Real IT Spend

This article is part of “How to perfect IT? Step by Step!” series. Go there to get to know more.

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Introduction

First things first, why “Real IT Spend” and not the “IT Budget”. There is a difference between the Real Spend and Budget. Budget is what you think that you’ll spend while Real Spend is what’s going out of your accounts.

Why is it so important to underline? Because plans vs reality rarely go hand in hand.

• How many times you’ve encountered that something was not planned in the budget?
• How many different vendors, resellers and manufacturers are not matching between your budget and Accounts Payable?
• How much spend is done outside of IT (often referred to as Shadow IT)?

Another thing in the Budget is that it often lacks:

• Categorization of spend e.g. using Technology Business Management (TBM) taxonomy.
• Mapping between Vendors, Resellers and OEM companies which blurs the picture.
• Continuous updates to reflect reality e.g. information about chosen vendor.
• Connection to respective invoices

One might ask “What about the ERP? It has everything!”. Yes and no. Mainly because it is first and foremost a financial tool. As long as books are balanced, everything is fine. It is the same with IT or Legal, everyone cares about their main goal in the first place. IT wants the infrastructure to run and usually no one stops to think “Hmm… I hope that this technology is correctly booked in general ledger. Let me check that!” or for an attorney to think “If during design of the whistle-blower system IT will include load balancing then it’ll improve UX and stability of the environment.” Let’s paint the picture by asking some questions:

• Does Accountant or Auditor care about cost categorization?
• Does finance department have knowledge about the IT products, services, and technologies?
• Is an account having any interest in challenging purchase or assignment of an invoice from someone with respective level of approval?

Of course, mechanisms like Cost Centres or Purchase Order Numbers on invoices help to direct the flow of cost in right direction; however, it still is prone to human errors.

That is why IT Spend Analysis is a key to success as we’re moving down to the very source of information (spend of the company) which is very tangible (respective invoices and transactions).

Due to potential complexity, it may be a bit scary. It’s enough to visualize spend of a company counted in billions of dollars, tens of thousands of transactions and thousands of vendors and usually it’s enough to lose determination to get through the workload behind it. Nevertheless, it is one of the most powerful methods you can find when it comes to optimizing IT Landscape and organization. Remember, “money talks”.

What is the value of IT Spend Analysis?

Visibility

Working directly with the spend of the company you will be able to establish strong baseline which gives you unique potential for discussions regarding investment, optimization, standardization, or consolidation activities. That is simply because payment is something physical with which you cannot discuss.

Transparency

Doing IT Spend Analysis you’ll also introduce standardized categorization. I’m recommending using Technology Business Management taxonomy as it’s a market standard. Using a standard gives you e.g. possibility to benchmark against your peers.

Insight

Such dataset enables you to track spending trends of respective categories or parts of the organization. You can also explore various angles like diversity of vendor portfolio, risk based on vendor scoring or add end dates of the contracts to segment work based on actual value.

Traceability

When you work through your data, at the end you’ll also have an easy to search through dataset. With possibility to sort based on categories of spend, vendors, manufacturers, or drill down to respective invoice and back which not only saves time but can be also powerful prioritization tool.

How to utilize the outcome?

Negotiation leverage

Having insight into complete spend gives you a powerful tool for negotiations as you get information like size of engagement with respective suppliers or direct (via OEM) vs indirect (via Resellers) purchases. Anyone sitting at negotiation table knows that having hard data like this at hand is invaluable during negotiation process.

And if you cross it with information on renewal dates of contracts… well, it’s next level game.

Control Shadow IT and Rogue Spend

We all know that it’s easy to spin up solutions with all the SaaS, IaaS and PaaS on the market. Especially if legal entities or managing directors have autonomy of using credit cards or doing some spend on their own. And that’s good; however, to optimize and standardize you need to have the full picture. What’s the point of introducing a new system if some people will still be using something else just because they can, don’t want to or avoid learning something new.

Additionally, the bigger the organization the more focus on security and stability, and it’s hard to ensure it when not evaluated software or hardware is being purchased.

Budget Planning

Knowing all the IT spend taking place in the company is a great input for budgeting process. There is nothing better than hard facts, especially if tough discussions appear. In such situations it’s good to base on facts and not just a wishful thinking as vision can be easily blurred by opinions.

Budget Control

Insight provided by IT Spend Analysis also helps to control the budget consumption during the fiscal year and quickly identify areas which are overspending and those who are doing well. When you drive this activity for more than a year you can start comparing respective spend categories. This will bring even more insight into your operations.

Educated Decision Making

One of the risks and pain points of many organizations is “I think that…” or “I believe that…” when making decisions about money. There is nothing riskier when it comes to finance management than basing on feelings or beliefs. Finance requires data-based decisions which helps you focus on most impactful areas and avoid costly mistakes.

Simplify Complexity

No-one likes complex explanations, even if that’s how the life and world works (rarely things are simple). Properly done IT Spend Analysis brings to the table a tool which enables you to easily zoom in and out when discussing IT finance. Everyone in the room will love you as it builds a bridge between C-level, management and operations since you don’t need lengthy explanations when you can just apply filters.

Consolidation, Standardization and Optimization

In big environments it’s very easy to chase mirages when driving consolidation, standardization or optimization activities. IT Spend Analysis supplies valuable insight into full cost behind respective areas. When you extend it with e.g. Technology Business Management discipline you receive a powerful insight into where to put focus and what are the potential cost savings.

Vendor Management

Combining information about the size of the engagements and criticality of suppliers helps to properly set priorities and focus on those relations which are most important for the company. It’s not always worth to manage all relations and sometimes our focus might be diverted by opinions.

IT Asset Management

Even though in the ideal world we should be managing everything, it’s rarely the case in day-to-day life. Often due to limited resources or problems creating the business case for ITAM. IT Spend Analysis supplies data to decide:

• Which products or areas should we prioritize?
• Should we skip the tail spend e.g. last 5% suppliers?
• Are we doing good (cost drops or raises)?
• What has the biggest cost saving potential?

Peer Benchmarking

This one kicks in especially if you follow common standard like TBM. Using Cost Pools and Towers enables you to benchmark against other companies from your industry who also use TBM. Not only it helps to check whether you’re doing good, exceed or maybe fall behind but also paves the way for discussion on why in this or that area someone is doing better as you’re already using same language.

Add More Context

You can also add more context like:

• Add Risk Scoring.
• Percentage of pie that given supplier has in respective category.
• Make a balance of trade if some of suppliers are also your clients.
• Add Vendor Scoring.

Extending the context will give you more valuable perspectives e.g. something might not cost much but solution you buy is crucial for the business thus it’s paramount to closely manage relations with the supplier.

Leads for the Business

Finally, you can also generate some leads for the business if your company provides services which can also be utilized by your suppliers e.g. like accounting, logistics or legal. This knowledge can be used by sales team to open doors and then earn trust since you’re already doing business together.

Which organizations will benefit the most?

Multiple entry points

If there are many people with cost approval possibilities, credit cards or multiple legal entities.

In such setup it may be exceedingly difficult to correctly capture and analyse all IT spend simply because of multiple people and groups of interest who may feel like being interfered with their mandate or responsibilities.

Credit cards are often associated with individuals, and such spend can be quite easily hidden in procedures as not being part of global reporting.

Example: New entity is being setup in Asia while company originates and is headquartered in Europe. Driving standards established by European IT units may be unacceptable from cost perspective in Asia thus local management is more prone to decide to overcome the problem by hiding the local purchases.

No strong ITAM discipline in place

One of the control mechanisms is IT Asset Management discipline, while its scope may vary due to assorted reasons, it provides tools, methods, and processes to capture IT Assets. However, it is easier said than done especially with limited number of experts on the market and sheer complexity of the matter where one of the most common pitfalls is scope of ITAM implementation saying “everything”.

In these organizations IT Spend Analysis should be the very first activity to support establishing ITAM discipline in adequate scope, prioritization, and tempo.

See “Software Asset Management – Benefits” article to find out more on why it’s worth to do ITAM.

IT Spend is over 50 million USD

This scale almost guarantees that something will be hidden, not captured, rogue, overlapping or not controlled (choose applicable). Here even one percent of not captured spend pays of any efforts related to IT Spend Analysis, not to mention importance of good data when making decisions regarding IT organization of this size.

Nevertheless, do not fix on 50 million USD cap, you can get enough complexity even below that level as it also depends on maturity of your governance and controlling processes.

Multiple ERPs

That is pure entanglement as you are working with multiple interfaces, various data models, naming standards, ways of working, integrations or even different languages. It is then crucial to work with data via IT Spend Analysis approach to ensure that nothing is kept hidden in the bowels of one of the systems.

Lacking visibility for the C-level

If you ever had to deal with busy C-level with whom you cannot find a free slot, then you have 15 min to present the topic and in the end you’re pinned with a question “How much is it in comparison to XYZ?” or “What are other top 5 costs in this area?”, and if you didn’t have the answer right away the decision was postponed next meeting in couple of days or weeks. IT Spend Analysis brings answers to such questions at the tip of your fingers.

On the other hand, if you are a C-level or decision-maker then you get a perfect tool to easily check how respective spend areas are doing, what are the trends and if any action is needed.

Doing Mergers and Acquisitions

Any organization dealing with M&As knows that it’s only a sweet talk when the other side says “We have everything under control and what you’ll receive will be a perfect set of data. Also, we’ll answer every question you ask in no-time.” and then the hammer of reality hits: data is not in your standards, sometimes there are no standards, someone get fired, someone leaves, someone has more important things to do and time flies, synergies must be concluded, so the deal is profitable etc.

Then IT Spend Analysis comes as a magnificent tool to provide input for further integration actions as you’ll be able to quickly figure out where are most financially impactful areas, what is the risk or with whom you have the best leverage.

What is the product?

The outcome is a dataset with all transactions and preferably relation to purchase confirmations (invoices, receipts etc.) with special focus on the following attributes:

Attribute	Purpose
Amount in Currency	To make the analysis easier, choose single currency, preferably the one used for official reporting of the company / group as then it’ll be easier to communicate across the organization.
Cost Center	Who eventually holds the cost for the spend. Granularity of Cost Centers varies due to structure of the company, size and methodologies used; however, with each Cost Center comes accountable individual which is crucial for getting things addressed and acted upon in later stages.
Description	What has been purchased? Line item, name of the product or service, description from the invoice. Crucial when doing the analysis.
Document ID	Association between transaction and document enables going directly into respective document to see the details.
Line Item ID	There might be multiple products / services on one invoice which then are going into different Cost Centers, TBM Cost Pools / Towers or have various OEMs.
Original Equipment Manufacturer (OEM)	Shows which company is the actual provider of technology, product, or service. Companies like Cisco or Microsoft have multiple resellers and associated companies, but eventually you are buying their products or services.
Supplier	Even if you buy Dell, you may be doing it through partner. This shows the map of relations with your suppliers.
TBM Cost Pool	Low level categories which can be easily connected to general ledger accounts (transactions). This categorization helps to understand and translate IT spend to Business areas. Finance Layer in TBM.
TBM Sub-Tower	Next layer of TBM model enabling greater granularity and precision of categorizing cost. This categorization helps to understand and translate IT spend to Business areas. IT Layer in TBM.
TBM Tower	Next layer of TBM model. Often referred to as domains or functions, are basic building blocks of solutions. This categorization helps to understand and translate IT spend to Business areas. IT Layer in TBM.
Transaction date	Enables timeline analysis.

You can then further expand the dataset by adding e.g. information like:

• Vendor Scoring
• Risk Scoring
• Diversity Scoring
• Which OEMs / Suppliers are also your customers
• Contract Expiration Dates

As well as visualize data by showing e.g.:

• Spend trends in respective categories
• Distribution of contract renewals in order of size
• Top spend Suppliers / OEMs
• Tail spend e.g. by showing last 5% of the overall spend or transactions below certain amount

How to do this?

There are two basic scenarios:

1. Doing this on your own, internally.
2. Using third party who supports / does everything or parts of it for you.

Having in mind practical and realistic approach to everything that we do, to get the right overview and see upsides, and downsides of both approaches, we’ll outline:

• What data, resources and tools are needed?
• What are the challenges and mitigations for them?
• What’s the difficulty level?
• What are the tools, solutions or third parties that can help?

What data, resources and tools are needed?

Spend from all ERPs

To get the full picture of IT Spend we need to have access to all company’s spend. Great if you have it all in one Enterprise Resource Planning (ERP) system like SAP; however, life is not always so colourful, that is why you need to make list of:

• All ERPs (name and ID if you use those in your company)
• IT Owners of those systems
• Business Owners of those systems
• SMEs on finance side who can provide you with data
• Ways that you are getting the data e.g. CSV export, Power BI, database etc.
  • Preferably you should get all in one format like CSV which leaves you with plenty of options to further process it.
• Coverage of the legal entities by each system.
  • This will allow you to catch the gaps or exclude those where your company is minor shareholder and does not interfere with operations.

Mapping of OEMs, Suppliers, Vendors and Resellers

To get the most from IT Spend Analysis you will need to build logic on relations between OEMs, Suppliers, Vendors and Resellers. There are numerous legal entities around the globe for each of the big companies as well as their partners. If you are buying Office365 from ACME Ltd. in France there will not be any relation to Microsoft unless you make it.

Such logic rarely exists within the company as finance department does not have a need for it. Nevertheless, you can look in Vendor Management, Compliance, Commercial Organization or Procurement.

This database can be expanded over time or “purchased” via third parties – more about this in “What are the tools, solutions or third parties that can help?”.

Technology Business Management (TBM) Taxonomy

Of course, you can develop your categorization as well; however, this is widely used standard on the market used by over 3 600 organizations, covering most of Fortune 500 companies and around one-third of global IT spend. I’ll be straightforward, while it makes sense to adjust it to your needs and reality, you’ll never beat the sheer amount of data on which the framework is being developed.

There are couple of layers in TBM Taxonomy; however, you can start with Cost Pools and Towers. From these you already gain enough insight to make educated decisions about next steps like introduction of Solutions and Business Elements of the TBM or optimization activities within your IT Landscape.

The key point is to categorize cost to be able to align Finance, Technology and Business worlds and in simpler words, be able to talk with people from different worlds and with different goals.

Team

There is no magic, you need people! There are three major areas to cover:

1. Coordination of the IT Spend Analysis activity.
   1. You need someone who can coordinate the work, address issues, and align different parties. This is quite a task, so there needs to be a resolute individual.
2. Subject Matter Expert(s) from Finance Department.
   1. You’ll need someone who can answer questions and explain how things look from General Ledger perspective and simply put introduce you to financial world of the company.
3. Subject Matter Expert(s) from IT Department.
   1. Even the brightest minds will not know all solutions, technologies, products, and services in IT world, so you need someone who tell you what is what when looking at respective items on the invoices and verify if assignments to Towers is correct.

Level of involvement and time needed from them will differ; however, completing proper team ensures not only that work will move forward, but also that nothing falls between chairs along the process.

Go-to tool

As always, Excel will take everything; however, considering your long-term goals, needs and setup you need to consider whether Excel is the best choice or maybe it is worthwhile to build proper setup directly in ERP, or develop something in tool like Power BI.

No doubts, if you do not have a good orientation in what you need then I would recommend starting with Excel; however, data size might be a limitation as well as collaboration options as it’s not the ideal tool if multiple people need to provide their input.

Mandate

Last, but not least. It can be a killer of even the best ideas. Make sure that you get the mandate to get the work done as it’s not a teatime task. Often access to spend data of the whole company is not something that is shared with anyone who wants to get it.

Good sponsor candidates are CIO, CFO, COO, or people who need visibility of IT Spend because you will be making their day if you can provide a full and easy insight into all IT spend with categories and trends since they don’t have time to investigate dispersed things.

What are the challenges and mitigations?

There are always some challenges awaiting; however, there are also ways to mitigate them, some are easier to be dealt with than others, but there is always a way. What are the challenges ahead of you when implementing IT Spend Analysis?

Challenge: Amount of data

If your company’s spend is 1 000 000 USD and IT costs are 50k USD then you won’t have an issue; however, when we enter levels of tens or hundreds of millions well… it is not a walk in a park to go through such amount of data.

Mitigation: Carving out data sets

This is the rule that applies any time you work with vast amounts of data where you do not need everything. Look for values or attributes which help you identify spend which is 100% non-IT. It will not solve everything but if you drop even 20% lines from 100 000, it is still a lot of saved time.

Procurement, Vendor Management or Commercial Organization may have information helping you to find such categories.

Mitigation: Using 3^rd party tool or service

This comes with an outside cost (remember that your time spent internally is also a cost, but rarely counted like one), but eventually saves you so much effort that it’s worth it.

There are companies who can support you with their services to process the data. There are those with more expertise or knowledge within the topic, but you can also just seek competencies of working with big data sets. The issue here might be limited data models of relations between OEMs, Suppliers and Vendors on the market. The important thing is to ensure that third party understands what you want to achieve.

Another option are tools dedicated to find IT spend among whole company’s spend and give you output which is ready to work with. These have the needed logic of relations and continuously develop it based on data from the clients.

See more in “What are the tools, solutions or 3^rd parties that can help?”.

Challenge: Scale of the organization

Another thing might be the size of the organization itself e.g. number of legal entities or their autonomy, number of individuals responsible for budgets, areas, cost centers, services.

There is simple rule of complexity where number of dependencies grows with size of the company – just look at multinational corporations.

Mitigation: Identify functions, roles, or positions

The key is to establish who is responsible for respective cost areas and make a clear statement about responsibilities. You can use it later to ensure that only appointed / accountable people are making decisions and that they feel motivation to deliver results – nothing works like having your name assigned to something which is not hidden behind team or department name.

This will also be helpful when you would like to utilize escalation paths.

Mitigation: Establish consensus on CIO’s team level

In big organizations, a major factor is whether you have secured understanding and approval with decision makers – the higher the better as this ends a lot of discussions before they even start. That is why before starting the work and continuously during the project you should stay in contact with top decision makers in IT area, so they provide you with their support and mandate even in discussions where you are not present. You are also solving their problems after all.

There is nothing more damaging to progress than decision made in panic by a person who influences big part of the organization – reversing such cases consumes considerable effort and always leaves a mark.

Challenge: Making it business as usual

To avoid making it a one-time exercise and being forgotten in the river of time, it is always good to establish a process, so the exercise can be repeated on regular basis or even transformed into a discipline in the company.

Mitigation: Make it part of the project’s goals

Planning the project make sure to include setting up the process and IT Spend Analysis discipline as part of the project’s products and success criteria. This way you will secure the resources.

It will nicely relate with introducing TBM in your organization which more advanced and comprehensive approach to ensure successful IT Landscape.

Mitigation: Document effort, cost, and outcome

If you cannot make a process or discipline out of it and it is treated as a onetime exercise, make sure to document what has been done, how, how many resources it consumed and what were the effects.

I guarantee that if someone did not want to make it a repeatable thing now, they will in the future and then you’ll be able to reuse what you’ve described.

Challenge: Mapping of OEMs, Suppliers, Vendors and Resellers

This one is trickiest to do internally as you need to build the logic yourself. The problem resides in ever changing worldwide business environment and continuous need to update Nevertheless, there are options on the market.

Mitigation: Third party tool or service

Like dealing with “Amount of data” challenge, you can seek support in getting a third-party tool or service. Tool will have all the logic inside and you will not worry about any changes happening on the market while buying a service or data set will have the outdating problem.

See “What are the tools, solutions or 3^rd parties that can help?” for more.

Challenge: Multiple input channels

Multiple sources of information can be problematic especially if you have a manual process but it’s also easy to forget something when planning various integrations and processing of data.

Mitigation: Documentation

So much forgotten, omitted and disliked… documentation! I know, I know, it takes time which we’re always lacking and can be a tedious task; however, the long-term profits are huge. No more guessing what was agreed, how something works or what should be the next step. And if you need to introduce someone new to the process, they can always learn from and refer to it.

No magic here but as not Aristotle said (actually it’s Will Durant) “We are what we repeatedly do. Excellence then, is not an act, but a habit.”

Challenge: Everyone believes we’re in full control

You may encounter a situation where either IT / Business management or Finance department say that we’re in full control and there is no chance that something is missing. There can be many reasons for such response, of course one being the fact that maybe you’re in perfect control; however, usually there are others at play:

1. Don’t challenge the status quo – there might be fear that if you find some discrepancies and tough discussions will start as for example some business unit had to pay more for IT even though they were not using some things.
2. Facts ruin personal agendas – even though in general people like transparency on paper, the reality check shows something different. Being faced with facts you are put in a position where you acknowledge existence of a situation and thus need to decide what to do.
3. Avoiding more work – eventually all this insight and information reduce the general amount of effort; however, having such informative tool will make it more likely that some improvement projects will be started, especially in the beginning which in many heads will ring a bell of “I already have too much work and now also this”.

Mitigation: Conduct Proof of Value

Agree with your potential sponsor to conduct a proof of value on a smaller scale to show why it makes sense. Choose a category or area that you have strong feeling or proof that not everything was accounted for and do IT Spend Analysis.

If you decide working with third parties, there might be an option to conduct PoV for a fraction of a full price or even for free.

What is the difficulty level?

If you aim to do everything yourself then based on experience, I must say that it will be quite difficult, the more the bigger (corporations) and more dynamic (M&As) environment you’re working with. Don’t be afraid though, it’s still doable; however, requires tons of discipline and firm project management.

You can make your life a lot easier by utilizing third party solutions or services to do the heavy lifting. Especially with when it comes to getting logic for mapping OEMs, Suppliers, Vendors and Resellers, and categorizing cost per Cost Pools / Towers.

It also gets way easier when aligned with other initiatives like setting up IT Service Management, Application Portfolio Management, IT Asset Management or building Business Capability Model for your organization.

What are the tools, solutions or third parties that can help?

I am describing here tools, solutions, or services which I have evaluated and got to know more about them to ensure that it solves the problem and brings true value. As I finalize the research and vetting process, deep dive materials are published on apm.zone, so you don’t have to spend time on it. 😊

If you know about tools, solutions or third parties that can help in this specific area, please reach out to me at info@apm.zone and I’ll happily conduct the research and share it with apm.zone community.

CXO Nexus – full article is work in progress and will be available soon.

CXO Nexus

Deep-dive article is work in progress and will be available on apm.zone soon.

Purpose / Scope: Analysing company’s spend with AI & Machine Learning and providing overview of all IT Spend. It provides categorization to TBM Towers, Mapping of OEMs, Suppliers, Vendors and Resellers, enables comparison to Account Payable, easy drill down through spend categories, shows trends and more.

Type: SaaS

Website: https://cxonexus.com/

Consulting Companies – Maryville Consulting Group, Deloitte, or Accenture

I mention those three as they are also Delivery Partners of TBM Council responsible for TBM standard thus have the experience. Nevertheless, please note that I haven’t fully vetted their offering yet.

Purpose / Scope: Providing guidance or doing the heavy lifting of IT Spend Analysis with further implementation of IT Finance Management or Technology Business Management disciplines.

Type: Consultancy

Websites:

Key takeaways

By default, ERP systems are not designed to give extensive and deep insight into respective categories for areas like IT. They are not capable of out of the box connecting the dots between OEMs, vendors, and resellers or introduce categorization – there are more and more components or capabilities added to enable TBM categorization.

Understanding your true IT Spend gives you powerful insight supporting decision making, driving optimization efforts and bringing value to business. This also lays a true baseline for how to evaluate IT organization in your company.

Can apm.zone support you?

Yes, I’m happy to advise you on the topic, choose tools or services, coordinate work or create roadmap for IT Spend Analysis and further steps in your company. Feel free to reach out to info@apm.zone.