, and to begin to balance your portfolio to hit that 35 percent marker, we recommend the following first steps:
- Start small – pick a few areas in which it is fairly evident that significant efficiencies can be gained.
- Begin in areas of IT infrastructure, in which there tends to be fewer control issues than in working to consolidate and eliminate end-user applications.
- Seek involvement from mission owners so it does not appear to be an IT-led analysis.
- Conduct benchmarking based on independent data (helps dampen arguments about the validity of the analysis). Ensure “apples to apples” comparisons.
- Launch a few projects that will drive significant efficiencies and cost savings, based on the cost analysis and benchmarking.
- Ensure the changes have resulted in significant efficiency gains for the agency, provided at least equivalent, if not upgraded, capabilities to mission owners.
- Use success to drive more areas for deep IT costs analysis and benchmarking.
*based on Censeo research