Monday, December 26, 2011

The Cost-Value Requirement

Dave Bressler has a wonderful blog, if I agreed with him, it would be less wonderful.  His post today on the "Cost-Value Conundrum" is a case in point.  In talking about replacing phone systems, he brought up an interesting and subtle point, what does it mean to meet business requirements.  I know the phone system scenario, because we replaced our phone system last year, so I'll provide numbers to back up my point.

If you do an RFP to look for phone systems, you find there are a number of alternatives and those alternatives have a wide range of prices.  For a seventy person company, there were options over $200K.  They were excellent systems with many intriguing features.  However, we went with a system that cost $34K that is good enough.

There's an interesting question in the IT world, when is a requirement a "nice to have" and when is something "good enough"?  And the follow on is, how much are you willing to pay to move from "good enough" to "nice to have"?

I would put it to you, that in this brave new business reality, "nice to have's" and "best of breed" will vanish from the business lexicon. The future for IT Executives is exactly what is described in the post you linked to, how does an executive cut CAPEX by 50% and increase capabilities?  That author didn't go into details, but I bet OPEX is also being cut.  Hell, any imbecile can cut CAPEX by 50% if no one's watching OPEX...

If you have to cut both, how do you do it?  By using RFPs to clarify requirements, understand the costs and shift power away from the vendor to the buyer.  That's how you buy a new phone system for $34K rather than $200K+.  Another example: A business can buy an onsite ERP systems for $1mm plus, which also requires hiring two employees, each costing $120K a year. Or that business can get a cloud based ERP at $50 per user per month that requires no additional employees be hired.

The cloud based ERP system will cost about $60K per year, which is less than the maintenance costs for the onsite system and you won't hire any additional employees.  Oh, and with the cloud based system, when you need customization, you hire a developer through Elance for $35/hr rather than through a consulting company for $285/hr.

That is the "Cost-Value Conundrum."  Every IT Executive should be given the mandate "Give me better capability than I have today and cut your budget by 50%. It's up to you how you achieve that between OP and CAP.  Oh, and I'm going to cut your budget again next year and the year after that too."

Yes, you have to understand requirements, but also understand that IT is a cost center, just like accounting or HR or building services.  The question is, how to provide the business the IT services or accounting services or HR services they need at the lowest cost?  Unless your IT services can move the dial by increasing revenue, they better move the dial by decreasing costs. In the current environment, there are plenty of options to decrease costs while increasing value and revenue.

That is understanding that doesn't require special training to communicate.