Executive Interview: Workday’s Aneel Bhusri on Advancement of SaaS and Cloud Models for Improved ERP

Transcript of a sponsored BriefingsDirect podcast with Workday’s co-CEO on the future of delivering HR and ERP solutions as cloud services to large enterprises.

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Workday.

Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you’re listening to BriefingsDirect. Today we present a sponsored podcast executive interview with a software-as-a-service (SaaS) provider upstart, Workday.

This human capital management (HCM), financial management, payroll, worker spend management, and workday benefits network provider is raising the bar on employee life-cycle productivity, by lowering IT support costs through the SaaS model. More than that, Workday is also demonstrating what I consider a roadmap to the future advantages in cloud computing.

We are here with Workday’s co-founder and co-CEO, Aneel Bhusri, who is responsible for the company’s overall strategy and day-to-day operations. Welcome to BriefingsDirect, Aneel.

Aneel Bhusri: Thank you.

Gardner: Workday has come an awfully long way in a fairly brief amount of time, since your launching in November of 2006 -- that's less than three years. Workday also attracted a significant additional round of venture capital support earlier this year. I believe it was $75 million, Level E.

Aneel, what explains this quick level of adoption on your user side, and then also this vigorous support from investors?

Bhusri: The adoption from the user side, I think, is very straightforward. SaaS is just a better way for these legacy systems around HR, payroll, and accounting. Our customers typically achieve benefits within a four- to six-month time period and they are typically saving 50 percent of their cost.

If you look around the world and you see the move toward cloud computing, it's for a reason. It's a better way than the legacy, on-premise technology.

As to the funding, I would hope that, number one, it's a big market opportunity that we are pursuing. We're not looking at a niche. We're looking to replace the full enterprise resource planning (ERP) platform over time, much like we did at PeopleSoft.

The pedigree of the team starts with my co-founder, Dave Duffield. He's an icon in the software industry. He's known for high integrity, innovation, and customer service. Many of us, like me, have been with him for 17 years now and we share that vision and that culture with him. We have set out to build the next great software company. I think people have recognized that.

Dave has mostly self-funded the company. We took this last round of funding as a validation of what we were doing. The best part of the validation is that the new investor, NEA, did reference calls with our customers. They said that those were the best reference calls to the customers that they have done in the last 10 years.

Gardner: You mentioned PeopleSoft, and, of course, that was acquired by Oracle. What was it about that PeopleSoft experience for you that helped shape the vision that you are now putting together for Workday?

Employees first

Bhusri: We're very similar to PeopleSoft in some areas, and in other areas, quite different. We have the same culture -- focused on employees first and customers second. We focus on integrity. We focus on innovation. We brought that same culture to Workday, and our customers are very happy.

We have a very loyal employee base. Fewer than five people have voluntarily left the company since we started back in 2005. People like working here. They like the other people that they are working with here. There are no politics. It's that kind of environment that we brought with us.

Much like PeopleSoft, we are taking advantage of a technology shift. PeopleSoft benefited from the shift from mainframe to client-server. When Workday started, people weren’t as focused on how big the shift was from client-server or on-premise computing to what is now called cloud computing or, back then, SaaS.

It now seems like it's even bigger than the shift from mainframe to client-server. This is a massive shift and you see it all across. That's the big difference. We are obviously leveraging a very different technology base. The thing that Dave and I both took away from PeopleSoft is that you have to stay on top of innovation, and that's what Workday is doing. We are innovating where the large ERP vendors have stopped.

Gardner: Some people would say that this notion of taking on and replacing ERP is a quixotic endeavor and that you are tilting against windmills of some kind. Why do you think ERP is vulnerable and that you can “replace" it?

Bhusri: When we first started the company, quite a few people thought we were crazy. Why would you take on these core systems? Why not take on these point systems?

If you look at the history of technology, every 10-15 years, there is a sea change and new application vendors emerge. The big winners are the ones that are the system of record -- the HR system, the accounting system, and the order management system-of-record. Those are the ones that become the PeopleSofts, the SAPs, and the Oracles.

In between, you have point solutions -- recruiting, talent management, and supply chain solutions -- that bolt on. Most times, you're not afforded the opportunity to be a system of record, because of your timing. But we were lucky enough that, when we started Workday, we were at the start of this change.

So, if you have your choice, you would much rather be the system-of-record vendor. Oracle has a $100 billion market cap, and SAP, a $40 billion market cap. Even PeopleSoft, as the third player, was a $10 billion market cap company, when we sold to Oracle. That's not the success you see from the niche vendors.

Dramatic change

It's that, along with the fact that ERP is now 15 years old and just needs to be rewritten. The world has changed so dramatically since the original ERPs were written.

Back then, companies were thinking about being global. Now, they are global. People were not even thinking about the Internet, and now the Internet exists. That was before Sarbanes-Oxley and before the emergence of the iPhone and BlackBerry. All these things pile together to say that it's time to go back and rewrite core ERP. It's no longer valid in today’s world.

Gardner: So, we see an inflection point in ERP, perhaps a detriment to incumbency. We see a shift in technology, more toward cloud types of activities, but we are also seeing a very difficult economic environment. Is there something about the economy that is providing you a catalyst or an accelerant to the adoption of a SaaS-based human resources portfolio?

Bhusri: Absolutely. These last nine months have been challenging for everyone. We, as a system-of-record vendor, saw fewer projects out there. At the same time, because of our new model and the cost benefits of the SaaS solutions, we were probably more relevant than we might have been without the economic downturn.

We had companies that were planning on implementing the traditional legacy systems, but could not afford it. They looked at different alternatives, came across Workday, found out that we are further along than they thought we were, and then decided that this is a much better path.

A great example is Sony Pictures Entertainment. They already own the licenses to the SAP HR system, and yet, after careful consideration, determined they didn't have the budget to implement it. They chose Workday. At the end of the first quarter, they will be live in five months, and they will get the benefit of about a 50 percent cost savings, if not more. They basically quoted it as one-half the time at one-third the cost.

A major upgrade is much like a new implementation and it's cost prohibitive.

Gardner: So, we've seen this fortuitous confluence of external forces along the trajectory of the evolution of technology. Can you tell us what these customers that you have -- I think it's up to 100 now in your first three years, which is pretty dramatic -- what they are doing with your services? Are they swapping one thing out? Are they using it to augment something? Are these people who didn’t do HR from a system-of-record perspective and are now doing that? All the above? What's the mix?

Bhusri: I'd say all of the above, but most are replacing a current legacy system that either is SAP, PeopleSoft, or Oracle. That's the predominant customer we're seeing.

They're replacing it for several reasons. Typically, they've decided that they were not going to take the major upgrade from one of those vendors. A major upgrade is much like a new implementation and it's cost prohibitive.

Usability is important

Second, they are looking at the systems and saying, "What do we get for that upgrade?" The world has changed. Talent is now more important, and usability is a lot more important.

They care about having systems that are accessible to their employees, that look more like eBay and Amazon, and that don't look like an ugly enterprise system. They're looking for systems that are flexible and keep up with their organizations. Workday happens to be a good solution for those systems.

They switch over and they get the benefit right away of going forward. Upgrades are our issue, not theirs, which is a huge, huge difference. That's the elephant in the room. Upgrades are really the bane of the existence of anybody running enterprise IT systems, and it's only getting worse with time.

Another piece is that they are now on a modern system with a user interface that looks like a consumer Internet system. As a result, people use the system. The most important measure of how good a system is whether people like using it, because that makes it more valuable.

Lastly, with our focus on continuing innovation, they are not stuck in time. Every customer gets upgraded every four months to the most current version of the system. So as we are innovating, they are all taking the advantage of that innovation, whether it's in usability, functionality, or a new business model. So, those are really the differences.

Gardner: That strikes me as potentially a game changer -- this idea that the cycle for adoption in a traditional license software model can be three to five years. It's very expensive, very complex, and disruptive. The incentives are against upgrading. But, you at Workday can get out in front of your competitors, with features, performance, and innovation, reacting to the external environments, and then bake that in almost seamlessly and invisibly to your customers.

We're able to leverage those same principles that they are and bring out capabilities very quickly, so a customer can identify something that's important to them.

You are at Workday version 8, already in three years. Am I right? Is this a game changer that the SaaS model can give you a huge advantage over anybody that you compete with?

Bhusri: Absolutely. I like to think about it as building at web speed, and that's how Google, Amazon, and eBay think about it. New features come out very quickly. There are no old versions of Amazon and eBay that they have to worry about supporting. It's one system for all users. We're able to leverage those same principles that they are and bring out capabilities very quickly, so a customer can identify something that's important to them.

We've gotten a lot of requests for an iPhone client. Within one update cycle, four months, we had an iPhone client built. We got a request for BlackBerry, and the next update cycle, four months later, there was a BlackBerry client built. In a traditional enterprise, with cycles of 12-18 months, by the time the release comes out, the world has changed.

So yes, it's SaaS, but it's more, because we build like the other consumer Internet companies and we look to them as our role model. The only enterprise company I look to as a role model is Salesforce, but they embrace many of the same views and technologies as we do.

Gardner: Let me pursue that a little bit. How do you see yourselves different -- either in character, culture, or the way you enter the market -- from Salesforce.com?

Application vendor

Bhusri: I think we are a lot like Salesforce. Dave and I have a very good relationship with Marc Benioff. They're focused on CRM, and we're focused on ERP. I think the big difference is that they are focused on becoming a platform vendor, and we are really very focused on staying as an application vendor.

We will not have a Force.com equivalent. We are really focused on building the best applications that we can, and maintaining a good partnership with Salesforce. We don't plan to be in the CRM world, and we have a very nice integration built to their systems.

They started out in the small and medium business (SMB) world and are moving into the larger enterprises. In some part, thanks to them, we were able to focus on the larger enterprises at the start and really did not focus on the SMB. So, that's a difference. But, really there are more similarities than differences to our approaches.

Gardner: I imagine -- given that you acquired Cape Clear Software and have significant integration capabilities -- that the data sets that exists within a Salesforce engagement with a customer, and your data sets, provide an opportunity to somehow mix and match here. This would allow business intelligence (BI) of some nature, or perhaps even some joining of these data sets?

Bhusri: Absolutely. As we roll out our financial products, we have prototyped some BI work that we have built on the Force.com platform. It takes CRM data from Salesforce, and accounting data and HR data from Workday, and presents it in a Force.com way. It's very slick, and, as we get into the market, we'll probably come up with more examples like that.

Our view is that the bigger bang for the buck, in terms of the cost savings and the real value for the technology, happens with larger companies. We started out serving companies in the 1,000-5,000 range, but our goal is to serve the largest companies.

The Cape Clear technology is really key to our success. Those of us who started Workday are all applications people. The last generation of applications didn't really care about integration, but today's world is very different.

We found out upfront, when we launched Workday with Cape Clear as a partner, that most of our early customers were focused not just on the application, but on the integration to the systems. So, we decided to bring the two companies together. Now, integration is part of everything we think about. Your example is one very good example, but there are a lot of other examples as well, and we don't think about it as an afterthought the way we used to.

Gardner: You mentioned that a significant portion of the adoption for Workday comes from the swapping out of legacy systems. This strikes me as something that would be from very large organizations, Global 2000 enterprises. That, I believe, is your focus. Why, as a SaaS provider, have you focused on large enterprise and not the expected SMBs?

Bhusri: Our view is that the bigger bang for the buck, in terms of the cost savings and the real value for the technology, happens with larger companies. We started out serving companies in the 1,000-5,000 range, but our goal is to serve the largest companies.

As the system has gotten more robust, we've really focused on the Fortune 1000 companies, our biggest being Flextronics. Those large, complex organizations with global requirements have a great opportunity for cost savings. That's number one.

Large-enterprise focused

Number two, with our PeopleSoft backgrounds we are large-enterprise focused. It's what we know. It's what we know how to build. It's what we know how to market. It's what we know how to sell. SMB is not in our DNA, and we believe that there is a big enough market in the large enterprises. That was the natural place to go.

Gardner: What are the economics of this? Some debate we have heard in the past around SaaS is whether it's a cost saver or a long-term wash? How do you view it? If you are going into these large organizations, I assume that you have got a sense of the economic metrics and what the return on investment (ROI) might be?

Bhusri: With the downturn in the economy, we have very detailed analysis, because every selection came down to the ROI case in the selection of a vendor. The data we have now is not theoretical. It's now based on 60 of our 90 customers, of our 99 customers. Being in production, we have been able to go back and monitor it.

The good news about our cost is that it's all-in-one subscription cost, so we know exactly what the costs were for running the Workday system.

The trickier part is that the customers typically underestimate the cost of running legacy. They don't think about the mainframe, the hardware upgrades, the database administrators that they need, or the networks that they have dedicated to their on-premise systems. A lot of outside costs don't really get calculated in.

When you add it altogether, really do it on an apples-to-apples basis, and look at what we have taken over for the customers, it averages out consistently to about a 50 percent cost saving over a five-year period.

When you add it altogether, really do it on an apples-to-apples basis, and look at what we have taken over for the customers, it averages out consistently to about a 50 percent cost saving over a five-year period. There are cases where it's less than that and there are cases where it's more that that, but it averages around 50 percent.

The most important assumption in that five period is that we don't count on a major upgrade of the legacy system. I personally think that's very conservative, because if you are running PeopleSoft, SAP, or Oracle, you should be upgrading at least once every five years. We are falling really far behind.

Gardner: If there is a certain set of applications that you can offload to a SaaS provider, that opens up quite a bit of capacity in your data center, which perhaps forestalls the need to replace a data center, which could cost $40 million or $50 million.

New breed of CIOs

Bhusri: Absolutely. I think the new breed of CIOs, and it's not based on age or experience, thinks differently than the last generation of CIOs did. They think about it as a business issue, not as a technology issue. If you can get your administrative applications, your non-mission critical applications -- CRM, HR, payroll, and accounting -- delivered from a vendor, and you can manage them to service-level agreements (SLAs), why not focus your resources on the core enterprise apps you have?

If you're a Wall Street firm, those are trading applications. If you're an insurance company, that's claims processing. If you're a retail company, it's merchandise management. Leave the rest to vendors who can deliver those levels of service and focus on your core business.

More and more CIOs are getting that. It does free up data-center space. It also frees up human resources and IT to focus in on what's core to their business. HR and accounting don't have to be specialized in running that system. They have to know HR and accounting, but they don't have to be specialized in running those systems.

Gardner: I suppose we can put ERP in that same category. Tell me a little bit about where you are going next. We've seen you come up with HR products and payroll products. You have obviously declared the ERP category, which is large and can be specialized from vertical to vertical. What should we look to next in terms of application sets from Workday?

Bhusri: Our big focus was HR and I think it will continue to be, but, right now, HR has, we believe has reached parity with the legacy systems. In 2009 there has been a big push on payroll, getting those to parity with the legacy systems, because many of the large companies run HR and payroll together. You can't replace just HR, if you leave them with the payroll headache.

We'll expand out of core accounting into procurement and order management and really be the full ERP suite for the services economy.

Going forward, next year, our view is that we want to be an ERP replacement suite, but not for manufacturers. We will sell our HR and payroll accounting system to manufacturers, but we are not looking to manage the shop floor manufacturing, the way an SAP might. We'll expand out of core accounting into procurement and order management and really be the full ERP suite for the services economy.

We've started many of those applications. We've started the procurement applications. We've got this application called Worker Spend, as well. The next big push for us will be in the order management, revenue management, and revenue generation side of the business. The best way to think about it is that we will effectively replace the full footprint we had at PeopleSoft, which was again ERP for the services industries.

Gardner: I want to close out with a little bit of thought leadership or vision direction around the cloud-computing opportunity. I've got a certain theory that Moore's Law carried IT quite a way in the past. For decades, productivity could be almost expected as a given, with this increase in the density of what silicon could produce. I think we are now at a new opportunity level, which is business process innovation.

Do you think that if we refine it, look for the ecosystem partnerships, go for the best opportunity, regardless of the sourcing location or organization, we can see a new level, a different law, perhaps some sort of a cloud law?

Fear of the cloud

Bhusri: I believe so. The only things that will get in the way of that are really two things. One is people's risk aversion. I think that right now people are scared of the cloud, what it means to open up their world into the cloud, and what does social networking do to their businesses.

I actually think that all these things are good things -- sharing of information, sharing of relationships, and being able to source in a way that's very different than the traditional world. So one is the risk aversion.

The second piece, which is a big unknown, is what will the governments do, as these clouds transcend national boundaries. Right now, all the governments are way behind in figuring out how to deal with these.

But, if the governments can stay away and risk aversion reduces over time, cloud computing is going to transform the way people communicate and the way people do business. These business processes will be meta-business processes that span multiple organizations, and they are organic, as opposed to hard-coded the way they are today.

Partners will become partners and fall apart as partners, somewhat organically, depending on the specific project. That's a pretty exciting world that we are headed into.

Partners will become partners and fall apart as partners, somewhat organically, depending on the specific project. That's a pretty exciting world that we are headed into.

Gardner: Do you think that the days are over for 46-percent profit margins from software vendors, and the whole idea of large enterprise devoting 4-5 percent of revenue to IT spend? Are those days over?

Bhusri: I think so, particularly in the latter category of what percent gets devoted to IT. Even some of the companies that have based their businesses on IT are looking at 2-3 percent. So, it's half. That's pretty universal. That's going to come out from somewhere. I think it will impact the margins.

One of the reasons why the margins are so high for those companies is that they are at the tail end of the technology life cycle. They are not really innovating. They are collecting maintenance payments. We all know that maintenance is very, very profitable. Well, when you start in a new technology, it's mostly investing. Usually, when the profitability rates get that high, it means that there is a new technology around the corner that will start cutting into those profitability rates.

Gardner: Well, I certainly look forward to a cloud economy. I'm not sure it will live up to Moore's Law, but perhaps there is something there that's very significant.

We've been talking about Workday, a fiscal management, payroll, and human capital management SaaS provider. Joining us has been Aneel Bhusri, co-founder and c0-CEO. Thanks so much for joining us.

Bhusri: Thanks, Dana, my pleasure.

Gardner: This is Dana Gardner, principal analyst at Interarbor Solutions. You have been listening to a sponsored BriefingsDirect Podcast. Thanks for listening, and come back next time.

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Workday.

Transcript of a sponsored BriefingsDirect podcast with Workday’s co-CEO on the future of delivering HR and ERP solutions as cloud services to large enterprises. Copyright Interarbor Solutions, LLC, 2005-2009. All rights reserved.

ITIL 3 Leads Way in Helping IT Transform Via the 'Reset Economy' into Mature Business Units

Transcript of a sponsored BriefingsDirect podcast on the latest version of ITIL, and how it helps IT organizations transform how they operate as business units.

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Hewlett Packard.

Free Offer: Get a complimentary copy of the new book Cloud Computing For Dummies courtesy of Hewlett-Packard at www.hp.com/go/cloudpodcastoffer.

Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you're listening to BriefingsDirect.

Today, we present a sponsored podcast discussion on how to better understand the standards and methods around ITIL Version 3, Prescriptions and Guidelines. We'll unlock the secrets behind ITIL Version 3, and debunk some common misunderstandings about ITIL and how it can be best used.

We're joined by three experts on ITIL, and they are folks who have been instrumental in ITIL development. They'll help us look into ways that IT leaders can leverage IT Service Management (ITSM) for better efficiency, operational accountability and how to keep the IT trains running on time and also at the lowest possible total costs.

Please join me in welcoming David Cannon. He's the co-author of the Service Operation Book for the latest version of ITIL, and an ITSM practice principal at Hewlett-Packard (HP). Welcome David.

David Cannon: Hi, Dana. Thanks very much.

Gardner: We’re also joined by Stuart Rance, service management expert at HP, as well as co-author of ITIL Version 3 Glossary, and of numerous other service management pocket guides. Welcome, Stuart.

Stuart Rance: Hello. Thank you.

Gardner: Also joining us is, Ashley Hanna, business development manager at HP and a co-author of ITIL Version 3 Glossary, and other industry best practices. Welcome, Ashley.

Ashley Hanna: Hello. Thank you.

Gardner: Let me direct my first question to David Cannon. Tell us a little bit about why the need for ITSM is a bit more acute nowadays. What do a tough economy and lean budgets mean in terms of how ITIL can be of benefit?

Cannon: That's a very interesting question. The first thing that comes to mind, whenever we think about that, is that IT needs to save costs. In fact, the business puts a lot of pressure on IT to bring their costs down. But, in this economy, what we're seeing is that IT plays a way more important role than simply saving money.

Business has to change the way in which it works. It has to come up with different services. The business has to reduce its cost. It has to find better ways of doing business. It has to consolidate services. In every single one of those decisions, IT is going to play an instrumental role. The way in which the business moves itself towards the current economy has to be supported by the way in which IT works.

Now, if there is no linkage between the business and the way in which IT is managed, then it's going to be really, really difficult for the business to get that kind of value out of IT. So, ITSM provides a way in which IT and the business can communicate and design new ways of doing business in the current economy.

Gardner: Some of the popular business press released here in the United States has been calling the recession a "reset" and saying that "business as usual" is really not going to fly. Is ITIL something that can help with that, both at the IT level and the business level with this notion of a reset, David?

Changing operating models

Cannon: Yes, it is. That's not to say that, in every single case, IT is going to drive these changes to the business. What we're seeing in the reset is that businesses have to change their operating models.

Part of an operating model within any business is their IT environments and the way in which IT works and is integrated into the business processes and services. So, when we talk about a reset, what we're really talking about is just a re-gearing of the operating models in the business, and that includes IT.

The way in which IT works and the processes that you read about in ITIL Version 3, for example,

What I've seen recently is that organizations that have already achieved a level of ITSM maturity are really building on that now to improve their efficiency, their effectiveness, and their cost-effectiveness.

are increasingly being used in the business environment to create new services or different ways to manage their existing operational environments.

Gardner: I wonder if any of our speakers thinks that the economy has, in fact, provided an impetus or catalyst to embrace ITIL, whether it's in its versions, 1, 2 or 3. Is it possible that there has been a silver lining to this dark economic cloud?

Rance: That's a really interesting question. What I've seen recently is that organizations that have already achieved a level of ITSM maturity are really building on that now to improve their efficiency, their effectiveness, and their cost-effectiveness.

Maybe a year or two years ago, other organizations that were less mature and a bit less effective were managing to keep up, because things weren't so tight and there was plenty of fat left. What I'm seeing now is that those organizations that implemented ITSM are getting further and further ahead of their competition.

For organizations that are not managing their IT services effectively towards the end of the slump it's going to be really difficult. Some organizations will start to grow fast and pick up business, and they are going to carry on shrinking.

Gardner: Thank you, Stuart. Ashley, do you have anything further to offer?

Hanna: I think, as well, that if ITIL has been implemented correctly, then it is not an overhead. As times get tough, it's not something you turn off. It becomes part of what you do day-to-day, and you gain those improvements and efficiencies over time. You don't need to stop doing it. In fact, it's just part of what you do.

Gardner: For those of our listeners who might not be too deeply aware and have the background for ITIL, let's give them a quick primer. David, help me understand a little bit about the context of ITIL and where it fits in now.

Helping operations managers

Cannon: ITIL was initially created within the UK government to help operations managers within IT manage that environment a lot better. As the industry progressed, and as we became more mature about the way in which we managed IT, it became very clear that what we were really doing was not simply managing a set of infrastructure components and applications. What we were really doing was delivering a set of services to the business.

As that matured, we began to realize that we're not simply providing a set of outputs to the business and then forgetting about what the business does with them, and, as long as we produce the outputs, we've done our job. We began to realize that this approach wasn't good enough. What we had to do was focus on not only what we delivered to the business, but also what the business did with those services. So, we are focused more on the business outcomes.

In the current environment and in the current version of ITIL, we're looking at not only how IT manages itself, but how IT provides service to the business, and also how the business generates value based on the services that they use from IT. That's where the industry is right now.

And, just to stress, ITIL didn't invent the stuff. ITIL is not a theoretical approach that came out of the minds of a few academic individuals. It really is based on what companies have been doing over the past 20 years. So, when you read ITIL, everything you see in those books is something that has been done by a company somewhere, and it has worked.

What you have there is a set of recipes, which really talk about how I, as an IT professional, can play a strategic role within the business, and how I can help to measure my contribution of value within the business organization. That's really where we are within ITIL right now.

Gardner: Stuart or Ashley, do you have anything further to offer on a level set on ITIL nowadays?

Rance: I've got a lot that I'd like to say about value, but I'll hold off on that for now. I'd like to talk about what service management is from a more operational viewpoint, because a lot of people don't really get what we're talking about, when we talk about service management.

The point is that there are lots of different service providers out there offering services. Everybody has some kind of competition, whether it's internal, a sort of outsourcing, or alternate ways of providing service.

All of those service providers have access to the same sorts of resources. They can all buy the same servers, network components, and software licenses, and they can all build data centers of the same standards. So, the difference between service providers isn't in those resources they bring to bear. They are all the same.

Service management is the capabilities a service provider brings in order to deploy, control, and manage those resources to create some value for their customers. It includes things about all of your processes for managing changes, incidents, or the organizational designs and their roles and responsibilities, and lots of different things that you develop over time as an organization, it's how you create value from your resources and distinguish yourself from alternate service providers.

Gardner: Is there anything from you, Ashley?

Focusing on outcomes

Hanna: I'm just reflecting on what both have said. We've gone from managing technology processes, which was certainly an improvement, to managing end-to-end IT service and its lifecycle and focusing on the business outcome.

It's not just which technology we are supporting and what silos we might be in. We need to worry about what the outcome is on the business? The starting point should be the outcome and everything we do should be designed to achieve what's wanted.

Gardner: David, it certainly seems to me that the progression of IT is toward the delivery of processes, rather than technology sets. The feature function abstraction is perhaps elevated, particularly now, when we think about cloud services and a variety of different sourcing options. That seems to me to dovetail very well with the fact that we're changing the way that IT operates at precisely the same time as the way that IT is consumed is changing. Does that sound fair?

Cannon: Yes, it does sound fair. I think in terms of initiatives or movements like cloud, or should I say trends, what you're seeing is a focus on exactly what it is that I get out of IT, as opposed to a focus from the business on the internal workings of IT.

What you've seen historically is that the business has traditionally been very concerned about the internal workings of IT. They're very concerned about mitigating risk and very concerned about making sure that we're running in a cost-optimal way. What things like cloud tend to do is to provide business with a way of relating to IT as a set of services, without needing to worry about what's going on underneath the surface.

However, I need to point out that, even within a cloud environment, where you have a cloud-service provider, that service provider still has to worry about the processes.

So, business is going to look for clear solutions that meet their needs and can change with their needs in very short times.

They have to worry about managing the technology. These issues don't go away. It really is just a different way of dealing with the sourcing and resourcing of how you provide services.

Gardner: So, I suppose the point is that ITSM, how you run your IT department and how you provide for your users and their perceptions of IT as a business partner, is being elevated by some of these other trends in the sourcing environment?

Cannon: Yes, and what we're seeing is just the need for business to be able to react quickly and the need for them to be able to be very flexible within a rapidly changing volatile economy. So, business is going to look for clear solutions that meet their needs and can change with their needs in very short times.

Gardner: Ashley, let's go to you now about some of the myths or misunderstandings around ITIL -- what needs to be debunked or what lets people stray in understanding ITIL and how they could avail themselves of it?

Responding to change

Hanna: A lot of the issues are based on the fact that something has changed. We all know and love ITIL Version 2, and have a certain image of that in our minds -- and we all respond differently to change.

An issue that comes up quite a lot is that ITIL Version 3 appears to have gotten much bigger and more complex. Some people look at it and wonder where the old service delivery and service support areas have gone, and they've taken surprise by the size of V3 and the number of core books.

There is new content in Version 3, but actually Version 2 was pretty big, if you looked at the complete set of publications that came out. This view of it being small and self-contained was reinforced by what we were taught, when we studied Version 2.

The highest level of certification then was the Managers certificate and exam.

. . . these changes are long awaited and they're very useful additions to ITIL . .

This concentrated just on service delivery and service support. Yet, there were at least five other significant areas. Publications that came out from those other areas, such as business perspective and planning to implement, didn't get the same kind of attention.

When Version 3 came out, it launched with a much bigger perspective right from the beginning. Instead of having just two things to focus on, there are five core books. I think that has made it look much bigger and more complex than Version 2.

It is true that if you go through education, you do need to get your head around the new service life-cycle concept and the concept called "business outcomes", as we've already mentioned. And, you need to have an appreciation of what's unique to the five core books. But, these changes are long awaited and they're very useful additions to ITIL, and complementary to what we've already learned before.

Gardner: Stuart, just for the edification of our audience, what general characteristics would you apply to Version 2 and then Version 3, and what generally distinguishes them?

Better and cheaper

Rance: Version 2 was very much about how the IT service provider could do what it does effectively, efficiently, and cost effectively. All of the Version 2 processes led to ways that the service provider could deliver what they did better and cheaper. What it didn't really look to was the value of what they were doing, and were they doing the right things?

I'll give you a simple example. Version 2, in financial management, talked very much about what sort of cost units you should be looking at, how you should be calculating things, how you should be doing your accounting.

Version 3 includes that, but it includes it in quite a small part of the book in a couple of sentences that basically say your accountants will tell you how to do that. If you look at financial management in ITIL Version 3, it says you really have to understand the cost of supplying each service that you supply and you have to understand the value that each of those services delivers to your customers.

Now, that's a very simple concept. If you think of it in a broader context, you can't imagine, say, a car manufacturer who didn't know the cost of producing a car or the value of that car in the market. But, huge numbers of IT service providers really don't understand the cost of using its service and the value of that service in the market.

ITIL V3 very much focuses on that sort of idea -- really understanding what we are doing in terms of value and in terms of cost-effectiveness of that level, rather than that procedural level.

Gardner: Going to you David, is there something about ITIL and the confusion that might exist in some quarters around this notion of financial management? Where do you see this financial management aspect of ITIL and is that something that people need to better get their heads around?

Cannon: Financial management really hasn't changed in the essence of what it is. Financial management is a set of very well defined disciplines.

ITIL V3 very much focuses on that sort of idea -- really understanding what we are doing in terms of value and in terms of cost-effectiveness of that level, rather than that procedural level.

There are well-established procedures and practices. When applied within IT, financial management really starts to answer some very specific questions.

In Version 3, the nature of those questions changes. For example, in Version 2, we talk about how to account for the cost of providing IT services and how to track your assets, for example. It's very much a cost-based model of financial management.

Within Version 3, the financial management questions become more strategic. How do we calculate value? How do we align the cost of a service with the actual outcome that the business is trying to achieve? How do we account for changing finances over time?

For example, if we invest a certain amount of money this year, what is the relative value of that investment going to be in 5 or 10 years time? How do I align financial decisions that I make with the portfolio of services that I deliver? How can I track the investment in IT throughout the life-cycle of the services that I am providing?

Questions have changed

So, the questions that we ask in financial management within ITIL have changed significantly, but the underlying core procedures and practices are still the standard financial practices that exist within any organization.

Gardner: As we progress from applying financial management to systems, and then now to processes, it sounds as if we're starting to talk more the talk of the business side of the house. Business probably wants to understand the true cost of processes.

My question then is, do the folks on the business side of the house need to know anything about ITIL, or do they simply need to know what the fruits of ITIL are? Let me throw that out to Stuart.

Rance: Something that David said earlier, which I have also come across, is that a lot of businesses are in the service business themselves. It might not be IT service, but many of the customers we're dealing with are in some kind of service business, whether it's a logistics business or a transport business. Even a retailer is in the service businesses, and they provide goods as well.

In order to run any kind of a service you need to have service management. You need to manage your incidents, problems, changes, finances, and all those other things. What I'm starting to see is that things that started within the IT organization -- incident management, problem management and change management -- some of my better customers are now starting to pick up within their business operations.

They're doing something very much like ITIL incident management, ITIL change management, or ITIL problem management within the business of delivering the service to their customers.

. . . if you're running yourself as a business, you need to understand the business or businesses you serve, and you need to behave in the same way.

That completely gives you an end-to-end value chain, where the incident management, problem management, and change management you're doing within IT is simply a subset of your overall business incident management, problem management and change management. And, I could have listed all the other processes as well.

Gardner: It sounds as if we're moving toward some sort of a unifying theory of how to run both your business and your IT department. Essentially, they're both providing service management, provisioning, delivery, and measurement function. Why shouldn't they have a similar framework?

Hanna: I absolutely agree. Some of the shock that some people have when they pick up the service strategy book in ITIL V3 is they see it reads as a business book -- where is the IT, where is the data, where has my memory chip gone from this book? That's deliberate. It sets out that if you're running yourself as a business, you need to understand the business or businesses you serve, and you need to behave in the same way.

There's a great deal of new thinking that has gone into the service strategy side of things around providing a service of any kind. And as Stuart said, businesses can start adopting some of the IT process practice, but also the other way around. The IT people, when they start thinking about it, start to realize that it's not just them who have change management and incident management. Their business has to implement these aspects when they talk to their customers and the products that they sell. It is very much coming together in the industry.

Gardner: Is this a two-way street? Do the lessons learned on the business side apply to IT, and then vice versa? Does anyone want to offer an insight into the transfer of best practices?

Two-way communication

Rance: It's a very important question, but I'd like to go even further than that and say that, as a business unit, IT is already participating in a lot of this two-way communication. In many cases, IT doesn't think of itself as a business unit, but if you think about it, they really are. Today, the average IT department is delivering services to external customers and those services are revenue producing.

When that starts to happen, the IT unit starts becoming both an internal service provider, as well as a strategic business unit within the organization. And so, not only is it communicating with the business, it, in fact, is the business in many cases. That's a very important realization to come to within most IT organizations.

Gardner: I suppose we're all parochial and that we are involved with IT, but it sounds as if IT is not just a peer business unit, but perhaps a special business unit in a modern cooperation or enterprise. David, do you have any sense of whether we can claim special status in IT, or whether that gets us in trouble?

Cannon: We certainly could claim a special status, but I wouldn't try that. I think that the most important thing about ITIL and about ITSM is to ensure that IT is viewed as part of the business, that it is contributing to the value generated from the business, and that it is able to achieve its objectives.

I wouldn't try to create any special case for it. I would simply say that the management

I never heard an organization saying it needed to get the legal department aligned with the business or the finance department aligned with the business

challenges within IT tend to be more unique, and it's important to use approaches like ITIL, which are specifically designed around these challenges.

Rance: Can I speak up on that just for a moment? In the days of ITIL Version 2, a lot of organizations used to talk about business-IT alignment, and how important it was to align IT and its goals and strategies with the business and its goals and strategies.

I always found it very strange that you never heard a similar conversation about other business units. I never heard an organization saying it needed to get the legal department aligned with the business or the finance department aligned with the business.

I think that used to be a fundamental failing of IT organizations -- that they were trying to align with the business instead of trying to be a part of the business. That was one of the big changes in ITIL V3. I don't think an IT department should consider itself special or different. It should consider itself part of the business in exactly the same way as other core, shared services are.

Gardner: Perhaps another way to phrase the question is rather than to ask about whether it should be special, ask why it should not be special, and should be peer.

Rance: Exactly.

What do they want?

Hanna: Absolutely. One customer I work with felt they were getting a beating from industry best-practices consultants. The consultants were saying, "Look, you need to understand and align with your business. If only you did that, everything would be okay." What the IT organization found when they tried to do that was that, when they communicated with the business and got the right discussion around availability, performance, or whatever it was, the business didn't know what it wanted either.

So there's this idea that the magic is just a little bit further away, if you can get there. Once that organization engaged with the business, and they both realized they had challenges in this space, and it wasn't just one or the other's fault, they were able to start working together to get things done in a better way.

Gardner: I wonder if we could take a moment to understand better the relationship between HP and its approach to IT data centers, IT shared services and ITIL. Several of you here are instrumental, but also working with HP, what's the relationship?

Cannon: Dana, are you talking about the relationship between data-center management and ITSM?

Also I'm using it myself personally. I'm using ITIL guidance to help define and manage a service portfolio, which is a new concept within ITIL.

Gardner: No, I was asking about HP, as a vendor supplier, a partner and ITIL as a progression. How do they relate?

Hanna: I'm a business development manager within HP, within our Mission Critical Services organization, and I'm using ITIL as part of our assessment and continual improvement methodologies and tool set. So, I'm either helping to sell those kinds of ideas as a product or I am using it to improve what I do when I do that.

Also I'm using it myself personally. I'm using ITIL guidance to help define and manage a service portfolio, which is a new concept within ITIL. Within that, I have a pipeline of services that I offer to my customers, and new services or significant changes I'm bringing along. I've also got a service catalog of things that I sell to my clients today.

So, I am very much personally using ITIL, and I know many of my other colleagues are. But, it's not just how we go to market -- it's also within our own infrastructure.

Gardner: Does anyone else want to offer a way in which the philosophy of HP aligns with ITIL?

Everything is ISTM

Cannon: Absolutely. The point is that there is nothing in HP that we do that is not service management. Everything that we do -- from manufacturing and delivering computers to installing those computers, to making sure that they are operating effectively, to working with our customers to make sure that they are able to use IT and support their businesses -- are essential components of ITSM.

So, our whole approach to ITSM is not only that we help our customers do ITSM, but, as Ashley pointed out, we use ITSM internally to make sure that we are doing things in a quality manner and in a way that creates an added value for your customers.

For example, when I got into the data center services side of things, a lot of people said to me, “Oh, so you are leaving service management?” And the point is, no, absolutely not. How can you deliver IT services, how can you manage those services, if you have no control of your data center? Everything we do is tied into service management and how our customers are able to achieve value within their organizations.

Gardner: I would think that also end-to-end visibility, control management, and integration are essential to providing that end service in a timely and efficient manner. Is there a

Within our service management profession, it's incredible how many different things people are doing with service management.

comprehensive aspect to what HP involves in working with a number of partners and what you can then attain with ITIL guidelines?

Rance: We have within HP something we call a service management profession, which is part of our overall knowledge management. Interestingly, knowledge management, a relatively new process for ITIL was something we have been doing for a long time, as with many other organizations of course.

Within our service management profession, it's incredible how many different things people are doing with service management. They're all engaged with service management and they're all sharing knowledge and capabilities with each other, but it ranges from people who are developing, planning and delivering ITIL training courses. People are developing, delivering, configuring, installing, and managing our complete range of software products.

Our internal IT organization, our outsourcing organization, many different people doing different source of consulting, anything you can think of in the service management space, there is somewhere in HP a team doing it. Usually, those teams are doing it in every country around the world. We all talk to each other and learn from each other, and it's a lot of fun. I don't think there is any other organization in the world that comes close to that.

Gardner: So, in a sense, it's a whole greater than the sum of the parts.

Rance: Absolutely.

Concrete examples

Gardner: We've talked about this ITIL set of benefits and we debunked some of the misunderstandings. We've kept it at a fairly theoretical level, but I wonder if we had some concrete examples. As you pointed out earlier, ITIL has come from practices and not academics. Where are people applying these guidelines and the increased role of ITSM to a benefit? What are some of the metrics of success? Let's start with you, David.

Cannon: It all depends what each company is trying to achieve with their implementation. For some organizations it's about simply trying to solve a very specific problem. For example, how do I become more responsive to my customers when my IT services break, or how do I control changes within the organization?

If that's all that you are trying to achieve right now, then your metrics are going to reflect what it is that you've been working on. So, am I getting quicker at resolving these incidents? Am I getting fewer incidents? Are changes being more controlled, and are there fewer incidents as a result of rolling out changes? Some of the metrics that you are going to focus on are going to be very operational and very much focused on the problem that you're trying to solve.

In other organizations, which are trying to go for a more holistic implementation and are trying to really get into a growth mode for their organization, they are going to approach this in a very different way. They are going to look at things like, "What kind of services am I delivering? Are those services achieving the desired outcomes?"

The metrics are going to be a combination of what their businesses are using to measure their

So, the discussion changed very, very quickly from, "How much does ITSM cost us?" to, "Hey, can we have some more of this kind of thing?"

success, as well as how IT is measuring the consistency, the reliability, and the availability of their services. It's going to be a combination of that.

We've seen a number of organizations, which have really been using ITSM extensively, coming up with some very interesting ways of measuring the success of the program. What's interesting is that they may start out with looking at, "What is the cost of ITSM and how can I demonstrate the return on investment (ROI)?" But, where they end up is very interesting. Where they end up is, "How does IT support our business?"

I was sitting in one customer organization and they were talking about the cost of IT. We switched the discussion around and took a very specific example of a service that was used commonly within the business. We said to them, "Let's not focus on the cost of IT for now. Let's focus on what you get out of the service."

The managers in the business sat around and talked about the things that they do with the service. It turns out that by using the service, the business was able to save something like $20 million a year in certain testing procedures that they were running.

So, the discussion changed very, very quickly from, "How much does ITSM cost us?" to, "Hey, can we have some more of this kind of thing?" Again, it really depends on the kind of initiative that you have going within your organization and how you're going to measure the success of your ITSM program.

Gardner: Stuart, how about you? Do you have any examples of ITIL in practice and perhaps any metrics on its impact?

Service management journey

Rance: I'll tell you about one of my customers. I don't think it was a metric when they stopped, but it was certainly an outcome. This was an organization that started on their service management journey about four years ago. It was a big mobile phone company somewhere in Eastern Europe.

They started on an ITIL implementation program at the time of ITIL Version 2, and their goals and metrics were largely around quality of service and cost of delivering service, the sorts of things that we think of when we think about ITIL Version 2. It was a really good program and it went really well.

They got the cost reductions they were looking for. They got the improvements in services they were looking for. The other thing that wasn't originally on their goals was that was they got a massive improvement in the relationship with the business. As a direct result of the improvements that they made with their ITIL program, the IT manager became the IT director. In other words, he got himself a seat on the board.

He was quite happy to come back to us afterward and say, "Thank you for your help. Implementing that program directly led to me getting a seat on the board."

The outsourcer couldn't complete the deal, and the IT organization is still in house today. So, that's a great success story from that IT organization.

It's a really nice piece of feedback, because the next thing he said to me was, "Now, what does ITIL V3 mean for me, and how can I capitalize on that and get even better?

I've run quite a few strategy and planning workshops to look at the best way of implementing ITIL V3 in different organizations. We did one of those here and came up with a number of ideas for his next four- or five- year program to improve the relationship even better and to improve the outcomes he's delivering in the business.

Gardner: Ashley, similar question to you.

Hanna: I have a very interesting example as well. I've worked with one of our customers on the Mission Critical Partnership and we helped them implement continual improvement over a number of years. We benchmarked them as to where they were against best practice and against peers in the industry. Then, we helped them identify key risks to address and the improvements that they could make. We helped them measure their progress on an annual basis.

What's very interesting is that they were so successful that, when the decision was made to outsource the IT organization, the outsourcer found that they were already so efficient and effective, they couldn't make the required saving to make the deal worthwhile. The outsourcer couldn't complete the deal, and the IT organization is still in house today. So, that's a great success story from that IT organization.

Looking into the crystal ball

Gardner: Before we wrap up, I'd like to take a peek into the crystal ball, looking into the future a bit. As I mentioned earlier, it strikes me that the emphasis on process over systems and on services from a variety of sources, over monolithic and tightly controlled centralized delivery, is probably going to be growing in importance over the coming years. That perhaps augurs well for ITIL and particularly ITIL V3. So I'd like to go one last time through our panelists on this crystal ball notion. David, what's your prediction for how ITIL Version 3 progresses?

Cannon: What we're going to start seeing is the market will continue to mature, as it has been over the last 20 years. More and more organizations will get in control of their IT environments. They will be articulating value to the business more and more.

But, two additional things are going to start happening as we move forward. The first thing is

In addition, we're going to see ITSM moving more-and-more inward into the IT organization.

that service management is going to move outward. We are already seeing how organizations are starting to use the procedures, the practices, and the principles of ITIL within the business. For example, a lot of businesses are using simple IT event management to drive some of their business operations. So we are going to see ITSM moving out and being applied into business environments.

In addition, we're going to see ITSM moving more-and-more inward into the IT organization. We're going to start seeing ITSM being applied to the actual infrastructure, applications and networks within the IT organization, and we are going to see more and more technical applications of ITSM as well.

Gardner: Stuart, your view on the future?

Rance: I'm not sure if I agree with David on this. Rather than more organizations getting good at service management, what's going to happen is a massive consolidation. There will be fewer really good organizations that understand service management, do it well, Increasingly, they're going to be dominating the market, and the small, ineffective IT organizations aren't going to suddenly learn how to do service management. They're just going to go out of business.

The other thing that I see happening is that those organizations that are currently running their services using good service management practices and developing the capabilities and managing end-to-end services are in a really great position to take on new technologies, paradigms, and ideas to invest in things like virtualization, clouds, blades, and other technologies which provide a more complex infrastructure environment.

Because they're already managing these things from the viewpoint of the service, they're going to find adoption of new and interesting architectures much easier. So again, those organizations that do service management well are the ones who are going to be able to take advantage of all of the flexibility and cost savings of new technologies.

Gardner: Last point to you, Ashley.

Much easier to do

Hanna: Speaking to that idea around the new technologies, some organizations have used some of the new blade infrastructures in virtualization as being easier to deploy than some of the old style mainframe heavy-duty things, but are finding that actually a lot of it is absolutely much easier to do. There is more automation and things work better and smoother.

But, with many more devices and new concepts, they still need to apply these traditional service management approaches. So, I think, we'll see a lot of these organizations that have branched out recently into new technologies realizing that they need to equally invest in new service management guidance.

And I think, best practice today is relatively high level, and I think we'll see the actual sources of best practice like ITIL will get deeper down, and we will get more day-to-day operational advice and templates made available that also adhere to this best practice.

Gardner: Very good. We have been discussing how to better understand the standards and methods around ITIL Version 3, Prescriptions and Guidelines. And we have been better understanding how that can impact the modern enterprise.

I want to thank our panel for today's discussion. We have been joined by David Cannon, an ITSM practice principal at HP, thank you David.

Cannon: Thanks for having me.

Gardner: We have also been joined by Stuart Rance, an ITSM expert at HP and author of the ITIL V3 Glossary. Thank you Stuart.

Rance: Thank you. It's been fun.

Gardner: And Ashley Hanna, an author of Version 2 and Senior Examiner for ITIL V3 as well as a business development manager at HP. Thank you so much, Ashley.

Hanna: Thank you.

Gardner: This is Dana Gardner, principal analyst at Interarbor Solutions. You have been listening to a sponsored BriefingsDirect podcast. Thank you for listening and joining us and come back next time.

Free Offer: Get a complimentary copy of the new book Cloud Computing For Dummies courtesy of Hewlett-Packard at www.hp.com/go/cloudpodcastoffer.

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Transcript of a sponsored BriefingsDirect podcast on the latest version of ITIL, and how it helps IT organizations transform how they operate as business units. Copyright Interarbor Solutions, LLC, 2005-2009. All rights reserved.

IT Financial Management Provides Required Visibility into Operations to Reduce Total IT Costs

Transcript of a BriefingsDirect podcast on how IT departments should look deeply in the mirror to determine and measure their costs and how they bring value to the enterprise.

Listen to the podcast. Download the podcast. Find it on iTunes/iPod and Podcast.com. Learn more. Sponsor: Hewlett-Packard.

Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you’re listening to BriefingsDirect.

Today, we present a sponsored podcast discussion on bringing improved financial management capabilities to enterprise IT departments. The global economic downturn has accelerated the need to reduce total IT cost through identification and elimination of wasteful operations and practices. At the same time, IT departments need to better define and implement streamlined processes for operations and also for proving how new projects begin and unfold.

Knowing the true cost and benefits of complex and often sprawling IT portfolios quickly helps improve the financial performance of how to quantify IT operations. Gaining real-time visibility into dynamic IT cost structures provides a powerful tool for reducing cost, while also maintaining and improving overall performance. Holistic visibility across an entire IT portfolio also develops the visual analytics that can help better probe for cost improvements and uncover waste.

Here to help us understand the relationship between IT, financial management, and doing more for less in tough times are two executives from Hewlett-Packard (HP). Please help me welcome Ken Cheney, director of product marketing for IT Financial Management at HP Software and Solutions. Welcome, Ken.

Ken Cheney: Thanks, Dana, I appreciate the opportunity.

Gardner: We’re also joined by John Wills. He’s a practice leader for the Business Intelligence Solutions Group at HP Software and Solutions. Welcome, John.

John Wills: Hi, thank you, Dana.

Gardner: Ken, let’s start with you. We’ve heard for quite sometime that IT needs to run itself more like a business, to do more with less, and provide better visibility for the bean counters. But, now that we’re in a tough economic climate, this is perhaps a more pressing concern. Give me a sense of what’s different about running IT as an organization and a business now versus two years ago.

Cheney: Dana, the economy has definitely changed the game in terms of how IT executives are operating. I and the others within HP are hearing consistently from IT executives that cost-optimization, cost-containment, and cost-reduction initiatives are the top priority being driven from the business down to IT.

IT organizations, as such, have really shifted the focus from one of a lot of new initiatives that are driving innovation to one of dealing with situations such as how to manage merger and acquisition (M&A) processes, how to deleverage existing IT assets, and how to provide better decision-making capabilities in order to effectively control cost.

The landscape has changed in such a way that IT executives are being asked to be much more accountable about how they’re operating their business to drive down the cost of IT significantly. As such, they're having to put in place new processes and tools in order to effectively make those types of decisions.

Gardner: Now, John, tell me about the need for better visibility. It seems that you can’t accomplish what Ken's describing, if you don’t know what you have.

Wills: Right, Dana. That’s absolutely correct. If all of your information

Historical data is a prerequisite for knowing how to go forward and to look at a project’s cost . . .

is scattered around the IT organization and IT functions, and it’s difficult to get your arms around, then you’re exactly right. You certainly can’t do a good job managing going forward.

A lot of that has to do with being able to look back and to have historical data. Historical data is a prerequisite for knowing how to go forward and to look at a project’s cost and where you can optimize cost or take cost down and where you have risk in the organization. So, visibility is absolutely the key.

Gardner: It’s almost ironic that the IT department has been helping other elements of the enterprise do the exact same thing -- to have a better sense of their data and backwards visibility into process and trends. Business intelligence (BI) was something that IT has taken to the business and now has to take back to itself.

Wills: It is ironic, because IT has spent probably the last 15 years taking tools and technologies out into the lines of business, helping people integrate their data, helping lines of business integrate their data, and answering business questions to help optimize, to capture more customers, reduce churn in certain industries, and to optimize cost. Now, it’s time for them to look inward and do that for themselves.

Gardner: When we start to take that inward look, I suppose it’s rather daunting. Ken, tell us a little bit about how one gets started. What is the problem that you need to address in order to start getting this visibility that can then provide the analytics and allow for a better approach to cost containment?

From managed to siloed

Cheney: If you look at the situation IT is in, businesses actually had better management systems in place in the 1980s than the management systems in place today. The visibility and control across the investment lifecycle were there for the business in the 1980s with the likes of enterprise resource planning (ERP) and corporate performance management capabilities. Today, IT operates in a very siloed manner, where the organization does not have a holistic view across all the activities.

In terms of the processes that it’s driving in a consistent manner, they’re often ad hoc. The reporting methods are growing up through these silos and, as such, the data tends to be worked within a manual process and tends to be error-prone. There's a tremendous amount of latency there.

The challenge for IT is how to develop a common set of processes that are driving data in a consistent manner that allows for effective control over the execution of the work going on in IT as well as the decision control, meaning the right kind of information that the executives can take action on.

Gardner: John, in getting to understand what’s going on across these silos in IT, is this a problem that’s about technology, process, people, or all three? What is the stumbling block to automating some of that?

Wills: That’s a great question. It’s really a combination of the three. Just to be a little bit more specific, when you look at any IT organization, you really see a lot of the cost is around people and around labor. But, then there is a set of physical assets -- servers, routers, all the physical assets that's involved in what IT does for the business. There is a financial component that cuts across both of those two major areas of spend.

As Ken said, when you look back in time and see how IT has been maturing as an organization and as a business, you have a functional part of the organization that manages the physical assets, a functional part that manages the people, manages the projects, and manages the operation. Each one of those has been maturing its capability operationally in terms of capturing their data over time.

Industry standards like the Information Technology Infrastructure Library (ITIL)

IT organizations are going to be starting in multiple places to address this problem. The industry is in a good position to address this problem.

have been driving IT organizations to mature. They have an opportunity, as they mature, to take advantage and take it to the next level of extracting that information, and then synthesizing it to make it more useful to drive and manage IT on an ongoing basis.

Gardner: Ken, you can’t just address new technology at this juncture. You can’t just say, "We’re going to change our processes." You can’t just start ripping people out. So, how do you approach this methodologically? Where do you start on all three?

Cheney: IT organizations are going to be starting in multiple places to address this problem. The industry is in a good position to address this problem. Number one, as John mentioned, process standardization has occurred. Organizations are adopting standards like ITIL to help improve the processes. Number two, the technology has actually matured to the point where it’s there for IT organizations to deploy and get the type of financial information they need.

We can automate processes. We can drive the data that they need for effective decision-making. Then, there is also the will there in terms of the pressure to better control cost. IT spend these days composes about 2 to 12 percent of most organizations’ total revenue, a sizable component.

Gardner: I suppose there also has to be a change in thinking here at a certain level. If you're going to start to finding cost and behaving like a business rather than a cost center, you have to make a rationale for each expenditure, both operationally and on a capital expenditure basis. That requires a cultural shift. Can you get into that a little bit?

Speaking the language of business

Cheney: It sure does. IT traditionally has done a very good job communicating with the business in the language of IT. It can tell the business how much a server costs or how much a particular desktop costs. But it has a very difficult time putting the cost of IT in the language of the business -- being able to explain to the business the cost of a particular service that the business unit is consuming.

For example, quote to cash. How much is a particular line of business spending on quote to cash or how much does email cost based on actual usage per employee. These are some of the questions that the business would love to know, because they're trying to drive business initiatives, and these days, the business IT initiative is really part of a business initiative.

In order to effectively asses the value of a particular business initiative, it’s important to know the actual cost of that particular initiative or process that they are supporting. IT needs to step up in order for you to be able to provide that information, so that the business as a whole can make better investment decisions.

Gardner: I suppose business services are increasingly becoming the coin of the realm and defining things such as a processor, number of cores, license per user/seat, and that sort of thing doesn’t really translate into what a business service costs. John, how does BI come onto the scene here and help gather all of the different aspects of the service so that it could be accounted for?

Wills: It all ties together very strongly. Listening to what Ken was saying

That’s one of the keys in helping IT shift from just being a cost center to being an innovator to help drive the business.

about tying to the investment options and providing that visibility ties directly to what you are asking about BI. One of the things that BI can help with at this point is to identify the gaps in the data that’s being captured at an operational level and then tie that to the business decision that you want to make.

So again, Dana, back to one of your earlier questions about whether it's a people, process or technology issue, my answer would be that it's really all of the above. BI comes along and says, "Well, gee, maybe you’re not capturing enough detailed information about business justification on future projects, on future maintenance activity, or on asset acquisition or the depreciation of assets."

BI is going to help you collect that and then aggregate that into the answers to the central question that a CIO or senior IT management may ask. As Ken said, it’s very important that BI, at the end of that chain or sequence of activities, helps communicate that back in terms that business can understand so they can do an apples-to-apples comparison of where they would like IT to satisfy their needs with a given budget at hand. Dana, that goes back to again one of your earlier questions. That’s one of the keys in helping IT shift from just being a cost center to being an innovator to help drive the business.

Gardner: I suppose that as we move from manual processes in IT toward these visualization analytical tools, there's also a cultural shift. A print out might work well in the IT department. If you take that to your decision maker on the business side, they're going to say, "Where's my dashboard? Where are my dials?" What’s the opportunity here to make this into more of a visual benefit in terms of understanding what’s going on in IT and in cost? Why don’t we take that to Ken?

Getting IT's house in order

Cheney: In terms of the opportunity, it’s really around helping IT get its own house in order. We look at the opportunity as being one of helping IT organizations put in place the processes in such a way that they are leveraging best practices, that they're leveraging the automation capabilities that we can bring to the table to make those processes repeatable and reliable, and that we can drive good solid data for good decision-making. At least, that’s the hope.

By doing so, IT organizations will, in effect, cut through a lot of the silo mentality, the manual error-prone processes, and they'll begin operating much more as a business that will get actionable cost information. They can directly look at how they can contribute better to driving better business outcomes. So, the end goal is to provide that capability to let IT partner better with the business.

Gardner: Tell me a little bit more about the solutions and services that you'll be announcing at HP’s Software Universe event?

Cheney: At Software Universe this year, we rolled out a new solution to help customers with IT financial management. For quite some time, we’ve been in the business of doing project portfolio management (PPM) with HP Project Portfolio Management Center, as well as in the business of helping organizations better manage their IT assets with HP Asset Manager.

We have large customer bases that are leveraging those tools. With our

This product effectively allows IT organizations to consolidate their budgets, as well as their costs. It can allocate the cost as appropriate to who they view as actually consuming those particular services that IT is delivering.

customers who are using the PPM product as well as the Asset Management product from HP we can effectively capture the labor cost. If you look at PPM, it really tracks what people are working on, effectively managing the resources and capturing the time and cost associated with what those resources are doing, as well as the non-labor. It's all of the assets out there -- physical, logical, and virtual. We're talking about servers and software so that we can pull that together to understand the total cost of ownership.

We’ve brought together what we’re doing within PPM as well as within Asset Management with a new product called HP Financial Planning and Analysis. This product effectively allows IT organizations to consolidate their budgets, as well as their costs. It can allocate the cost as appropriate to who they view as actually consuming those particular services that IT is delivering.

Then, we provide the analytic reporting capabilities on top of that to allow IT organizations to better communicate with the business, better control, optimize, make decision making around cost. They can effectively drive the decision making right down to the execution of the work that’s occurring within the various processes of IT. That’s a big part of what we are delivering with our IT financial management capability.

Gardner: So, tell us about the products and solutions that are coming into the market?

Cheney: We have a new solution that we’re announcing as part of the HP Financial Planning and Analysis offerings.

Gardner: Does that have several modules, or are there certain elements to it -- or more details on how that is rolling out?

Service-based perspective

Cheney: The HP Financial Planning Analysis product allows organizations to understand costs from a service-based perspective. We're providing a common extract transform load (ETL) capability, so that we can pull information from data sources. We can pull from our PPM product, our asset management product, but we also understand the customers are going to have other data sources out there.

They may have other PPM products they’ve deployed. They may have ERP tools that they're using. They may have Excel spreadsheets that they need to pull information from. We'll use the ETL capabilities to pull that information into a common data warehouse where we can then go through this process of allocating cost and doing the analytics.

Gardner: So, John, going back to that BI comparison. It sounds a lot like what people have been doing with trying to get single view of a customer in terms of application data.

Wills: It really is. It’s a single view, except in this case we're getting single view of cost across many different dimensions. It’s really important, as Ken said, that we really want to formalize the way they're bringing cost data in from all of these Excel spreadsheets and Access databases that sit under somebody’s desk. Somebody keeps the monthly numbers in their own spreadsheets in a different department and they are spread around in all of these different systems. We really want to formalize that.

As to your previous question about visualization, it’s not only about formalizing it and pulling it altogether. It’s about offering very powerful visualization tools to be able to get more value and to be able to see immediately where you could take advantage of cost opportunities in the organization.

Part of Financial Planning and Analysis is Cost Explorer, a very traditional BI capability in terms of visualizing data that’s applied to IT cost, while you search through the data and look at it from many different dimensions, color coding, looking at variants, and having this information pop out of you.

Gardner: It’s one thing to be able to gather, visualize, and put all this

. . . once you are able to actively price your services, you're able to charge back for the consumption of those services.

information in the context of a cost item or a service, but the larger payback comes from actually being able to associate that cost with the user or some organization that’s consuming these services at some level or another. How do we get from the position of visibility and analytics to a chargeback mechanism?

Cheney: Most customers that I talk to these days are very keen on jumping immediately to the charge back and value side of the equation. I like to say, "Let’s start by walking before we run," with the full understanding that the end goal really is being able to show the value that IT is delivering and be able to charge back for the services that are actually being consumed.

Most organizations haven’t even put in place these processes that they need, which is why, when we talk about what we are doing with IT financial management, we want to make sure customers understand that it’s a complete solution, where we view the underlying processes being the end goal of understanding of the value doing charge back. To get to that nirvana of understanding the value of IT, customers need to put in place those processes around capturing labor cost and non-labor assets and effectively managing the IT investment lifecycle end-to-end.

On top of that, by doing the cost aggregation and the analytics that we are doing with the Financial Planning and Analysis offering, you get the cost visibility. Once you understand the cost, you can then go through the process of pricing out what your services are. At that point, once you are able to actively price your services, you're able to charge back for the consumption of those services.

IT underappreciated

Gardner: Over the years, I've heard from a number of IT folks about their frustration at not being appreciated. People don’t understand what goes into being able to provide these services. This perhaps opens up an opportunity or a door for the IT department to explain itself better and perhaps be better appreciated. Does that bear fruit in some of the uses that you’ve come across so far?

Cheney: Absolutely. That is really what we are driving for -- to help IT organizations be much more credible in front of the business, for business to understand what it is that they are actually paying for, and for IT to react much more nimbly to the requests that are coming in from the business.

Wills: You are certainly being more transparent. Put the question of charge back to the side for a moment. Without question, you're able to be more transparent in what the costs are. You're able to use the same terminology, very consistent terminology, that the business understands, which is a huge leap forward for most organizations. When you have that transparency, when you have a common set of terminology in the way that you communicate things, it’s a huge boost for IT to be able to justify how they are spending their budget money.

Gardner: Let me ask an interesting question. Who in IT is responsible for this? Is there a "chief visibility officer," if you will, within the IT department? Who is generally the sign-off on the purchase order for these sorts of products?

Wills: The chief sign-off officer, the chief visibility officer, is the CIO. There is no question. The CIO is the one. It’s really interesting. When we talk to accounts, the one who has the burning issues, the one who is most often in front of the business, justifying what IT does, is the CIO --at the highest level obviously.

That's always interesting, because the CIO has the most immediate pain. Often times, people one or two levels beneath him are grinding through manually pulling data together month after month and sending that data upstairs, so to speak. They don’t have the same levels of interaction with the end customers to have that acute pain, but the CIO is definitely the chief one who sees that on a daily basis. Would you agree, Ken?

Cheney: I would. Many CIOs have created essentially an IT finance arm and they may have a role, such as a CFO for IT or IT finance, which is taking all that information rolling up from those folks that are lower down in the organization and trying to make sense of it. This is a manual, very error-prone process these days. So, for that particular organization charged with making sense of IT finances and associating the actual cost of IT to the services consumed it is a big challenge. As such, it makes the job of the CIO very difficult when it comes to going out and communicating with the business.

Gardner: Let’s see if we can quickly identify some examples. Do you

. . . we found that, on average, that strategic portfolio work that our customers would do could save 2 to15 percent of their total IT budget.

have case studies or customers that you can describe for us who have undertaken some of this, and what have they found? Did they get actual significant savings? Did they see an improvement in their trust and sense of validation before the business or perhaps are they looking more for efficiency and are improving the productivity of their IT departments? Any metrics of success for how these products are being used?

Cheney: In terms of how customers are being successful, we’ve seen customers these days who are very focused on quick results, meaning that when they deploy what we are bringing to the table, they are doing it in a very targeted manner. We recommend that customers actually do that. That they want to make sure they’re tackling this problem in what I call bite-size chunks, where they want to get a win within a few months maximum. We have customers who will start, for example, with a base level of control over their IT processes.

One great starting point would be strategic portfolio management. We recently did a survey of about 200 IT executives and found that 43 percent of those executives said they have no form of portfolio rigor in place today. We did a benchmark study with a group of our customers with an organization called the Gantry Group, a third-party group that does return on investment (ROI) analysis and we found that, on average, that strategic portfolio work that our customers would do could save 2 to15 percent of their total IT budget. That's an area where we can have a very quick impactful win, and it's a good example.

Another area would be asset, inventory, and utilization, where we have customers who will get started just understanding what they have out there in terms of their services and desktop software and getting a grip on that. There are immediate savings to be had with that type of initiative as well.

A look at the future

Gardner: That brings up looking at the future. We've heard a lot about virtual desktop infrastructure (VDI), bringing a lot of what was done locally back to the data center, but with cost issues being top of mind around that. Then, we're also hearing quite a bit about cloud computing. It seems to me that we're going to have to start doing some really serious cost benefit analysis about what is the cost to maintain my current client distribution architecture versus going to a VDI or a desktop-as-a-service (DaaS) approach.

I am also going to need to start comparing and contrasting cloud-based services, applications and/or infrastructure against what it costs and what we're doing internally. Do you see some trends in the field, some future outlook, in terms of what the role of IT is going to move into in terms of being able to do these financial justifications?

Cheney: Absolutely. This is an area that we're seeing customers having to grapple with on a consistent basis, and it’s all about making effective sourcing decisions. In many respects, cloud computing, software as a service (SaaS), and virtualization all present great opportunities to effectively leverage capital. IT organizations really need to look at it through the lens of what the intended business objectives are and how they can best leverage the capital that they have available to invest.

Gardner: John, something further to offer?

Wills: There is a huge inflection point right now. Virtual computing, cloud computing, and some of these trends that we see really point towards the time being now for IT organizations to get their hands around cost at a detailed level and to have a process in place for capturing those cost. The world, going forward, obviously doesn’t get simpler. It only gets more complex. IT organizations are really looked at for using capital wisely. They're really looked at as the decision makers for where to allocate that capital, and some of it’s going to be outside the four walls.

We've seen that on the people side of the business with outsourcing for quite some time. Now, it’s happening with the hardware and software side of the business as well. But these decisions are very strategic for the enterprise overall. The percentage of spend, the IT spend-to-revenue, for a lot of these organizations is very large. So, it’s absolutely critical for the enterprise that they get their hands around a process for capturing cost and analyzing cost, if they're going to be able to adapt and evolve as this market continues to change so rapidly.

Gardner: If an outside provider can walk in and say this application or this infrastructure is going to cost this much per employee per month, that’s pretty concrete. If the business decision maker goes back to the IT department and says, "How much is that going to cost from your perspective," they have got to have an answer, right?

Wills: Right. You'd better have an answer for what your fully loaded costs are across every dimension of your business and you'd better understand things like your direct cost, indirect cost, fixed cost, and variable cost. It’s really about looking into the future and predicting not only risk, but opportunity, advising the board and CEO, and saying, "These are our choices and this is the best use of capital."

Gardner: I was just having a chat about cloud computing with Frank Gillett of Forrester Research a few weeks ago. He was saying that when you take a hard look at these costs, in many cases, doing it on-premises internally is actually quite a bit more attractive than going to the cloud but you have to come up with the numbers to actually justify that.

Wills: You have to be able to justify it. There is also the dimension of

You'd better have an answer for what your fully loaded costs are across every dimension of your business and you'd better understand things like your direct cost, indirect cost, fixed cost, and variable cost.

customer satisfaction. You talk about service-level agreements (SLA), and you must factor that in. So, you start to get into some of the soft aspects of costing things out and looking at opportunity cost, but you have to factor those in as well. It does show some of the complexity here with the problem that’s at hand.

We really believe this is the time for the organizations to seriously get their arms around this.

Gardner: Well, I'm afraid we are about out of time but we have been learning more about how improved financial management capabilities can help reduce total IT cost through identification and elimination of wasteful operation, but also gaining visibility into actual IT cost structures can certainly help our organizations justify themselves to the business, find the right balance in budgets and future projects, and, as we have seen for the future, being in a good position to compare and contrast against virtualization, and cloud computing, and some of the other new opportunities for IT acquisition.

I want to thank our panel for getting deeply into this conversation. It’s really been fun. I also want to thank our sponsor for today’s discussion, HP Software and Solutions, for underwriting its production. We've been joined by Ken Cheney, director of product marketing for IT Financial Management at HP software. Thanks, Ken.

Cheney: Great. Thank you.

Gardner: And also, John Wills, practice Leader for the Business Intelligence Solutions Group at HP software. I appreciate your input, John.

Wills: Thank you, Dana.

Gardner: This is Dana Gardner, principal analyst at Interarbor Solutions. Thanks for listening and come back next time.

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Transcript of a BriefingsDirect podcast on how IT departments should look deeply in the mirror to determine and measure their costs and how they bring value to the enterprise. Copyright Interarbor Solutions, LLC, 2005-2009. All rights reserved.