The method of calculating the optimal level of costs for corporate IT

How to stop being afraid of technologies and start applying them effectively

Luddites in 1812 destroyed the machines. Around the same time, executives and technical specialists are arriving at optimizing IT costs.

How many specialists are needed to maintain 268 computers? 14 servers for 450 users - is it a lot or a little? Our admins have bought such a program - is this the right decision? - such questions are asked to me by company executives when they are trying to figure out whether their company's costs for corporate IT are optimal or not. Personally, I have no monosyllabic answers to these questions. But even more - I believe that monosyllabic answers to such questions will only harm the company.

The fact is that corporate IT is not just a set of equipment, programs and unshaven people in sweaters with deer. It is also a working tool on which the efficiency of the company depends. For this reason, talking about the optimality of IT costs, not understanding how these very costs affect the business, to put it mildly, is short-sighted.

Below, I want to share my approach to optimizing corporate IT costs. To do this, I will try to lucidly explain how a business benefits from information technology, how to calculate this benefit and correlate with costs, and offer one of the methods for calculating the optimal level of IT costs. I hope that my article will help some company executives and technical specialists to reconsider their views both on corporate IT in general, and on optimization of its associated costs in particular. At the end of this entry and turn to the point:

I have broken the whole statement into five consecutive questions:
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• When are IT costs in companies optimal, and what is the optimal cost point?
• How to calculate the business benefits of information technology and their costs?
• How are IT costs and business benefits related?
• How to calculate the current value of the optimal IT costs?
• How to, how not to, and why optimize IT costs altogether?

So, in order:

When are IT costs in companies optimal, and what is the optimal cost point?

No one has ever forbidden companies to work "in the old manner" - to draw up contracts by hand, to go to the bank with bills, to make copies of documents for carbon copy. Nobody ever required companies to buy computers and hire admins. Why then are computers used in business everywhere?

The fact is that information technologies have changed the paradigm of office work just as machine tools once changed the production paradigm. Computers have reduced the staff of estimators, typists, accountants, accountants and lowered the professional requirements for office professions, reducing them, in fact, to PC operators. Where previously there were required several qualified specialists, now one user with a computer is enough.

Companies can still work "in the old way" and contain a huge staff of office workers, but with the current level of technology development, such costs for office paperwork will be disproportionate to the result or suboptimal. Companies can also try to replace all office workers with robots with artificial intelligence, but with the current level of technology development, such costs for office paperwork will also be disproportionate to the result or suboptimal.

Information technologies increase the productivity of office workers, but are not yet able to replace them completely. Therefore, the economic effect of the use of information technology depends on the balance between the cost of office staff and the cost of information technology. As always, when choosing between the two extremes, there is a certain golden mean, which I call the point of optimal cost:

The point of optimal IT costs is the level of IT costs at which total office expenses, including IT costs, reach the lowest possible value.

It should be noted that quite certain equipment, programs and technical solutions stand behind any point of optimal costs. But technical progress, as well as business, does not stand still, and the point of optimal costs changes with time, while the equipment and programs once acquired remain unchanged. And if the transition to a new point of optimal costs associated with the rejection of previously made investments, it only worsens the economic effect of the use of information technology. For this reason, when evaluating the optimality of IT costs, I use the following criterion:

Current IT costs are optimal when they bring a company closer to achieving an optimal cost point and allow it to stay at that point in the long term.

Here I risk completely confusing you, so let's start small — by calculating the optimal cost point for the company at the current time. In order to do this, you will have to learn how to count the business benefits created by information technologies and correctly relate them to IT costs. Therefore, we proceed to the following question:

How to calculate the business benefits of information technology and their costs?

Information technology increases the productivity of office workers by simplifying and automating day-to-day office routines. Through the use of information technology, the company reduces the labor costs of office workflow and saves office hours. That is why I prefer to consider the benefit of information technology for business in the saved office hours due to their use.

To compare the benefits of information technology with their costs, both of these values ​​must be brought to a single system of change. To do this, you can convert the time saved by office employees into money, but such absolute figures differ from one company to another and are not very informative. For this reason, I prefer to measure IT costs and saved staff time in relative terms - as a percentage of the average monthly payroll of office workers (PF).

Since IT costs are divided into operational and capital costs, in order to correctly compare business benefits with information technology costs, I adhere to the following principles for calculating these values:

When calculating IT costs, it is necessary to standardize all IT costs over their useful life. If the server is bought for 5 years, then it costs the company 1/60 (5 * 12 months) of the cost of its acquisition monthly. If the project is done for 3 years, then it costs the company 1/36 of its value monthly. Received average monthly costs must be correlated with the average monthly payroll of office employees.

When calculating the business benefits of IT, it is necessary to measure how much time it saves IT office staff daily / weekly / monthly, and to correlate the figure with the total working time of employees during these periods. If employees work on average 8-9 hours a day or about 500 minutes, then every 5 minutes of the daily routine costs the company 1% of the payroll. If information technology reduces the daily routine by at least an hour a day, then they save companies 12% of the payroll of office workers.

Further in the article, under IT costs and business benefits, I will imply values ​​calculated according to the principles above.

For companies that do not work for the first year, IT costs can be roughly estimated by considering all the costs for equipment, programs, administrators, communication channels and cartridges for 4-5 years and relating them to the payroll of office employees for the same period. In my experience, for most companies, IT costs for such a calculation model are in the range of 5 to 15% of the payroll. Moreover, this ratio depends mainly on the average wage in the company, and not on the steepness of internal IT.

In the case of calculating the absolute benefits of IT, everything is somewhat more complicated. Over the years, few people remember how much time is spent on drawing up contracts on a typewriter, correspondence with customers through Russian mail, drawing on drawing boards and keeping inventory records in a notebook. The absolute benefits of IT have long been worthless. But if you try to imagine life without computers, it becomes clear that even the simplest computer and printer (no more than 4% of the payroll in the long term) saves at least a couple of hours of work per day (each hour of work is 12% from payroll).

If my task now was to justify the profitability of corporate IT, then on this note it would be possible to finish the article. But my task is to find the level of IT costs that will bring the company the maximum economic effect. And for this you have to deal with the following question:

How are IT costs and business benefits related?

All parameters of information systems that affect the productivity of office workers can be divided into five general categories:

1. Information Systems Functionality
   
   Functionality is a set of actions that users can perform in an information system. It is the functionality of information systems (and the ability to use them) that determines which office tasks can be simplified or automated at all, and which ones will have to be done “in the old manner”.
   
   
2. Ease of working environment
   
   The simplicity of the working environment is the number of actions taken to achieve the desired result. The need to constantly search for documents in the file server, enter dozens of usernames / passwords for access to different systems, enter the menu of a certain level of nesting, or run to the printer to the far end of the corridor only complicates the work environment and takes staff time.
   
   
3. Ergonomic user workstations
   
   Ergonomics is the compliance of the workplace with the physiological characteristics of a person. If employees are not comfortable sitting at the computer, if they have sore eyes from the monitor or fingers from the keyboard, then they are more distracted and work less. No motivation system will stand before the eyes in the eyes of a cheap monitor or before back pain due to an uncomfortable chair.
   
   
4. Speed ​​information systems
   
   With the speed of information systems, everything is simple - employees have to wait for the system to figure out (it will start / calculate / provide the necessary information) or not. The higher the speed of the systems, the less time the office staff will lose in anticipation of a response from it.
   
   
5. Reliability of information systems and prompt technical support
   
   The reliability of information systems and the efficiency of technical support depend on how much time office employees have to spend on communicating with IT specialists instead of working. True, in addition to communicating with admins, in some cases, office employees also have to redo work that was lost as a result of a failure, or apologize to customers for disrupting deadlines.
   

Each of the above categories may limit the beneficial effect of other categories. If information systems in a company either constantly break down, or wildly inhibit, or do not have the functionality necessary for work, or if the working environment of office employees is too complicated or inconvenient, then it does not matter how well everything else is done - the productivity of office employees will be low.

If we turn to analogies, all the above criteria affect the productivity of office staff as well as the five valves on one pipe affect the volume of fluid flowing through it. If one of the valves is screwed to full, then it doesn’t matter how wide the other four are open - the volume of liquid to be passed through will be low.

But if in the case of a pipe, it is enough to spin all five gates, then in the case of information systems, it is not affordable for most companies to roll out all five quality categories to their fullest extent. As a result, each of the categories remains “half-open”, and the consequence of such a “half-openness” is the presence of distortions in which one of the categories limits the performance of the others. Such a bias means that the money invested in IT does not give a complete return or, in another way, the money invested in IT does not work efficiently. And here we come to the following important definition:

An effective configuration of information systems is such a set of technical solutions, as well as their configuration and maintenance parameters, which, for the current level of IT costs, ensure the highest possible productivity of office employees.

If we now make up the dependence of the business benefit on IT costs, in which each level of costs corresponds to the most effective configuration of information systems, we will get some optimal dependence, which I will denote in the future as P (x):

The optimal dependence of the business benefits (P) on the costs of information technology (x) is such a relationship in which each level of IT costs corresponds to the most efficient configuration of information systems for this level of costs .

If we sketch out the dependence of the business benefits on IT costs, then the optimal dependence P (x) on the graph will look something like this (red dotted line):

Figure 1. Sketch of the optimal dependence of the business benefits on the costs of information technology (P (x) - red dotted line on the graph).

A few explanations of the sketch above:

1. As I measure the business benefits in the saved payroll of office employees, the maximum increase in the business benefits from the use of information technology relative to the current value cannot exceed the current labor costs of office paperwork. Or else, the function P (x) has a limiting value. True, in order to reach this limit, you will have to replace all office employees with robots and neural networks.
   
   
2. There is a level of IT costs at which the costs and benefits for the business of information technology are equal. To indicate this point in the sketch, I spent the line P = x (blue dotted line). With the current level of technology development, the replacement of office workers with robots and neural networks is confidently moving to the right side of the chart.
   
   
3. Line x = xcur and point Pcur is the position of the current level of IT costs and business benefits of using information technology. Usually in companies, the benefits of IT are less than their possible effective value - I previously explained why this is happening.
   
   
4. Point P0, x0 - this is the point of optimal IT costs at which the costs of office workflow, including IT costs, reach the minimum possible value. After point x0, any additional IT investment does not pay off.
   

Now, in order to find the optimal cost point, we only need to construct the optimal dependence P (x) and find on it the minimum value of the point x0 for which for any x> x0 the ratio (P (x) -P (x0)) / (x-x0 ) <1. It's time to go to mathematics:

How to calculate the current value of the optimal IT costs?

Here I must make a reservation that building an optimal P (x) dependence for an abstract company is not an easy task, if it can be solved at all. When building the optimal dependence P (x), it is easier for me personally to build on the current state of affairs in the company. In this case, the dependence P (x) can be represented as follows:

P (x) = Pcur + P (x1, x2, x3, x4, x5)

Where:

P (x) is the total business benefits of IT,
Pcur - current business benefits of IT,
x = xcur + x1 + x2 + x3 + x4 + x5 - total IT costs,
xcur - current IT costs,
P (x1, x2, x3, x4, x5) - the function of saving employees' working time, depending on the improvement of one of the five quality categories of information systems (functionality, simplicity, speed, ergonomics, reliability of information systems, and prompt technical support),
x1, x2, x3, x4, x5 - additional costs for each of the quality categories.

Since, within the framework of the equation above, Pcur is a constant, to find the optimal cost point, it is sufficient to construct the optimal dependence of the function P (x1, x2, x3, x4, x5) on the additional IT costs (x1 + x2 + x3 + x4 + x5).

All further decision is based on the dynamic programming method, which is used both in the theory of computing systems and in such an exciting discipline as “operations research” (in Wikipedia there is a history of the emergence of this discipline - I recommend reading).

To calculate the optimal form of the function of the five variables P (x1, x2, x3, x4, x5), you must first calculate the optimal form of the five functions of one variable: P (x1,0,0,0,0), P (0, x2,0, 0.0), P (0.0, x3.0.0), P (0.0.0, x4.0), P (0.0.0.0, x5). To do this, it is necessary to figure out what the company is under-paid for at the moment for each of the quality categories, with which these losses are connected and how much it costs to eliminate them.

To measure current losses in each of the quality categories, you need to find answers to five questions:

1. How much staff is losing time due to lack of functionality?
2. How much time does the unnecessary system complexity take away from employees?
3. How much time do employees spend on “waiting for system response”?
4. How much time do employees take a break from the computer during the day?
5. How long do employees stand idle due to system failures or the need to communicate with tech support?

To answer these questions, you can use monitoring systems, application systems, user surveys, benchmarking and analysis of workflows. Determining the current loss of working time, it is necessary to find the sources of these losses and analyze the cost of eliminating them.

Having compiled a complete list of losses and costs to eliminate them, and also reducing these values ​​to a unified system of measurement (in thousandths from the payroll), you can proceed to the next step - to compile optimal numerical sequences of five functions of one variable. To do this, it is necessary to sort out the possible amount of investment in each of the quality categories with equal steps and for each investment size to choose those technical solutions that promise the maximum economic effect. The numerical functions obtained by such principles will look something like this (the numbers below are invented and used to demonstrate further calculations):

xi	P (xi, 0,0,0,0)	P (0, xi, 0,0,0)	P (0,0, xi, 0,0)	P (0,0,0, xi, 0)	P (0,0,0,0, xi)
one	0.5	0.5	3	five	one
2	0.5	one	3	6	four
3	9	one	3	eight	6
four	ten	14	eight	eight	ten
five	14	18	9	eight	17
6	15	20	15	eight	nineteen
7	15	21	15	eight	20
eight	15	22	15	eight	21

Table 1. Illustration of the numerical dependence of each of the quality categories of information systems on additional investments in them. The numbers in the table are used to illustrate the calculations and are a figment of the author.

A small clarification - xi - is the amount of additional investment in each of the quality categories, relative to the current size of costs. It should be defined as the difference between the cost of the used solution and the new one. That is, xi is not the cost of a new steep piece of iron or a program, but the difference in the cost of a new steep and old simpler (considering their useful life).

If we assume that all six quality categories do not affect each other and are additive (in practice this is not quite the case), then the function P (x1, x2, x3, x4, x5) can be represented as follows:

P (x1, x2, x3, x4, x5) = P (x1,0,0,0,0) + P (0, x2,0,0,0) + P (0,0, x3,0,0 ) + P (0,0,0, x4,0) + P (0,0,0,0, x5)

Based on this assumption and knowing the numerical dependencies of each of the five functions of one variable, you can make an optimal dependence of P (x1, x2, x3, x4, x5) on Δx = x1 + x2 + x3 + x4 + x5, selecting for each investment size such configuration of functions of one variable, which give the maximum economic effect:

∆x	Maximal solution space	The maximum value of P (x1, x2, x3, x4, x5)	Right derivative dP / dx
one	P (0,0,0,1,0)	five	3
2	P (0,0,1,1,0)	eight	one
3	P (3,0,0,0,0), P (0,0,1,2,0), P (0,0,0,1,2)	9	five
four	P (0.4,0,0,0), P (3,0,0,1,0)	14	five
five	P (0.4,0,1,0)	nineteen	four
6	P (0.5,0,1,0)	23	3
7	P (0,5,1,1,0)	26
eight
....
31	P (5,7,6,3,8), P (5,8,6,3,7), P (6,7,6,3,7)	79	one
thirty	P (5,8,6,3,8), P (6,7,6,3,8), P (6,8,6,3,7)	80	one
31	P (6,8,6,3,8)	81

Table 2: Illustration of the methodology for finding the optimal dependence of business benefits on IT, depending on costs. All values ​​are in the thousandths of the payroll.

I constructed the table above based on the assumption that all five quality categories are independent of each other and are additive. In practice, this is not quite the case; therefore, the resulting space of optimal solutions should be additionally checked for additivity. According to the results of the check, some of the maximum solutions may decrease due to the effect of dyssynergy, while others, on the contrary, may increase due to the effect of synergy.

Having checked all interim solutions for synergy / dissynergy, one can proceed to the calculation of the optimal cost point. For this, moving in the direction of increasing costs, for each point you need to check the value of the right derivative dP / dx. Points at which the value of the right derivative is less than or equal to one should be checked for the relation (P (x) -P (x0)) / (x-x0) <1, for all x> x0, where x0 is the current point. The first point at which this relationship holds, and will be the point of optimal costs.

In the sketch below, I will note how the calculated area will look like:

Figure 2. Illustration of the optimal dependence of P (x) on the results of the calculation (blue line in the graph).

Now it remains to be told what to do next with this point of optimal costs:

How to, how not to, and why optimize IT costs altogether?

As I said earlier, the point of optimal costs changes over time due to business changes or changes in technology. Only the previously acquired equipment, programs and technical solutions remain unchanged. Therefore, in order to achieve maximum economic effect from corporate IT, it is necessary to take into account possible changes in the optimal cost point in the future. In practice, this means that:

• IT capital expenditures should be no lower than the current value of the optimal cost point and take into account its possible change in the future, if such a change could lead to premature write-off of technical solutions related to capital expenditures.
  
  
• Operating expenses for IT should ensure the maximum long-term economic effect for the company, taking into account both possible changes in the value of the optimal cost point in the future and additional costs that may be required for such a change.

But often, companies do not care about the economic effect of the use of information technology, and by optimizing the cost of information technology means only one thing - reducing IT costs. The principles of this optimization are somewhat different:

• Invest in IT only when absolutely necessary.
• Acquire technical solutions in sufficient size to solve the problems, but no more.
• Hard price qualification - choose the cheapest solutions from all possible alternatives.
• Capital costs, if possible, be transferred to operating expenses through the rental of equipment and programs, cloud service subscriptions.
• Configure and develop information systems exclusively by the staff of full-time specialists, without the involvement of external contractors.

The problem is that such optimization does not give the desired savings - equipment and programs acquired according to such principles have to be written off ahead of time, rent in the long run eats up more money, and staff specialists lack the strength to implement all the functionality embedded in information systems. In the long run, the company does not save anything, but it reduces its effectiveness significantly.

Today, many believe that competitive advantages are created by the ability to save on IT, but in practice, such savings only aggravate the financial situation in the company. Competitive advantages today creates the ability to squeeze out of information technology to the maximum benefit to the business minus the cost of them. That's just between the theoretical knowledge of how to do it, and the practical implementation is the gulf of trial and error.

I have been working on the topic of finding a balance between business benefits and IT costs since 2007, and for those who decide to do this in their company, I want to advise only one thing - don’t be afraid to make mistakes. No matter how weighed you make decisions, you cannot avoid mistakes, but you need to be afraid not of mistakes, but of the fact that you will not see them and will not be able to draw experience from them. The whole theory above is a high-level understanding of the experience I have received, and perhaps there are also errors in this theory. It is for this reason that I share it in order to learn about the mistakes I have made as early as possible, and bring my clients closer to reaching the point of optimal IT costs.

Ivan Kormachev
Company "IT Department"
www.depit.ru