IT Spend Analysis

IT Spend Analysis Best Practices

IT leaders are often asked questions about IT spend (see sidebar). Most of the time, a company’s financial systems or chargeback systems do not provide the view required to answer these questions. An IT spend analysis can solve the problem.

An IT spend analysis is typically performed by having the IT finance team pre-populate a customized financial template. Key IT managers then use the template to break the spend down into the required categories. Given the resources involved in the effort, it is important to get the data gathering template right the first time and be efficient
with the time spent completing the template. The best practices below will help to avoid common pitfalls:

Anchor the analysis to financials

Use the company’s financials for the in-scope cost centers as the anchor for the IT spend analysis. In other words, the total spend of the in-scope cost centers from the company’s financial system will equal the total from the IT spend analysis; it is only the classification of the spend that will be different. Without an anchor, capturing spend will be like “nailing jelly to the wall” because spend can easily be shifted out of the scope of the analysis.

Align data gathering to the goals of the analysis.

The data requested for the analysis should be the most efficient set possible that meets the goals of the analysis. For example, if the goal of the analysis is to compare IT application development spend across geographical business units, the spend categories used might be new development, discretionary maintenance, non-discretionary maintenance and infrastructure. In this case, it is not necessary to break infrastructure down into data centers, networks, end-user computing, etc., (the infrastructure total is needed to anchor to the financials). If the goal was infrastructure focused, then the infrastructure categories would be more detailed, and the application development spend would be lumped into one category (to anchor to the financials).

Understand timing implications

The ideal time to perform an IT spend analysis is after the fiscal close because a full year of financial actuals exists and the data will be current. Completing an IT spend analysis in the third or fourth fiscal quarter requires making a decision: anchoring into actuals from the previous fiscal year (data may be stale) or anchoring into forecast numbers (data may have low accuracy). In either case, the goals of the analysis should drive the timing decision.

Use a cash view

A cash view (capital plus operating expense without depreciation) is aligned with the period being analyzed. Operating expense (expense view) includes deprecation which is capital spent during prior periods. Using an expense view can bias analysis results towards historical spend rather than current spend. Some companies are very focused on expense spending and executives may not recognize “their numbers” when presented in a cash view. In these cases, it is still better to use a cash view for the analysis, but it will be important to allocate additional time to educate stakeholders on the advantages of the cash view.

Summary

An IT spend analysis can generate insights and solve pressing questions about IT spend. Adopting best practices will help to get insightful results from the analysis and avoid the cost of rework.