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November 3, 2008

Using ITFM to Transform the ITIL Paper Tiger into a Cost Cutting Machine

CostCutting When ITIL v3 came out in May of 2007, it seemed that it would take the IT world by storm. Many CIOs bought into it, and IT organizations made significant investments to implement various ITIL processes and disciplines. However, today a lot of that enthusiasm is beginning to dry up...And it isn't because ITIL doesn't work -- on the contrary, most CIOs still believe in the ITIL way of doing things, and feel that their ITIL initiatives have been fruitful.

Why the loss of enthusiasm then, you ask? The answer, as is often the case, is money. While many IT organizations have used ITIL processes and concepts to streamline and improve their operations, few of them are able to quantify these gains. And without such quantification, a hefty ITIL investment is difficult to justify and sustain: what reasonable business executive will throw millions of dollars at a project with no clearly documented financial benefits -- especially in today's economy!? As a result, many execs have come to view ITIL as a paper tiger - a lot of bark, but no bite.PaperTiger

This is why IT Financial Management and Service Economics are such a critical part of any ITIL initiative. Implementing unit costing, chargeback, and demand management helps to lower the overall IT spend, and at the same time the cost transparency these disciplines enable allows for much easier quantification of the resulting savings. ITFM can help turn your paper tiger into a cost cutting machine.

Here is just one example that underscores the importance of ITFM and the hazards of undertaking an ITIL effort that is not centered around solid ITFM principles. A number of IT organizations have implemented requestable service catalogs, but our research has shown a remarkable difference between organizations that did so with and without service-based costing and pricing information. Customers who have implemented a service catalog with service-based costing and chargeback have seen:

  • 26% reduction in unit costs
  • 18% reduction in baseline business demand
  • 20% reduction in overall IT spend

Those are some serious numbers! On the flip side, customers who have implemented a service catalog without including service-based costing and chargeback have seen:

  • Significant increases in baseline demand and overall IT spend due partially to an increase in requests for premium services.
  • No change or increase of the value gap between what customers think it costs to provide services, and what it actually costs IT to provide them.

The other side of the equation is justifying the money spent on your ITIL effort, and that is actually covered in the example above as well, albeit indirectly. It's in the language. Note how the statistics I quoted above are phrased. The first set of stats is very exact and quantitative, while the second is more of a qualitative analysis, the kind that wouldn't fly in the board room. Why? Because in an IT organization without service-based costing and chargeback, it is next to impossible to collect the exact quantitative statistics that execs want to see. In contrast, when IT is built on a solid ITFM foundation, this kind of data is readily available.

This is why ITFM should be at the center of any ITIL initiative. It is not enough to develop a long term service strategy, design a best practice based service catalog, and streamline service operation and delivery. While all of these are positive things, to be sure, at the end of the day it comes down to money. The end result of an ITIL endeavor should be a reduction in IT spend, and you need to be able to illustrate that reduction with some hard facts. ITFM and properly implemented service economics can provide both.

So how do we lay this ITFM groundwork? Lontra SUCSESS™! This proven methodology can guide your IT organization from a reactive, specialized "job shop," to a "product house" that has full transparency around its products (the IT services) and their unit costs. It can take you beyond building a hierarchical service model, and to cost modeling, unit costing, and cost allocation, giving your ITIL effort a strong basis in Service Economics. This transformation will yield dramatic savings that you can show in stark terms to your executive board. I will explore some of these topics more in my upcoming webinar on November 5th.

Posted on November 3, 2008 | Permalink


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