Table of Contents

1.       Introduction

The goal of providing effective Information Technology Service Management (ITSM) within distributed IT environments is one of the key challenges being faced by many organisations today.

Following an initial period of rolling out distributed systems within IT environments, companies are now focusing resources on providing distributed management capabilities to support the delivery of the IT services. This activity is often referred to as distributed Information Technology Management (ITM) or Network and System Management (NSM). The basic goals of this activity, the support of IT Service Delivery, are not new - mainframe datacentres have conducted service delivery operations for many years. However, the technical challenges associated with managing truly distributed IT infrastructures have presented new challenges.

The current portfolio of distributed management frameworks and tools assures that the technical challenges of providing distributed ITM are no longer insurmountable. However, one issue that many companies encounter, when attempting to provision ITM solutions, is justification of the costs associated with these solutions. Often the costs of building a comprehensive ITM solution appear to be out of proportion with the perceived benefits. As a result, engaging with such an undertaking is either discounted as being unjustifiable or the scope is constrained to minimise cost.

This paper discusses the true role of ITM and its positioning within the broader topic of IT Service Management. Some common reasons for the difficulty in justifying expenditure on ITM solutions are explored. The concepts of Total Cost of Ownership and Total Value of Ownership are described. Important tactics and considerations when justifying expenditure in IT Service Management are discussed. Finally, some examples for evaluating the benefits associated with performing effective IT Service Management within a corporation are provided.

Armed with a realistic understanding of the contribution which ITSM can make towards the success of the business, IT organisations can provide a compelling justification for the expenditure to implement such a solution.

• Business Objectives. The single driver for an ITSM solution and its architecture are the fundamental business objectives which relate to the IT Services which will be provided and supported.
• Service Level Objectives are derived from the Business Objectives.
• Processes are defined to support the SLOs in conjunction with an appropriate Organisation structure.
• The Organisation structure is aligned to the SLOs and has its working practices and interfaces driven by the process definitions.
• Technology is defined and implemented to support the Organisation and Process model that has been established. The IT Management (or Network and Systems Management) solution is one component of this technology. Other components will include ‘Service Management’ software to support Helpdesk activities, change management, service-reporting etc.

3.    Taking a broader view.

The benefits of implementing an Information Technology Service Management system are varied and far-reaching within any organisation. No simple model exists for evaluating the benefits that a specific organisation will achieve. However, the diagram below illustrates typical benefits that may be achieved.

As can be seen, the benefits which effective ITSM can deliver extend from the IT department to the business and on into the customer base (although benefits to the customers of the business are viewed as business benefits). The benefits within the business will usually significantly exceed those within the IT organisation. This fundamental statement is based on the reality that the relative size of the IT organisation when compared with the business user population will be minimal. Hence, even small benefits for each individual business user will accumulate into significantly greater gains than can be achieved with a significant benefit for individuals within the IT organisation. In addition, the range of benefits that will be achieved within the business will be farther reaching and will extend to the actual customer base which the business services, thus resulting in improved competitiveness and customer loyalty.

One mechanism for examining the financial dynamics of IT Service Delivery is to consider the Total Cost of Ownership and Total Value of Ownership of the IT Services which are delivered.

3.1     TCO and TVO.

Total Cost of Ownership (TCO) is an industry term that refers to the actual costs associated with providing IT Services. This cost will include everything from the floorspace in the computer rooms, to electricity costs, maintenance costs, hardware costs, software license costs, IT staff costs etc. In addition the actual costs within the end user population are included – one typical example is the amount of time which workers spend involved in ‘peer support’. Peer support is time spent assisting colleagues with issues in using the IT solutions. For example, Fred cannot work out how to print an invoice on his local printer so he asks Mary for help. Whilst Mary is helping Fred, neither of them is actually doing their own job. Peer support is one way in which end user productivity is negatively impacted by poor Service Delivery. Other productivity losses because of poor service availability are also included in TCO.

Total Value of Ownership (TVO) refers to the total value delivered to the business by the IT Services. It includes all benefits arising from the IT Services and the IT Service Management solution which supports them. Some TVO components are the result of reductions in TCO (less failures in the network, brings higher availability of the services and reduces productivity losses in the end user population). Others are generated by direct improvements in the effectiveness of the business – faster time to market, improved customer satisfaction because of better customer care etc.

TCO and TVO are inextricably linked and it is, usually, unrealistic to consider one without considering the other. As an example, a $100,000 reduction in the costs of running the IT Services, gained by reducing staffing, may result in increased failures in Service Delivery because the IT organisation is further overloaded. This may result in a reduction in the availability of core IT Services, which in turn, impacts the ability of the end users to provide services to the customers of the business. Customer satisfaction will be impacted and churn (the rate at which customers are lost) will increase. The cost of acquiring new customers can be very high and the losses in customers caused by the satisfaction issue will be an ongoing burden that will soon outstrip the savings gained from the IT cost reduction. In addition, market research shows that each dissatisfied customer will tell 9 other people of their experience – thereby making customer acquisition more difficult / expensive.

This example can also be ‘turned around’. An extra $100,000 invested in the IT organisation and effectively spent on improving IT Service Delivery will result in improved IT Service availability, end users better able to service their customers, improved customer satisfaction and an improved market image for the company. The increased retention rate for existing customers coupled with an improved ability to acquire new customers will provide benefits that exceed the initial expenditure. In addition the increased control which the IT Organisation has of the IT Services will result in less reactive support and allow more time to be focussed on proactively addressing the needs of the business with new and improved IT Services. This will result in additional competitive improvements.

• Manage direct Costs of Ownership such that they are optimised for the value delivered by the IT Services. This is not the same as minimising the costs as this may have a negative effect on the Value delivered and the indirect costs.
• Minimise indirect costs of ownership (elimination of these costs would be ideal but is never possible).
• Meet or exceed targets for the direct value of ownership (based on the business case for each IT Service or investment).
• Maximise the indirect value achieved from each IT Service or investment.

3.2     Impediments to 'Taking a Broader View' (taking the Pleasurable approach)

• Focus on technology and not business. As has been noted, many organisations approach ITSM as a technical challenge. In effect they focus on implementing ITM / NSM rather than ITSM. Because of the technical aspects associated with ITM / NSM, the task of defining and driving forward the solution is delegated to technicians within the IT organisation. These personnel focus on the specific technology issues rather than the broader business view. In effect they are too close to the problem. This has many repercussions, often the ITM / NSM solution is technically over-specified - because there is no clear definition of what the business really needs an all embracing technical solution is identified. This solution will be over-costly, over-complex, and difficult to justify and will probably not address the real service delivery issues, which affect the business. If the implementation goes ahead it will often be deemed a failure as no clear deliverable will be produced for the business (i.e. no perceived benefits).
• Don’t want to take a risk with estimates. IT organisations are usually comprised of personnel with technical backgrounds - often extending to the middle and senior management within the organisation. Often these personnel have rigorous analytical backgrounds and are used to dealing with numbers that have high degrees of accuracy (capacity planning being a typical discipline where detailed analysis takes place). Many of the indirect benefits which are associated with ITSM solutions cannot be quantified with high degrees of accuracy - business productivity gains may be estimated as between £250,000 and £400,000. Because of the apparent uncertainty of these calculations they are discarded as being of insufficient accuracy to act as the basis for justifying the investment in ITSM.
• Fear of exposing failures. The fundamental basis for demonstrating the benefits of ITSM derives from the proposition that IT service delivery to the business will be improved. This gives rise to two issues. Firstly, many organisations (who do not have the benefit of any kind of service management solution) cannot produce the necessary 'evidence' to demonstrate that the existing levels of IT service delivery are less than desirable. Secondly, even though the necessary service delivery metrics are available many IT Executives will choose to not expose these facts to senior executives on the basis that they might be seen as an admission of failure within the IT department.
• It’s just not worth it. IT is often seen as a significant cost centre within many businesses. Essentially IT is a necessary evil into which money is poured with minimal resulting returns for the expenditure. This is often the motivation for seeking to 'outsource' IT activities as cost constraint is seen as the only effective means of containing the unjustifiable expense of IT. If this attitude is endemic within a company then attempts to reposition IT as a profit centre into which capital invested returns significant benefits within the business will be deemed a pointless exercise.
• Implementing ITSM is too hard. Implementing comprehensive IT Service Management is a complex and potentially costly exercise. It involves considerable change to the IT organisation structure, the relationships between the IT organisation and the business, the establishment of new processes to support IT Service Management and, finally, some underpinning technology. Many IT organisations look at this proposition, gravitate to the comfort zone – technology – and ignore the organisational and process issues (which can constitute the most significant cost and time elements). This approach will inevitably fail. Consider buying an aircraft and trying to fly it without investing in the right organisation structure (crew) and processes (how to fly the aircraft, how to navigate, how to get clearance for takeoff etc.).

3.1     Tactics for Justifying ITSM (taking the Business approach).

• Understand what it is that IT delivers to the business. If an IT Services catalogue does not exist then create one and ensure that all relevant parties understand it. It should include all application services and labour based services (helpdesk, PC installs etc) delivered by the IT organisation. Catalogue entries will consist of a high level definition of the service in user terms (i.e. what application name or functional area do they use to describe it), along with the agreed and current service levels if known (availability, performance etc). This will be the basis for cost and value analysis and discussions.
• Get the right level of sponsorship. ITSM solutions must be justified, designed and implemented from the perspective that they are a business initiative and not an IT initiative. Ensure that the sponsors for the ITSM programme have the authority to authorise the changes and expenditure that will be required and that they understand the benefits of the ITSM programme and fully support it.
• Focus on the business and not the technology. The ITSM programme goals must relate to improving the effectiveness of the business and not to addressing technology issues. It will often be the case that achieving these goals will require improvements in the ability to manage distributed technology. However, the specifics of the requirements for the technology management initiatives must be derived from actual business goals. In effect any activity at the technology level (e.g. improved monitoring & proactive alerting) should be aligned with a specific business objective (reduced downtime providing improved productivity and customer satisfaction).
• Work with the business to gain agreement of the potential benefits. The financial justification for an ITSM programme should be a co-operative effort between the IT organisation and the business managers. The ITSM programme is, after all, a business initiative. The IT organisation will be able to evaluate their own 'internal' benefits in terms of increased productivity, more time for proactive planning and activity, the ability to develop and deploy new IT services more rapidly etc. The IT organisation must also estimate the predicted improvements in Service Delivery (response time, availability, helpdesk call turnaround, ability to rapidly deploy new services etc.). The business managers must assist in evaluating these predicted benefits with respect to their own departments. These estimates will be in terms of increased productivity, reduced product development costs and time to market, enhanced customer service and loyalty within the customer base, competitive advantage from new IT services being available more rapidly etc.
• Be comfortable with estimates. It is unlikely that the actual anticipated business benefits can be calculated with high degrees of accuracy (many of them will be indirect benefits when considered in the context of the ITSM solution). More typically, ranges of potential benefits can be estimated. For example, improved customer loyalty will result in losing between 50 and 100 less customers per month thus translating into savings of between $5,000 and $10,000 per month (assuming it costs $100 to acquire a new customer in terms of marketing, pre-sales, administration etc.). Note that the only source of this type of information within a company will be the business managers. Once the estimated benefit boundaries have been determined then a policy for deriving the anticipated benefits must be agreed between IT and the business managers and applied - take the lowest predicted benefit value ($5000), or the mid-point between the predicted values ($7500) for example. Obviously, using the upper value will tend to lack credibility and is also a high risk strategy as the project will be deemed a failure if the predicted benefits are not achieved.
• Use the business goals as measures. Once the business benefits that are anticipated have been agreed, mechanisms for establishing the progress in achieving these measures must be defined. This will be one of the fundamental means of demonstrating the value that has been delivered through the investments made in ITSM.
• Be open about the current Service Delivery performance. IT executives must position ITSM as a fundamental component of a Total Quality Management (TQM) programme within the IT organisation and the business. TQM is based on the tenet that no organisation or process is ever perfect - in a changing world it is impossible for any static solution to be perfect. However, by applying defined iterative mechanisms for planning, implementing, measuring and reviewing the service delivery environment it is possible to continually improve and adapt the IT service delivery organisation and environment in line with the changing needs of the business. In support of this approach any existing service delivery metrics which exist (no matter how 'bad' a story they portray) must be presented to senior executives as a valuable source of information for the first stage of the ITSM TQM 'loop'. In addition these metrics provide the ability to demonstrate that progress is being made during subsequent iterations of the TQM process. Where an organisation is ISO9000 (or BS5750) registered, the ITSM processes should support the ISO9000 registration.
• Understand and market the contribution of IT. In organisations where IT is perceived as a cost centre the focus will typically be on cutting the cost of IT. Unselective outsourcing (driven by the Board) is a typical response. It is essential, in these environments, to establish and demonstrate the close alignment of the IT Services with the business and the delivery of real benefits, in terms of bottom line profits which are directly related to the efforts of IT. Only when this has been understood will a plan for improving IT Service Delivery, through an ITSM programme, be realistically considered. The first activity must be an active campaign by the IT Executives to establish and market the business value of IT to the Board and senior business managers.
• If you get stuck then take a step back. When struggling to understand the possible benefits of ITSM for a particular IT Service, refer back to the original business case for implementing the IT Service. There should be a business case, including a statement of the anticipated benefits, for each of the IT Solutions used by the business. This information can be used to derive current TVO estimates and predictions of potential benefits / losses if the ITSM programme is or is not undertaken. If a business case does not exist then talk to the business managers about the benefits that they perceive from using the IT Service. Ask questions about the impact on their departments and goals when the IT Service is slow or if it were unavailable for an hour or day.
• Substantiate your case for ITSM with Industry examples. Look for examples in your industry of cases where inadequate IT Service Delivery has resulted in significant losses or bankruptcy. These examples can serve to illustrate ‘worst case’ scenarios associated with not undertaking the ITSM programme – but should be backed up with a concise explanation of the benefits of the ITSM solution as well (don’t paint just a picture of doom & gloom!). Refer to the computer press (who love to publish these stories) and search on the Internet for this type of information. Vendors marketing presentations for ITM and ITSM software and services can be useful sources of this type of information (attend presentations or visit web pages).

4      Justification Examples.

The following examples are not intended to show detailed analysis of the business processes and benefits of specific companies. Instead, they illustrate some of the areas of potential business benefit which may be achieved by applying effective ITSM into distributed IT environments where there was a limited solution or no solution previously. As has been noted there is no simple model for deriving the benefits of ITSM within any company, however, the examples provide some ideas that may be applied. The key factor when trying to derive the business benefits associated with effective ITSM is to understand the business drivers behind the provision of the IT services and the implications of those IT services being unavailable or performing at less than optimal levels. The implications must be considered not only from the perspective of the IT service users within the business, but also from the perspective of each of the other components in the 'value chain' ending with the final customers of the business.

• Cost per employee is based upon the salary cost plus overhead costs (floorspace, computer systems, facilities etc.) for customer care staff only. Productivity losses of one hour per user per week would account for 1/37.5th of the annual staff / infrastructure cost. ($15,000,000 / 37.5 = $400,000).
• Customer acquisition costs approximately $100 per customer. 12,000 customers lost each year means that 12,000 additional customers have to be acquired just to 'tread water'. 12,000 x $100 = $1,200,000.
• Cost of late billing is based on the lost interest charges associated with not having customer payments in the bank for one extra day, based on a monthly billing cycle.
• No consideration is given to the effects of not being able to introduce new services rapidly - such as per second billing - either to differentiate the service offering or respond to efforts made by the competition. In effect slow time to market for new service features will reduce the take up rate of new customers and increase the loss rate in the existing customer base as customers renew contracts with other service providers with better offerings. The worst possible scenario is a shrinking customer base.
• No consideration is given to potential attrition of staff caused by dissatisfaction with the working environment. In all likelihood any staff who leave will go to work for a competitor - and potentially take valuable 'mindshare' with them.

4.2    Financial Environment.

A Merchant bank has 200 traders world-wide using front-office PC clients in co-operation with 50 back-office mid-range UNIX® application servers. The systems provide information about the risk positions, profit and loss, market forecasts etc. to support the bank in effectively trading with their customers financial portfolios.

Traders need to make rapid, effective decisions in order to focus on their transactions making profit. A trader relies on the information systems for command, control, communication and market information to support submission of trades and accurate forecasting of the market in order to achieve maximum profit. In this aggressive financial arena every second of delay in making decisions could potentially cost thousands of dollars.

Whilst external market data feeds are usually subject to rigorous service level agreements with the service provider, the internal systems and infrastructure are the responsibility of the IT department.

Slow performance and poor availability of this "lifeline" infrastructure will inevitably impact on the timing and quality of financial decisions. Global "follow the sun" trading relies heavily upon the wide area network infrastructure. Failure of this infrastructure could potentially prevent the Bank from completing trading activities or covering potential financial exposures. For example losses in New York being balanced by profits in Tokyo.

Typical markets feed systems are engineered to provide updates on the current market position within seconds. A chronic performance problem within the local trading floor infrastructure will mean that traders receive out of date information and are unable to trade effectively. Small losses for a single trader are likely to amount to thousands of dollars - if this situation is prevalent throughout the operation then losses of millions of dollars can easily ensue.

With time critical systems such as these any additional delays introduced by bottlenecks or problems in the infrastructure will cost money. It is easy to see that the ability to detect and alert performance and availability issues in real-time is of paramount importance.

This example provides no hard figures to support investment in ITSM. However, it is quite apparent that one 'bad' day could result in each of 200 traders being unable to manage their trading risks effectively and each could loose thousands of dollars. Optimistically this might be constrained to $10,000 per trader (total loss $2,000,000) in one day. Pessimistically this figure might increase by a factor of ten.

If there is any doubt about the importance of these financial control systems then the Barings Bank event in 1985 should serve as a salutary lesson. Barings Bank was one of the oldest Merchant Banks in London. Following some ‘exotic’ trading by one of their employees in Singapore, the bank collapsed with losses exceeding $1 billion. One of the key findings of the various investigations into the collapse was the inability of the IT systems to adequately track and report on the activities of the traders. In Barings case the necessary control systems did not exist, but even if they had, poor availability or performance of the control systems through inadequate ITSM could have precipitated the same outcome.

4.3     A Production Environment.

• Time saved by the support staff and invested in infrastructure development has been ignored.
• Improvements in time to market resulting in avoidance of late delivery penalties and other commercial improvements (competitive improvements etc.) have not been quantified.
• The estimate of one hour of "down" time per engineer saved per week is conservative.
• Engineer’s annual costs of $100,000 are conservative.

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