Can you afford to have an IT department?

Many non-digital businesses augment their core business with digitization and automation. IT is "The Thing", and even though every organization want to have the benefits of an IT, few seem to consider the cost of IT. In this article, we will examine a few critical considerations.

Bad IT is just as good as burning cash.

When IT becomes a poor investment

In many organizations, IT is still considered a "feature factory" where business dumps in requirements, gets a cost estimate and upon approval, a piece of software to automate a phrased request, and that's it. Business and management neither wants to think about what is being done, nor how much effort is required to create and maintain the solution.

This approach was okay in the past, when the major cost of IT was in procurement of hardware and licenses and the human factor was neglegible.

Fixed cost procurement

Factoring the cost of a purchased IT product is easy: you have a purchase price for hardware and licenses, sign a support contract with a fixed price, order some training and you're done.
The cost of such an IT can easily be computed as a business case: when the cost is lower than the savings, you're good.

Cost Estimation

Unfortunately, that's not how today's or tomorrow's IT works.
Today, business wants automation for something that they are currently doing either manually or not at all. There is no solution which can be purchased.
Knowledge work is required. Since the optimal solution isn't known, the cost becomes difficult to compute, and therefore, all cost estimates are just that - estimates. There is no reliable way to tell the production costs of a feature until it is done.

Hidden Costs

And now we come to the fatal trap which many organizations fall victim to: the accruing cost of IT over time! Business terms like debt, deprecation and amortization are also applicable to IT.

Debt in IT

A financial debt is accrued when spending exceeds available funds. In IT, debt is accrued when technology is being utilized in ways which will result in future problems. Known debt still has the can be controlled, although few organizations measure and control thind kind of debt. Every accountant would cringe if someone told them, "Oh yeah, we're making debt every day, but we're neither keeping books nor make plans for repayment" -  yet this is how IT works in many companies.

Time-saving measures allow the business to get visible results faster, yet increase future cost.

In some organizations, this invisible IT debt is already so high that things which would take minutes on a green field take weeks within the existing infrastructure. Imagine that you're paying a loan shark an interest rate of a couple thousand percent per day - that's uncontrolled IT debt for you!

Deprecation in IT

The good thing about the constantly evolving field of IT is that new technology makes ever more complicated things ever simpler to achieve. On the reverse side of the medal, if you're not familiar with this technology, you're missing out!

While IT specialists are busy maintaining the existing legacy and struggle to integrate the latest feature requests, their technology outdates - and their knowledge, as well!

The company constantly invests into an ever-shrinking asset: status quo. At some point, the existing staff will no longer suffice to maintain status quo, so additional experts are brought in to keep IT running, although the marginal value of the infrastructure is already approaching zero.

Adding insult to injury, re-engineering the legacy based on the legacy processes with a legacy skillset using legacy tools exponentially increases the cost of change and produce a similiarly ineffective outcome.

Take, for example, the company still maintaning an IBM 704 mainframe: the costs of administration, maintenance and electricity are astronomical - yet the computing power of the system dwarfs a $100 smartphone! Yet, many companies still stick to their old systems because core business processes rely on them. Any effort to replace this legacy becomes unfeasible both because nobody has time and the effort is humongous.

Amortization in IT

The financial technique of amortization splits the cost of a finite-life product into a series of installments. and something similar happens in technology.
Danger: The analogy of amortization is highly flawed - your accountant would rip your head off if you tried to explain to them that:
  • You have no idea when the final installment will happen, and there will potentially be an infinite number of them!
  • If the present value of a system is lower than its cost, each installment will have a negative ROI.
  • You're very likely to pay installments long after the marginal value is zero.

Let's say, you your developers need a technical training; If you don't invest, their code is more expensive and less valuable than it could be - but if you do it, in a year, their code will still be outdated. You amortize not to generate profit, but to reduce loss.

IT is a money sink

Running an IT department is not just about having a handful of servers and building some business functionality.
This is how IT costs money:

IT assets are debt-riddled

Quick wins in IT tend to be even faster losses. Without a future-oriented sustainability strategy, you're no longer taking a controlled debt, you're baiting loan sharks!

If you don't (want to - or can) control your technology debt, your IT will eventually kill your business with skyrocketing costs at little to ROI!

Make technology debt visible and keep the interest at a maintainable level.

IT assets deprecate drastically

Any technology should be replaced within 5-7 years, so regardless of whether you're investing $1000 or $100m, be prepared to re-invest a similar amount in less than a decade. The more your IT is worth, the more it will cost you.

Without a deprecation control stratey, your IT will eventually be worthless, yet continue to drain money needed for investments.

Move towards continuous asset migration and decommissioning rather than investing heavily into maintenance and support.

IT assets won't amortize

Any technical or knowledge asset which isn't worth its cost by the time it becomes available, will never be. While cross-subsidization or taking a loss in order to avoid greater losses are both feasible options, throwing good money after the bad isn't a strategy!

The acquisition and maintenance of assets which "might have future value" is an unsound strategy that will most likely result in an economic shipwreck.

Avoid over-engineering, keep as little technology as possible and consider any investment "lost" the minute you signed the check.
Obtain technology only when it is needed, and only as much as needed.

An IT Investment strategy

Based on the above, let us now consider a few choices that you need to make with your IT:

  • Are you willing to consistently and scrutinously track and combat technology debt?
    • NO: You will lose cost control of your IT if you haven't already.
    • YES: Lapses cost twice. Be alert!
  • Do you have a sound mechanism for determining the net present and maginal value of your IT?
    • NO: Your ROI will most likely tank.
    • YES: When a processes' cost exceeds its marginal value, eliminate it.
  • Are you willing, able and ready to identify, replace or eliminate ineffective cost drivers?
    • NO: Your IT is a gambit with diminishingly low odds of success.
    • YES: Remember that yesterday's business driver can be tomorrow's cost driver!
  • Will you consistently invest a significant amount of time and money into the continuous learning of your IT workforce?
    • NO: Your IT is dead already, you may just not know it yet.
    • YES: Keep an edge. Avoid tailgating others.
  • Does your organization have the courage to admit and the grace to write off mistakes?
    • NO: Your IT will eventually be the Emperor's New Clothes.
      YES: Turn failure into learning, mishaps into opportunities for change.

If you have answered "NO" to any of the above questions, either re-consider your IT strategy or consider obtaining services from a provider who would answer all of them with "Yes".

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