How Enterprise Architecture Enables Effective and Strategic Cost Management

25 Oct 2021

by Edward Granger

Finance is the international language of business. To be successful, IT strategists and business planners need to therefore be able to tell financial stories about their roadmaps. 

Whether it’s understanding the current costs of operations or projecting future costs, it’s imperative to integrate financial data into your IT and business architecture. This can be daunting territory to enter, especially if you’re a strategist or technologist, not an accountant. However, putting a dollar value on your assets helps you articulate their current value. These figures will also help you decide how to manage or transform them in the future.

Even if strategic cost management isn’t your primary focus, almost any key benefit of your target solution or operating model will carry a cost impact, from new revenue streams, better customer experience, increased efficiency, agility, innovation, and availability to reduced complexity and risk. Enterprise Architecture can help equip you to gain cost insight and justify your plans.

Beyond General Ledger: How to Get Cost Insight

The ability to provide a financial lens on your architecture, present and future, is mission-critical.

While your finance department has visibility on the organization’s transactions, they generally do not have insight into how those figures relate to each other. To understand and control costs effectively, you need to know what business or technical value an asset brings and how your IT and business assets relate to each other.

For example, the cost of a cloud service affects the run cost of an application, affecting the cost of servicing a given business product. These dependencies are cost levers or constraints that may enable or prevent you from optimizing your operating expenses.

Looking exclusively at IT and business assets as expense items on a ledger do not help us to understand their interdependencies. Without understanding these interdependencies, cost-cutting in one area can easily create more expenses in another.  

Enterprise architecture helps you document and understand these critical relationships between your assets and the organization.

strategic cost management

Enterprise Architecture Enables Execution

Enterprise architecture models are the bridging language between traditional cost management from an accounting standpoint and execution from a project standpoint. 

By defining the IT and business assets your costs are related to, technology and business planners can understand impacts, analyze constraints, and identify opportunities that would not otherwise be visible. 

This offers a new level of transparency and predictability for your cost management initiatives, such as application rationalization. From an accounting perspective, applications appear only as a series of expense items mapped to cost centers. There is no visibility on utility or which applications can be safely removed. 

An enterprise architect can provide this insight through their understanding of the relationships between those applications and the processes, products, and revenue streams they support, suppliers, other applications that depend on them, and more.

The enterprise architect can also advise if decommissioning an application might enable the organization to divest a data center or a challenging supplier relationship. They can also advise on a successor application, project future run costs, and much more.

Common organizational objectives where enterprise architecture can provide a new level of cost insight include: 

In each case, enterprise architects can provide new insight into cost and efficiency opportunities by matching IT and business architecture models to financial data.

Strategic Cost Management Approaches

There are three primary ways by which organizations can reduce IT and business costs. Most organizations use a combination of all three to keep their costs under control, and not all of these require a deep understanding of enterprise architecture.

  1. By divesting, disposing of, or replacing a cost-bearing asset

    E.g., an application or datacenter. This may also include converting capital expenditure into operational expenditure by disposing of an asset and buying an equivalent service in its place.

  2. By reducing consumption of a cost-bearing product or service

    E.g., cloud hosting. In this case, the cost item is retained, but expenditure is reduced through controlled usage. Thus, many organizations have started down the path of IT Business Management (ITBM), establishing chargeback systems for internal services. The end result is an ‘IT Utility Bill’ that is sent to business units every quarter.

    This is a mature capability that can be hard to implement. It can be challenging and time-consuming to reconcile and justify IT spending with the general ledger expenses. Great effort is required to gain agreement on cost allocations with consuming business units. This exercise may also lead to relying more heavily on ungoverned external providers, which increases your risk.

  3. By renegotiating the cost of a product or service

    E.g., renegotiating a business process or outsourcing contract. Renegotiation can be one of the more straightforward approaches, but it is heavily reliant on the leverage you have with your suppliers.

The more significant point is that there is little value in controlling costs on assets you don’t need in the first place. It is then in the first method - identifying where a cost-bearing asset can be disposed of or replaced - where enterprise architecture can contribute the most cost insight. 

Where accountants reconcile figures, internal billing, and develop reports for the market, enterprise architects help provide an understanding of directional costs to inform strategic internal investment decisions.

Enterprise architects should work with the best financial data available to their organization. That said, even incomplete or estimated financial data can still yield valuable strategic cost insights. Working with broadly accurate cost numbers and architecture models will give visibility to potential strategic opportunities and challenges.

Lack of exactness is compensated for by increased situational awareness. Once candidate opportunities have been identified, a detailed financial analysis can be done with more efficiency and precision than was previously possible.

➡️ Read more about what gets added to an enterprise architect’s cost model, how it works, and how you can use it to tell insightful financial stories. 

The Ardoq Cost Model

 

Edward Granger

Ed is the Product Strategist at Ardoq. With over 15 years of experience in the Enterprise Architecture industry, Ed’s unique insight is instrumental in shaping the product roadmap and strategy for Ardoq. As a keen writer, you can find his name on much of the Ardoq material as well as the occasional screenplay. Ed is at the forefront of driving innovation in the company and has a strong belief that for EA to control Digital, it must be Digital.

  

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