Shining a Light on Maintenance

CEOs are demanding to know what's under the maintenance rug. You'd better find out first.

At a recent conference for chief financial officers, participants and presenters appeared to agree that IT maintenance is more than a huge budget line for nondiscretionary spending. The consensus was that it's become something of a slush fund for virtually any costs CIOs want to hide, from R&D skunk works to rogue projects. This assessment of maintenance may or may not be true at your company, but if your executives perceive it to be true, you've got an image problem. And if it is true, you've got a bigger problem.

Maintenance is "a huge black hole," says Robert Rosen, CIO at the National Institute of Arthritis and Musculoskeletal and Skin Diseases in Bethesda, Md., and president of Share, an IBM user group. "I have not seen anyone taking a step back and saying, 'OK, we have all these systems; what does it really cost to keep these things running?'"

If you're used to sweeping wish-list items under the maintenance rug, experts say you're probably spending more than you should on initiatives that aren't aligned with corporate priorities or return-on-investment expectations. Moreover, without a clear view into what's being spent and why, you lose the ability to assess risks and assign responsibility.

Some CFOs and CEOs, driven by tightening budgets and governance standards, are demanding more details from their CIOs about the costs that fall under the maintenance header. The result is more transparency, which brings better accountability, smarter decisions on spending and, ultimately, more credibility for IT.

"More and more business leaders are demanding that accountability on the IT budget," says John Stevenson, vice president and CIO at Sharp Electronics Corp. in Mahwah, N.J. "IT leadership has to have a handle on costs, because the details of the IT expenditure are now being put on the table and they can't say, 'This is a black box.' "

Long Time Coming

The current frustration with IT maintenance budgets isn't the result of an overnight revolution within corporate America. Phil Murphy, an analyst at Forrester Research Inc. in Cambridge, Mass., and author of a recent report titled "Stop Treating Maintenance as a Chore," says the situation has been building for years. "Maintenance budgets are higher than they should be," Murphy says, but he blames that on shortsightedness rather than malfeasance. "I don't believe it's a 'let's hide the money in maintenance' malicious activity," he says.

"The thing that governs maintenance is political power," Murphy says. "There is collusion, but it's not at the level you think. It's not the CIO stockpiling money to hide."

He thinks that companies have been ignoring the maintenance mess as they have focused on promising technologies. That's one reason why many are spending 75% or more of their IT budgets on maintenance, Murphy says. "Now we have to pay the piper," he adds.

Maintenance budgets are also high because of something Murphy calls "leakage." That's when an IT staffer who's tight with a business-unit leader helps get the unit's wish-list project done "one bug fix at a time." On the pretext of fixing a system, they're really slowly converting it to a new system -- under cover, he says.

Part of the confusion arises because companies put slightly different items under the maintenance budget heading. Generally, it includes vendor fees and labor to maintain existing systems. It also includes costs for activities that keep the whole IT infrastructure running, such as fixing a bug or adding a user.

For a long time, corporate leaders didn't question this spending because it was viewed as nondiscretionary. But over the years, some maintenance budgets have come to include spending that should be listed under other headings, such as research and development or new projects. How much of that is the result of deception, mislabeling or misinterpretation isn't clear.

"Do people label enhancements and upgrades exactly the same way, every time, company to company? I don't think so. There's no bright line," says Joel D. Jacobs, deputy CIO at The Mitre Corp., a not-for-profit company with headquarters in Bedford, Mass., and McLean, Va., that provides technical and R&D support to the government.

Jacobs says Mitre saw its vague definition of maintenance as a problem and decided to do something about it.

Two years ago, Mitre changed its working vocabulary to enhance understanding between business and IT and get a better handle on how it was spending its money. Part of that change was to break the IT budget into more-accurate headings. Mitre had once used "operations," "maintenance" and "development," then "frontier work," "utility" and "productivity" as IT budget headings. Now the labels are "nondiscretionary," "core services" and "initiatives/service enhancements." (Jacobs says there's still some discussion on whether that third category should be separated into two.)

Jacobs stresses that Mitre focused on more than just vocabulary. Business and IT leaders looked at what was to be included under each item. "We have to have a collective agreement about what it means," he says.

As the name implies, the nondiscretionary heading includes contracted fees and expenses. Core services are defined as same-level services -- "operation and maintenance in the strictest sense," Jacobs says. The initiatives/ service enhancements heading, he says, is "where things are going, what we chose to fund, where we have a certain amount of discretion on this vs. that."

The budget breaks down like this: 35% to nondiscretionary, 57% to core lights-on, day-to-day operations, and 8% to enhancements and initiatives.

Those percentages may not be fun to work with, but at least Mitre knows where it stands, and that's the first step toward managing costs better. Many IT leaders don't have a good handle on maintenance because they don't have an accurate count of their IT assets and the cost of running each part, says Murphy.

Kaiser Permanente is decidedly not one of them. Michael Blake, vice president and CFO at Kaiser Permanente Information Technology in Oakland, Calif., has worked for the past two years to assess and analyze the health care provider's IT assets, including 5,600 professionals and an annual operating budget that exceeds $1 billion. "We try to understand different applications, projects and services," he says.

The result is a lot more detail on how much the various parts of his large and complex organization cost. For example, IT has more than 1,700 applications, projects and services, Blake says, and it uses time reporting and a chargeback mechanism to keep tabs on costs, as well as who and what are driving them. "I call it transparency," he says.

In the past, IT might talk to the business units about investing in data centers and people doing "break-fix," Blake explains. "But that was IT telling the business in IT-speak what they're paying for," he says. "And the business couldn't really translate."

Today, he can tell business leaders how much it costs to run Kaiser Permanente's appointment systems or a class of PCs or laptops. With this view, Blake says, he and other business-unit leaders know how much systems cost to keep on and, perhaps more important, what value they provide to the organization. "This allows us to have a more informed conversation," he says. "And understanding your current costs allows you to better make those value decisions."

Having just recently achieved this transparency, Blake says, Kaiser Permanente has yet to start making the decisions that could yield savings. However, he adds, when he implemented a similar process at a large retailer, the results were quick and impressive. For example, Blake found that the company was spending more than $100,000 to maintain an application that generated a logistics report that only two people used and that could be obtained through other systems.

The transparent view of the maintenance budget that Mitre and Kaiser Permanente are achieving will slowly come to other companies, experts say, and it behooves CIOs to get started. "CFOs are actually starting to push back on this," says Mark Lutchen, a senior partner in the IT Effectiveness practice at PricewaterhouseCoopers.

CIOs who don't create greater visibility into -- and controls over -- their maintenance budgets won't be able to hold on much longer, says Lutchen, a former CIO at Pricewaterhouse-Coopers and the author of Managing IT as a Business: A Survival Guide for CEOs (John Wiley & Sons, 2003). "CFOs and CEOs aren't going to tolerate the lack of discipline. The new generation of executives is becoming savvier about IT; they're not afraid of it," he says. "They will force the issue."

As CIOs start to work on greater visibility into maintenance expenses, it will bring savings and closer alignment with the business. And demonstrating greater control may even boost their budgets. "Transparency will bolster your credibility," says Blake. "And when you're transparent, you can make a case for the things you know will change the business."

Pratt is a Computerworld contributing writer in Waltham, Mass. You can contact her at marykpratt@verizon.net.

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Copyright © 2006 IDG Communications, Inc.

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