The phrase "vive le difference" is as much a call to remember what is common as it is a call to celebrate what is unique. In the business world, the differences between marketing, sales, finance, manufacturing, service, etc., can be significant. Not surprisingly, the business systems that support these distinct functions will themselves exhibit important differences.

But as much as 80% of IT investments -- infrastructure, personal systems hardware, help, networking operations, etc. -- are 100% common across business functions. The remaining 20%, usually specialized applications, often are the central source of any business value generated by IT. Specialized application needs must be protected, but it's equally important that decision making processes appropriate for crafting and sustaining specialized applications are not employed to make common decisions.

IT and business groups share responsibility for allowing unnecessary uniqueness to creep into business system design and implementation activities. Politics, management perks, and pet technologies all infect delivery activity, adding complexity to infrastructure and application stacks that creates cost without adding any appreciable value. The only way to ensure that rational application, infrastructure, and user decisions are made consistently is to employ money: the standard for rationalizing economic resources.

Through pseudo-pricing mechanisms, business decision makers can express their specialized needs by agreeing to pay a premium for specialized services. Similarly, IT organizations can articulate the benefits of common services by offering leveraged services that, usually, will go down in price as scale increases. Finally, computing elements that appear to be clutter can be made prohibitively expensive to the business to maintain -- since they usually are.

The notion of using degree of commonality to establish pseudo prices capable of leading to more rational resource allocations is used in all business to some degree. For example, IT chargeback is a pseudo price. However, what is new is the idea that pseudo prices can be set utilizing metrics related to utility infrastructure and application technologies, like service-orientated architectures or project management services. From this kind of exercise, a portfolio of IT delivery packages can be established, each class defined in terms of a common approach to developing and applying pseudo prices.

Figure 1 details one example of an IT delivery portfolio based on pseudo prices. It is an aggregate of approaches we've seen in working with IT clients. Ultimately, decisions regarding how best to render pseudo pricing models are developed to accommodate the impacts of investment leverage, pricing disciplines, and investment decision processes in IT is aggregated from multiple real-world examples. For example, businesses operating in markets featuring significant merger and acquisition activity may have to operate physically distinct networks by geographic or institutional domain to facilitate the buying and selling of operating units.

Figure 1: FOUR CLASSES OF IT SERVICE DELIVERY THAT CAN BE PSEUDO-PRICED

As IT organizations are increasingly blended with outside suppliers of IT-related services, from hosted applications, to first-line help providers, to outsourcers, establishing pseudo-prices will become both easier and more essential. Indeed, IT organizations increasingly utilize supplier prices as benchmarks for their own cost structures, factoring scale economies, marketing and sales costs, and profit requirements.

The degree of granularity for IT offerings is dependent on multiple factors, such as the business's reliance on third-party service providers (more reliant usually equates to more granular pricing structures), the relationship between business risk and IT risk (the tighter the relationship, the greater the willingness to price IT services), and, not surprisingly, IT simplicity (simpler encourages pricing conventions).

All IT organizations should begin experimenting with different approaches to recovering delivery costs as a means of encouraging greater commonality - and therefore simplicity - in IT delivery forms.

IT organizations today can more accurately, reliably, and cost effectively institute pseudo pricing models in their delivery streams. Doing so helps to reveal real business consumption of IT resources, to rationalize IT investments, and to encourage exploitation of different, potentially highly favorable sourcing arrangements utilizing real pricing insight.

Given the business trend to more profoundly mix internal and external means to deliver IT services, avoiding pseudo pricing is a prescription for IT disaster. After all, if we've learned anything about IT/business decision making in the last few decades, it's that business executives favor the approach that offers not only the lowest cost, but the simplest cost. Unless IT organizations begin presenting prices for offerings, they'll find themselves at the mercy of external organizations that will.

» posted by abennett

Appergy, Inc.

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