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Quantifying the Business Impact of IT Agility

Harris_SeanBusiness ImpactBy Sean Harris

Let’s examine a story I see often in my work with customers as part of the VMware Advisory Services team.  The names and details have been changed to protect the innocent.

Jessica, the new Head of IT Service Delivery at ABC Banking Corp, was frustrated with being told that the cost of delivery of IT was too expensive. She wanted to show that had she massively reduced the cost of IT delivery with the new private cloud that her team had delivered.  Not only that, but the elastic demand and agility of the service had generated so much value to the business, in terms of revenue and market share, that the business should be investing considerably more in this solution going forward than they had done to date.

She worked with VMware’s Advisory Services to build a model that showed the true value of the private cloud solution in terms of time to market, market share (as a result of being earlier to market) and revenues over a 3-year period.

They first built a model that looked at supply and demand and showed the impact of shortage of supply on the loss of customers to competing services (so reducing demand and market penetration).  Once they understood the organisation’s ability to service demand they were able to estimate the revenue impact from lost customers, using the metric for average revenue per customer.

The Assumptions

The model did not consider the application development time of the service. It was assumed that this has already been done.  There is another value model that can be built to show the benefits of time to market through agile and cloud native application development vs traditional application development approaches, but that was out of scope for this exercise.

For a traditional service delivery model, it was assumed that capacity would be built linearly over time.  You need a certain capacity before the capability is available and/or there is a marketing decision made to delay the launch (availability) of a service (to prevent customer dissatisfaction due to disappointment when the service is actually not yet fully available).

For the cloud (public, private or hybrid) service it was assumed that the capability can be delivered from day one.  The agile elastic capacity of the private cloud infrastructure means the service receives the infrastructure capacity that it needs on demand.

The final key assumption was that they existed in a competitive market place and so there were other equivalent competitive services available to consumers. This means that if demand out strips supply and some consumers are unable to get the service when they want it a percentage will go to a competitive service and never return.

The Results

Business ImpactArmed with this model, Jessica could show her leadership team that with a traditional service delivery approach they were unable to deliver the service from day one, resulting in demand outstripping supply.  This would have resulted in a loss of final market share of 10 points (down from 40% to 30%) and a loss of 3 year service revenues of around 25%.

By switching to a private cloud delivery model, that allowed supply to match demand from day one, they would not lose out on revenue to their competitors.  Not only that, but she proved that a private cloud significantly reduced the TCO (total  cost of ownership) of infrastructure delivery at ABC Banking Corp. and that while some competing public cloud solutions were comparable in price, they were not fully compliant with (sometimes unique) security and audit requirements of the business and external regulators.

The lines of business and marketing were now able to clearly see the value to the business of the new private cloud infrastructure service and quickly approved additional investment in current private cloud.  They added private cloud services as well as directed a multiple new projects to target Jessica’s private cloud platform.

What can we learn from this story?

Providing on-demand infrastructure absolutely increases the agility of the business, and that agility has far reaching benefits throughout the organization, particularly for the bottom line.  A well-researched business case has proven to be the linchpin of success for many of the transformation initiatives, making it easy for the business to see the massive return on investment they will realize through shifting to a private cloud delivery model.

Like Jessica, many IT leaders have limited or no direct experience of creating business cases that go beyond IT costs and into revenue, market share or margin impacts to the business itself  If that’s the case for you, contact your VMware representative take advantage of the deep expertise of VMware Advisory Services.

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Sean Harris is a Business Solutions Strategist in EMEA based out of the United Kingdom.

Business IT is Coming Out of the Shadows

Harris_SeanShadow ITBy Sean Harris

For a number of years the perception among businesses that internal IT is unable or incapable of delivering to their needs (particularly for new and emerging requirements) has led them to bypass internal IT and source their solutions directly from external vendors. This is commonly referred to as Shadow IT.

According to most analysts (see references below), the shadow is now bigger than original object that cast the shadow, which only happens during the final hours of sunset (an interesting analogy) and has brought about the joke that the title CIO stands for “Career is Over”. Synonymous with this is the rise of the Chief Digital Officer (CDO), Chief Technology Officer (CTO) and application development teams, who are becoming more embedded in the lines of business.

How and why has this happened and what can Enterprise IT and the CIO do to reverse this trend?  Or is it too late?

Why is Shadow IT So Prevalent?

Ten to fifteen years ago, for the vast majority of businesses, IT and technology ran the business. By this I mean they ran the business systems, such as HR, CRM, inventory management, financial systems and logistics. There were a few notable exceptions such as mobile operators, media companies, investment banking and the likes of Thomson Reuters, for whom IT and technology was/is the business. In those cases, the revenue generating services that they provided were dependent on IT and technology.

This is even more true today. There are few, if any, businesses that do not rely on technology and IT of some sort to deliver business services to their customers, partners and channels or use IT to provide technology or IT services to enhance the customer experience. This is part of what is often referred to as the Digital Revolution. So why haven’t internal IT departments benefited from the increasing dependence of the business on IT and technology

There are a number of reasons for this. In no particular order these include:

  • A focus on the stability and reliability of IT systems, and the processes and procedures that support them, at the expense of agility has led to a perception that in-house IT is unable to react at the speed of business. This is despite the fact that technology has moved considerably in the direction of delivering agility combined with reliability and availability.
  • Organisational silos in IT make the organisation rigid and unable to react to the changing needs of the business.
  • A one size fits all approach to IT operations. The push for standardisation and shared services to improve IT operational efficiency has led to a one size fits all approach to IT operations, governance, security and application development/delivery.
  • A focus on IT operational efficiency rather than focusing on end to end business benefits and linking IT investment to business gain (market share, margin and revenue). This is often at the expense of user experience and business outcomes.
  • A lack of clear understanding of the IT and technology needs of the business and the clear articulation of this to all in IT. Without this, it’s impossible to articulate to the business of the value that internal IT delivers.

This has led to the lines of business looking elsewhere to fulfill their technology and IT needs. Most CIO’s and IT departments that I speak to complain of ever increasing pressure to reduce spending on IT and cut costs.  However, many analysts point to an increasing spend on technology and IT (see references below). So where is the money going?

The answer is what we call Shadow IT, but so we can hardly call it “Shadow” any more.  Most analysts point out that Shadow IT spend is now greater than the CIO’s IT spend. It is well and truly mainstream.

5 Steps To Reverse This Trend

Step 1

It may sound blindingly obvious, but the first step is to get a clear understanding of the needs and KPIs of the business and how IT maps into that. From this it is possible to start mapping IT spend into business benefits and making the case for IT investments.

Step 2

The next step is to understand that not all applications are equal. Simon Wardley does an excellent job of explaining what I mean in his blog.  Organisations need to take a good look at their application portfolio, what categories they drop into, what their natural lifecycle is and where they are in that lifecycle. This will help to build a multi-modal IT strategy based on the needs of the business and the applications that support the business services.

Step 3

Next we need to switch to a user experience and business outcomes approach to defining and developing IT services rather than features and functions and a sole focus on IT operational efficiency.

Step 4

Next recognise that in-house is not always the best answer. Sometimes the best solution is a third party service and so you need to build an architecture to support a service broker function. In this way IT can ensure that the business gets the best solution for its needs while ensuring that corporate governance, security, audit and compliance requirements are all meet, something that is often compromised by Shadow IT.

Step 5

The final step is to build an organisation and multiple sets of operational procedures and processes (reflecting multi modal operational requirements) to support all of the above. A key part of this transformation is a clear focus on a service-driven organisation designed around the need to support business services and needs of the business.

To be clear this is not a case of tweaking minor parts of the IT organisation of a typical enterprise.  This is a major transformation, but this is your only hope to stop the increasing marginalisation of internal IT and the role of the CIO.

If the IT organisation is able to make this transformation it will lead to a massive increase in investment in the IT organization, redirecting the business IT spend away from third party vendors and back to the IT organisation.  This leads to a massive change in perception of the contribution of the IT organisation to the business.

If you need help applying these principles to your orgnaisation, VMware’s Advisory Services can help you build a strategy and roadmap to undertake the transformation needed to move to a business focused IT delivery organization, maximising the value (and perceived value) of the internal IT organisation within the business.

References:

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Sean Harris is a Business Solutions Strategist in EMEA based out of the United Kingdom.

Is Your IT Financial Model Fit for ITaaS and the Cloud?

Harris_SeanBy Sean Harris

IT as a Service (ITaaS) and Cloud Computing (Public, Private & Hybrid) are radically different approaches to delivering IT, from traditional IT delivery models, that require new operating models, processes, procedures and organisations to unlock their true value. While the technology enables this change, it does not deliver it.

Measuring the Business Value of IT as a Service

A question I hear often from customers is, “How do I measure and demonstrate the value of ITaaS and Cloud Computing?”  For many organisations, the model for measurement of value (the return) and cost (the investment), as well as the metrics that have context in an ITaaS delivery model, are unclear.  For example, most (surprisingly not every) customer I deal with can articulate the price of a server, but that metric has no context in an ITaaS delivery model.

Link IT Cost to ValueI have talked before on this very blog about the importance for IT in this new digital era to be able to link the investments in IT and the costs of running IT to the gains in business efficiency and true business value. This will link your business services, the margins and revenues they generate and the benefits they deliver to customers and the business as a whole to IT costs and investments. This is one step. The other side of this equation is how to represent, measure and track the cost of delivery of the IT services that underpin the business services, then present them in a form that has context in terms of the consumption of the business services that are delivered.

Have you mapped your business services to IT services in terms of dependency and consumption?

Have you mapped IT spend to IT services and IT service consumption?

What about your organisation and procedures? How do you account for IT internally?

The Project-Based Approach

Most of the organisations I speak to have a project based approach to IT spend allocations. There are variations in the model from one organisation to the next, but the basic model is the same. In this approach:

  • Funds for new developments are assigned to projects based on a business plan or other form of justification.
  • The project is responsible funding the work to design and develop (within the organisations governance structure) the business and IT services needed to support the new deployment.
  • The project is also typically responsible for funding the acquisition of the assets needed to run these services (although the actual purchase may be made elsewhere) – these typically include infrastructure, software licenses, etc.
  • In most cases the project will also fund the first year (or part year) of the operational costs. At this point responsibility for the operation is passed to a service delivery or operations team who are responsible for funding the on-going operational aspects. This may or may not include a commitment or ownership of tech refresh, upgrades and updates.

What is included can vary drastically. Rarely is there any on going monitoring of the costs mapping to revenues and margins. When it comes to tech refresh, in many cases, it is treated as a change to the running infrastructure and so needs an assigned project to fund that refresh. This leads to tech refresh competing with innovations for a single source of funds.

The Problem with Project-Based Accounting

Just for a second, imagine a car company offering a deal where you (the consumer) pay the cost of the car, the first years service, tax, insurance and fuel and then after that you pay NOTHING (no fuel, no insurance, no tax, no service). Would that not lead you to believe that after year one the car is free?

While the business as whole sees the whole cost of IT, no line of business or business service has visibility of the impact it is having on the operational cost of IT. It is also extremely hard, if not impossible, to track if a business service is still operating profitably, as any results are inaccurate and process of calculation is fragmented.

Surely this needs to change significantly if any IT organisation is to seriously consider moving to an ITaaS (or cloud) delivery model? Is it actually possible to deliver the benefits associated with ITaaS delivery without this change in organisation and procedure?

Applying a service-based costing approach can seem intimidating at first, but it is essential to achieving value from your ITaaS transformation and gets much easier with expert help.  If you are approaching this transformation, contact our Accelerate Advisory Services team at VMware who, along with the Operations Transformation Services team, provides advice and guidance to customers around constructing an operating model, organisation, process, governance and financial management approach that supports an ITaaS delivery model for IT.

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Sean Harris is a Business Solutions Strategist in EMEA based out of the United Kingdom.

Solving the Shadow IT Problem: 4 Questions to Ask Yourself Now

Harris_SeanBy Sean Harris

Most IT organizations I speak to today admit they are concerned about the ever-increasing growth in the consumption of shadow IT services within the business; the ones that are not concerned I suspect are in denial. A common question is, “How do I compete with these services?” The answer I prefer is: “Build your own!”

What Would It Mean for My IT Organization to Truly Replace Shadow IT?

Totally displacing Shadow IT requires building an organization, infrastructure and services portfolio that fulfills the needs of the business as well as—or better than—external organizations can, at a similar or lower cost. In short, build your own in-house private cloud and IT-as-a-Service (ITaaS) organization to run alongside your traditional IT organization and infrastructure.

Surely your own in-house IT organization should be able to provide services that are a better fit for your own business than an external vendor.

IT service providers often provide a one-size-fits-all service for a variety of businesses in different verticals: commercial, non-commercial and consumer. And in many cases, your business has to make compromises on security and governance that may not be in its best interests. By definition, in-house solutions will comply with security and governance regulations. Additionally, the business will have visibility into the solution, so the benefits are clear.

How Do I Build My Own Services to Compete With Shadow IT?

Answering the technical part of this question is easy. There are plenty of vendors out there offering their own technical solutions to help you build a private cloud. The challenge is creating the organizational structure, developing in-house skills, and implementing the processes required to run a true ITaaS organization. Most traditional IT organizations lack key skills and organizational components to do this, and IT organizations are not typically structured for this. For example:

  • To capture current and future common service requirements and convert these into service definitions, product management-type skills and organizational infrastructure are needed.
  • To promote the adoption of these services by the business, product marketing and sales-type functions are required.

These are not typically present in traditional IT organizations. Building this alongside an existing IT organization has three main benefits:

  • It is less disruptive to the traditional organization.
  • It removes the pain of trying to drive long-term incremental change.
  • It will deliver measurable results to the business quicker.

What If External IT Services Really Are Better?

It may be discovered after analyzing the true needs of the business that an external provider really can deliver a service that is a better fit for the business needs – and maybe even at a lower cost than the internal IT organization can offer. In this case, a “service broker” function within the IT organization can integrate this service into the ITaaS suite offered by IT to the business far more seamlessly than a traditional IT organization can. The decision should be based on business facts rather than assumptions or feelings.

How Do We Get Started?

As part of VMware’s Advisory Services and Operation Transformation Services team, I work with customers every day to map out the “Why, What and How” of building your own ITaaS organization to compete with Shadow IT services:

  • Why
    • Measurable business benefits of change
    • Business case for change
  • What
    • Technology change
    • Organizational change
    • People, skills and process change
  • How
    • Building a strategy and roadmap for the future
    • Implementing the organization, skills, people and process
    • Measuring success

In the end, customers will always choose the services that best meet their needs and cause them the least amount of pain, be it financial or operational. Working to become your business’ preferred service provider will likely take time and resources, but in the long run, it can mean the difference between a role as a strategic partner to the business or the eventual extinction of the IT department as an antiquated cost center.


Sean Harris is a Business Solutions Strategist in EMEA based out of the United Kingdom.

The Benefits of Linking IT Spend to Business Returns

Harris_SeanBy Sean Harris

For just a moment, consider the following fictitious organization, Widget Warehouse.

Widget Warehouse is making a gross margin of 15 percent and is able to spend five percent of its revenues on IT (you can replace these numbers with your own). The company would like to improve the financial performance of its business and is considering three IT programs to do that, as well as the likely impact on the CIO, CFO and CEO/shareholders.

 

  1. Leveraging IT agility to raise revenue by five percent without cutting IT spend – Assuming business costs rise—but that IT costs do not—this will generate an additional 0.23 percent of revenue, boosting gross margin to 15.23 percent. If both business and IT costs do not rise, it will boost gross margin to 20 percent. Most importantly, this would show a dynamic growing business rather than a static one, as seen in the following two scenarios.
  2. Leveraging improvements in IT agility, reliability and security to cut business costs by five percent (and not cutting IT spend) – This will deliver a four percent improvement in gross margin.
  3. Cutting IT spending by 20 percent – This will improve gross margin by one percent.

Now, consider the reactions of the Widget Warehouse CIO, CFO and CEO/shareholders to the three scenarios.

  • Scenario 1 – The CEO and shareholders will be most interested in this one, seeing not only improved margin, but also a growing business. This will generate the most interest from the CFO as well, and the CIO is now recognized as a contributor to the growth.
  • Scenario 2 – This will still be of strong interest to the CFO, but of lesser interest to the CEO and shareholders. The CIO will still be seen in a very positive light, but not necessarily a contributor to growing the business.
  • Scenario 3 It is still likely to be of some interest to the CFO, but of limited interest to the CEO and shareholders. It will more than likely generate a whole heap of pain for the CIO, since a chunk of the cost cutting will involve people and inevitably damage morale (and productivity) in the IT department.

The most appealing scenario to all parties is a combination of scenarios one and two, which can be achieved in parallel.

So, having agreed that Widget Warehouse wants to focus on the first two scenarios, they now face a critical question: “How do we approach it?”

Shifting the Focus of IT Projects

It is widely accepted that the use of cloud computing—public, private and/or hybrid—and the delivery of IT-as-a-Service (ITaaS) should provide benefits on three axes:

  • Efficiency Cost containment and reduction
  • Reliability – Reduced outage and improved availability
  • Agility – The ability to respond quicker to the needs of the business, customers and market

Using the software-defined datacenter to deliver the enterprise cloud adds a fourth axis, which is security.

Most IT organizations I speak to are always ready to discuss business cases or return on investment (ROI) based on the efficiency axis, and indeed ITaaS has much to offer in that space, but for the purpose of this discussion I will focus on the impact of agility, reliability and security, and how these can be linked to business benefits.

  • Reliability – Most organizations can easily measure the loss of business during an unplanned outage. The key here is to ensure you measure your availability in terms of business availability, and not IT services availability. For example, an IT group that is supporting five IT services—one of which is experiencing outages—might consider themselves to be 80 percent available. However, if that one service happens to be authentication and authorization, then it is likely all business services are not available, so IT services are actually 100 percent unavailable. It is therefore vital as a first step to comprehensively map business services to IT services and systems.

The most major impact of service outages on the business is reputation and brand equity. Much has been published on the cost to the Royal Bank of Scotland from their 2012 outage. They’ve admitted that due to decades of IT neglect their systems crashed, leaving millions of customers unable to withdraw cash or pay for goods. What is the risk to your business if during an outage your customers try an alternative…and never return?

Another consideration is not unplanned downtime, but rather overall availability. Most IT departments do not consider planned downtime as having an impact on the business or on IT service reliability, but is it possible that by reducing planned downtime you could increase revenues? For example, you could extend trading hours or re-use infrastructure for new services.

  • Security –In addition to the loss of business during a security breach, consider the permanent reputation damage resulting from public disclosure. The 2014 security breaches at SONY will cost the company $35 million in IT repairs in addition to the more intangible, but arguably more serious, harm to their brand’s reputation.
  • Agility – While examining reliability and security as the crucial axis, it can seem as though you are focusing on the negative impacts IT can have on the business, whereas the agility axis looks squarely at delivering positive impact and business value. To generate the metrics in this space requires a new form of communication between IT and the business: the conversation must shift away from pure cost pressures on IT.
    • By delivering agility, what is the impact IT can have on improving business efficiency (scenario 2)?
    • By delivering agile IT, what is the impact on revenues that can result from shorter time-to-market? What is the long-term impact on market share by being first to market? The first player in a market will often maintain a market leadership position, and be an established premier brand long after others enter the market.

Hopefully with this brief discussion I have whet your appetite for refocusing some of your IT transformation effort on not just driving greater efficiency in IT, but in using IT to be able to drive greater efficiency in the business, or even drive the business. This in turn will change the role of IT from being seen as a cost to the business (as it is in most organizations) to being an enabler and vital part of a successful business.

VMware Accelerate Advisory Services can help IT organizations like yours build a roadmap to transform IT into a business enabler and assist in building the business case for change – based not just on the cost of IT, but on the true value IT can contribute to the business.


Sean Harris is a Business Solutions Strategist in EMEA based out of the United Kingdom