CXO

Improve your IT department's performance by calculating key equations

An experienced IT consultant describes how using a few key calculations will help IT managers improve the performance of the IT team. The numbers can also help senior managers better understand the true cost of IT.


If you’re wondering if measuring the performance of your team is worth your time, consider NBA coach Pat Riley. As coach of the Los Angeles Lakers in the 1980s, Riley led his team to the NBA title in 1982 and 1985.

After they failed to make the finals the next year, Riley initiated the Career Best Effort (CBE) program to:
  • Measure performance statistics of each player against the stats of players of the same position in the league. (Previously, individual stats were compared to all league players.)
  • Challenge each player to improve each of his personal statistics by 10 percent. Players scoring 20 points per game were challenged to increase their average to 22 per game.

The Lakers believe these new sets of measurements helped them win the next two championships.

The Lakers in the early 80s were enjoying great success, but they used performance measurement to push even higher. IT managers who are achieving excellent results can also reach higher. Measuring performance is an important attribute for success as an IT manager. It can also be a powerful motivator and tool to help you achieve greater results with your team.

You will also find it useful to track trends where possible. Any given month can skew the real picture of what is taking place, but a trend line over time indicates true progress.

Measuring the organization’s progress
Senior managers tend to look at the big picture, and they may not be aware of your department’s progress unless you tell them. Collecting meaningful measurement criteria will assist you in making your case to others in the company. It also shows an awareness and an understanding of your business as a manager.

So where do you start? Start globally and work your way down. Consider what the CEO and CFO want to know. Most of the time, it’s tied to financial performance in some way.

Types of measurements
In the executive level of IT, there are several important measurements to have handy at all times:
  1. IT expense as a percent of revenue
  2. Actual expense compared to budget (monthly, year to date, and monthly trend)
  3. Future expense projections (at least the next three months or a full quarter)
  4. Summary of benefits derived from past project initiatives

Define the responsibilities of the IT department
It’s impossible to measure performance without first coming to a clear agreement of what is expected from the IT department.

In one situation I encountered while working as a consultant for a new company, the IT organization had very little credibility. Two main reasons were contributing to the problem—a lack of focus and insufficient staff in certain areas.

Like so many organizations, the CEO and CFO were insistent that IT was costing the company too much money, but they weren’t sure why. Senior management didn’t know what the problems were and they were looking to their CIO to resolve the credibility issues.

The CIO had a tough job. Not only did his department need to improve the IT delivery of services, which often means spending money, but he also needed to reduce the money spent by the IT department.

My approach was simple—define what services the IT department should be providing for the company and have management agree on this mission statement and list of responsibilities. Then, I would quantify staffing requirements in resource, experience, and skill to fulfill those needs.

In other words, I would show the true cost of providing the level of services they said they wanted. Keep in mind, “wants” don’t always translate to needs. Needs are often different after management understands and appreciates the true cost.

Once management has agreed with the IT department about what deliverables are expected, you can track performance and establish goals for increasing performance levels. For instance, if senior management decides that a superior level of service is not required for the help desk because the organization can only afford average staffing levels, then you can calculate realistic goals for your department that must operate with reduced staffing.

For example, with one help desk person for every 100 end users, perhaps the help desk staff member is expected to clear 30 telephone help calls each day with a 70 percent rate of resolution. The average wait time for end users may be another calculation that you need to consider. Whatever you establish as the standard, you can challenge your help desk to surpass that performance each quarter.

Calculate IT expense as a percent of revenue
One of the best ways to help the CEO or CFO relate to the cost of technology is to present IT expense as a percent of revenue using the calculation in Figure A.

Figure A


In this company, IT expense was running 6.5 percent of revenue. It was a small company with two separate IT organizations in two cities as a result of a company acquisition.

My assessment identified several opportunities to reduce cost by focusing the IT organization on the company’s true priorities and eliminating duplication of effort by two IT organizations. I recommended that this refocus could not be done too quickly without creating risk for the company and creating morale issues for the IT staff.

Note: The objective was not to simply cut IT expenses but to align IT spending in areas that supported the company’s true objectives. By focusing the team on the right issues, certain costs would drop and the expense as a percent of revenue would take care of itself.

To set the stage with senior management, I created a graph similar to Figure B to show what would occur as we refocused priorities of the IT organization.

Figure B


IT expense as a percent of revenue
The graph clearly indicates an increase in short-term spending that I refer to as the “bubble" effect. It also shows decreased expense as a percent of revenue by the eighth month. Typically, senior management will invest in the short term to achieve long-term benefits for the company. The key is to have a solid plan that indicates you have a high level of understanding and good odds of succeeding.

Track this measurement every month to keep your management team informed. Don’t be surprised if you need to remind senior management every month where the financial numbers are headed. The time frame when the “bubble” peaks can be financially challenging for the CEO and CFO because every bit of increase in IT spending reduces bottom-line earnings of the company. I draw the graph shown above at every opportunity when I’m taking an organization through such a transition.

In the company example, I reduced the IT expense as a percentage of revenue by 3.5 percent over five years while the IT budget grew from $1.7 million to $15 million to support company growth. The “bubble effect” is real, especially in turnaround situations.

Keeping it in perspective
Any accounting or financial measurement must be put into the context of what makes sense for your organization and your industry. For example, if a manufacturing company has the goal to be an aggressive leader in the industry, perhaps that company would find it acceptable to have a fairly high figure when it calculates “IT expense as a percent of revenue” compared to its competitors. Likewise, a business that relies on technology might have a high calculation even if it uses technology in a conservative way. As an IT manager, it’s your job to put these figures into perspective for senior managers who might misinterpret them.

Know your financial numbers
No matter what your title is, you should be aware of the financial numbers that are key to your organization. Your senior managers, the CEO, and CFO are going to be financially focused. If your organization has a board of directors, it will measure senior management on the health of financial performance more than anything else.

Keep track of where you stand relative to your annual budget. Your CEO and CFO may ask questions that pertain to your organization’s financial status, so it always makes sense to be prepared. Always keep three numbers in your mind.

Most recent month’s expense compared to budget
Know why your budget exceeded its limit or why it fell below the limit for the month. In many publicly held companies, the monthly budget is not as important as the quarterly budget. In these companies, it’s acceptable to have a monthly budget that’s over the limit as long as you have a plan to meet your quarterly goals. Be familiar with what time frame is key in your organization.

Year-to-date actual expense compared to budget
Know why it’s overbudget or underbudget and how you believe total expense will compare to budget at the end of the fiscal year. Also know the trend of your expenses and whether the current trend is expected to continue.

The next full quarter’s projection of actual expense
Regardless of the budgeted plan, actual expenses can be somewhat dynamic. The CFO and CEO will want to be able to forecast as best as they can for the next quarter. It’s important to know your organization’s near-term expense needs, especially if you expect to spend significantly more or less than your recent spending trend.

You will find your CFO and CEO to be strong supporters when they know that you are on top of the financial state of your part of the business.

Mike Sisco is president of MDE Enterprises, an IT management training and consulting company. He is a former CIO with 20 years of experience. Sisco provides practical resources and tools in his IT Manager Development Series publications.


What calculations are most important?
What numbers are important to your CFO or supervisor? Do you believe they are worried about the right financial factors? Post a comment or send us a letter.

 

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