Manage Time for Better IT
Ever since IT became a significant player in business, managing the costs has become an ever increasing managerial headache. IT demands two fundamental expenditures: technology (hardware, software, communication) and personnel. A recent expenditure analysis by Gartner and Forrester shows that, on average, technology and personnel costs are usually divided 50:50. So how can you know if you’re not spending too much and that you’re allocating funds optimally? This article aims to help CIOs and IT managers to answer this question by introducing two new concepts: Earning Capacity and Burning Capacity and shows how the ratio between the two can be used to show you how to improve the bottom line of the IT arm of your organization.
The value of technology is fairly transparent. The more you pay, the better the functionality. Even price increases over time have clear benefit. A new network server may cost 10% more than the old one, but it offers 10 times more processing power. And you can’t buy an old server even if you wanted one, because it’s off the market.
Psychologically, technology price rises feel like value for money because there is a quantifiable improvement in the technology. Moreover, technology costs are relatively transparent because they are simple purchases that recur with predictable regularity.
How much do people cost? Any visit to an HR department is to jump into the deep end of a pool of complexity. Salaries are only the beginning. There are pensions, lease cars, bonuses, training costs, recruiting costs and the list goes on. Plus there is the time it takes to hire and train new people. Attempting to manage and steer people using cost as the driver is doomed to failure. “Time” is, in fact, the single parameter that is most easily quantifiable when it comes to personnel. This is what managers should focus on when it comes to managing the effectiveness of people.
A given manager can go to a given employee and request that he or she “…stop doing [x] and start doing [y]?” It is this ability to determine how someone spends their time (control) and the readiness with which this can be changed (immediacy) that makes managing time so attractive. So, what does the average IT employee spend their time doing? We identified three key categories of time:
- Earning Capacity (EC)
- Burning Capacity (BC)
Overhead is defined as work that does not contribute to the primary process of the organization. In the case of IT, the primary process is delivering IT services. Anything that is not directly related to these activities is seen as overhead. Examples of overhead activities are personnel meetings, internal “special” projects, sick leave, “idle time”, coffee and smoking breaks and so on. Mostly, overhead is dealt within organizations by adjusting the number of effective hours per Full Time Equivalent (FTE). What is a FTE? A year has 365 days. Assuming a person works 5 days a week, has 6 public holidays and 25 personal/vacation days, the number of workable days (of 8 hours) is 230, or 1840 hours. Everyone (except lawyers) knows that it’s not realistic to expect 1840 hours of effective work from an employee. Time will always be lost due to activities defined above as overhead. Most organizations the authors have come across work with 1400 to 1600 hours of effective work time as the definition of a FTE.
The key to managing overhead time is to increase the net productivity of each FTE by being critical about how time is spent on overhead (everything that has nothing to do with primary service delivery). When an IT-organization can plan with, for example, 1600 hours rather than 1440 hours, an effective cost reduction of 10% can be realized (given that the salaries are kept the same). The actions associated with reducing overhead are things like actively reducing sick leave and having more effective – shorter – internal meetings. In practice, simply being aware of time wasted and making employees aware that overhead is taken seriously, helps to focus the organization.
For the rest of this article, we will assume that overhead has been optimized and is covered by the definition of an FTE.
As we have already seen, the primary process of an IT organization is delivering IT services. But what are these services? To define the services of an IT organization, let’s look at what the customers of an IT organization actually want. In essence, they want three things:
- They want their existing IT stuff (or functionality) to work properly, i.e. no disruptions
- They want new stuff (new or additional functionality), preferably as soon as possible, and
- They want advice on how best to use their existing and new stuff.
These are the three basic services of IT for which a customer is willing to pay, i.e. they represent value for the customer. And the customer is actually willing to pay for these activities. These are the activities that make up the Earning Capacity of the IT organization. It is very important to distinguish between what a customer wants to pay for and what we actually make them pay for. A rather distressing example is the contract in which the customer gets to pay for getting an incident solved. This really should be in the warranty of the service and not a money-generator for the service provider. What are the components of Earning Capacity? From the three basic services, we know that the elements of Earning Capacity are:
- Customer-initiated business improvement projects: these are changes and projects requested by the customer
- Running the IT operations: all activities associated with ensuring that the IT service works without incidents on a daily basis
- Providing advice: the advice customers are looking for from their IT organization is basically the result of the analysis required for availability and capacity plans and market research on technology applicable to the business of the customer.
If we translate this into basic IT processes (as described in ITIL®), we are talking about the activities in Change/Release/Configuration Management, Request Fulfillment, Availability/Capacity Management and IT Operations Management. The aim is to increase the proportion of time spent on these activities. All other activities are secondary in nature. These activities are collectively called Burning Capacity.
For many IT organizations, the activities (and processes) that make up Burning Capacity may be counter-intuitive for the simple reason that the IT organization charges the customer for these activities. As we stated above, there is a major difference between what a customer WISHES to pay for and what we MAKE them pay for. Burning Capacity activities are Incident Management, Problem Management, Service Level Management and other coordinating activities, strategic activities and any tactical activities that do not lead to advice for the customer to better guarantee and manage their own services and products. The aim for an IT organization is to reduce the amount of time spent on these activities as much as possible.
Financial Effect of Managing Earning Capacity
So how can managing Earning Capacity help you improve the financials of your IT organization? As we have seen, gaining insight into the aspects of IT that earn and burn money is the first step. It is now up to the IT management to improve the ratio of Earning Capacity to Burning Capacity (and Overhead). To illustrate the financial effect, let’s take a fictitious IT organization. This organization is able to charge its customers on average $100 per hour. Its internal costs for an employee are on average $50 per hour. If the IT organization has an EC:BC ratio of 50%, it will break even, since each paid (EC) hour needs to cover the cost of 2 hours (the EC hour and the BC hour).
If we improve the EC:BC ratio substantially to 66%, we see that each BC hour is supported by 2 EC hours. This means that the cost of an EC hour changes from $100 to $75. If the IT organization can sell its EC hours for an average of $100 to customers, it will be making a $25 profit per hour. The organization obviously has a choice. It can either pocket the margin or give some of it back to its customers in the form of a cheaper price per hour. The effect will probably be an increase in demand. An IT organization with an EC:BC ratio of 33% will need to cover 2 BC hours with 1 EC hour, i.e. in this example, it will need to recuperate $150 per hour from its customers to break even. Its chances of success are strongly reduced. The assumption in the above example is that the net financial effect of technology is zero, i.e. the customer pays for all hardware, software and communications. This is the way most companies work.
Looking at the market, we can compare a small supplier of IT support services for an ERP system with a large one-stop-shop supplier. The former employs 15 highly skilled and specialized people; the latter has people in various departments who work to provide similar services to customers. The small IT service provider is highly tuned to its Earning Capacity, ensuring that its people support specific customers. There is little coordination to be done and, due to their concept for supporting this particular ERP system, they are able to reduce incidents and therefore problem-solving to an absolute minimum.
The large IT service provider suffers from a high level of coordination and a higher level of incident and problem-solving It also has a less efficient way of processing paid customer projects. The result is that the small provider can provide a higher level of service for $15,000, whereas the large IT provider charges $4,0000 for the same service. This is the effect of the Earning Capacity-Burning Capacity ratio. It is true that some of the coordination cost absorbed in the cost of the large IT provider is taken over by the IT department, if the small IT provider is contracted. It is up to the IT manager in such a situation to determine whether the additional coordination weighs up against the reduction of operational costs.
Making it work
We have shown that there is a clear (financial) incentive to steer how time is spent in an IT organization. There is now a business case for the following aspects of IT:
- Having fewer incidents to solve, i.e. investing in problem management and good quality Change & Release Management;
- Solving incidents and everything else that is included in the service contract as quickly as possible (i.e. incidents and requests – information and standard changes)
- Spending less time on managing and coordinating people, i.e. ensure that processes are well-implemented and followed so that technical people can produce results with a minimum of coordination
There are obviously other dynamics at work in the EC:BC ratio, for example:
- There is a continuous pressure to reduce EC activities to ensure that the margin on service contracts is kept high, through the automation of repetitive tasks. The only reason to increase the amount of people you have in the operations is if you are getting new business. This has the effect of reducing the EC:BC ratio.
- It does not help to inflate the number of hours charged to the customer for projects, since the IT organization will end up with projects that are too expensive.
Managing the EC:BC ratio and the number of hours needed to deliver the agreed IT services is vital for the health of the IT organization. It leads to one or more of the following benefits for the IT organization:
- Reduction of staffing levels
- Reduction of number of external staff
- Create possibility to outplace staff
- Enables IT organization to spend more time on activities related to paid projects
- Allocation of freed-up staff to improvements
- Allocation of freed-up staff to projects
- Quality improvement
- Allocation of freed-up staff to projects to ensure quality