May 24, 2009

Quick Hit Savings for IT

During times of crisis, carefully managed transformation can reduce spending by 30 - 50%.

In today’s turbulent business environment driven by an unprecedented global recession, the operating landscape of many industries will change forever, forcing many businesses to alter operating models and portfolios not just for the sake of efficiency gains but also for survival. As such, IT organisations and their respective CIOs must play an essential role to enable critical change and business support through the various transitions, finds a new report by Booz & Company.

While cost control will remain a critical factor, IT strategies must improve on and go beyond such traditional measures leveraged over the past five years. “The vital question that CIOs must answer is: how can I help create alternate viable models for the business while meeting aggressive budget reduction targets?” commented Ramez Shehadi, the partner leading the IT Practice of Booz & Company in the Middle East.

Carefully managed transformation programs can deliver dramatic changes in IT efficiency and effectiveness—reducing spending by up to 30-50 %. Major IT transformations however, typically can range between a minimum of 18 to 24 months, and isn’t cheap as the wholesale transformation of IT’s operating model may require substantial investment over time.

As IT organisations aggressively reduce costs and investigate new opportunities, four key initiatives emerge to drive near-term realization of savings within a 12 month period and help lock-in such savings over the long term, while freeing finance to fuel the broader transformation efforts. These initiatives are as follows:

  1. Focus on quick hit opportunities around ‘lights-on’ costs

  2. Manage demand and refocus on in-flight projects

  3. Evaluate the promise of new technologies

  4. Assess new IT operating models

Focus on Quick Hit Opportunities around ‘Lights-on’ Costs

Over the recent past, IT has generally been asked to reduce costs while maintaining service levels. “Meeting aggressive cost reduction targets requires a comprehensive review of overhead costs starting with a determination of the minimum level of services and associated costs required to keep the lights on,” commented Shehadi. This often means however, that service levels must be reduced and modifying the provisioning model.

Adjust Application and Infrastructure Service Levels
The application service levels business users receive are largely intangible in terms of cost, and users do not accurately assess the impact and risks of an application going down, but expect systems to be available 24/7. In reality, only 20-30% of applications require such service levels. Once business users understand the true cost of different application service levels, they tend to be more willing to negotiate on their choices and ultimately, appropriately and realistically constrain their demands.

Initially, companies must catalog their current applications and infrastructure, formal service levels and informal service level expectations. IT and business users must cooperate to understand critical uptime needs, and the actual impact of downtime or slow service. For little used or expiring applications, this may mean moving service levels to the bare minimum required. A portfolio-wide review allows most companies to reduce service levels for up to 40% of their applications. The result: up to 20% reduction in application support costs.

Implement Needs Based Provisioning
“With rapid growth in the number and type of IT assets supplied to business users, a needs-based provisioning model can prompt businesses to make intelligent decisions about how to deploy them,” said Shehadi. Companies should develop policies including specific criteria, defining which departments and users receive exactly which assets. These must include the unique user characteristics that warrant the use of certain digital assets. Needs-based provisioning can lead to substantial savings.

The most effective examples of needs-based provisioning involve the coordination of provisioning across the enterprise—often executed centrally by IT. This can lengthen the useful life of a corporation’s IT assets. Companies should immediately freeze the ordering of new IT hardware or software licenses until they have completed an asset inventory and idle assets have been redeployed. Fresh policies should be extended to the true useful life of the assets.

Manage Demand and Refocus on In-flight Projects

Up to 50% of the value of reducing IT costs comes from understanding and rationalising demand. It’s vital therefore, to focus on demand management. There are three factors in demand management that CIOs can use to generate savings.

Control the Spigot for New Discretionary Spending
Organisations could consider limiting spend for projects requiring completion to satisfy legal or regulatory requirements. Some companies have slashed up to 80 % of project spending this way. Although savings are largely short term, they will serve to conserve cash and focus IT’s efforts on other cost saving initiatives.

Focus on High Value Projects that Are already Underway
Companies could rigorously reassess in-flight projects, and reprioritize them based on their value potential. Companies should accelerate the value capture for projects that will directly impact business operating costs or bring incremental revenue to the organisation. This includes a critical review of the business requirements, placing priority and funding on those that contribute most to the economics of the business.

Instead of asking ‘how much will it cost to satisfy our requirements?’ companies could alternatively ask ‘how many high-priority requirements must be satisfied and how is this affected by our available budget?’ They can then re-examine the issues most crucial for the business and conduct a value analysis—reorganising schedules and adjusting requirements.

Weed Out Hidden Project Spending
Once the IT organization has reviewed project work, it must look for project spending that is often unknowingly being funded from the maintenance budget. Such spending downgrades IT’s effectiveness, limits its ability to reduce costs, and obscures the true cost of providing IT services to the business. Up to 15% of companies’ maintenance budgets are used for these kinds of activities.

“Companies can conduct a thorough review of all maintenance work to reveal hidden spending. They should look for variances and trends in the monthly run budgets or anomalies in the amount of dedicated resources being applied to maintenance activities,” stated Shehadi. Uncovered discretionary spending should be placed into the overall demand management process for prioritisation with other initiatives.

Evaluate the Promise of New Technologies

Many emerging IT technologies promise to reduce costs substantially while delivering performance equal to—or better than—existing technologies. Emerging technologies can offer significant potential but some companies struggle to determine which are most appropriate for them. To decide, companies should pursue proven technologies for mission critical activities, and pilot less mature but promising technologies, using a rigorous portfolio approach to reduce risk. Institute systematic, enterprise wide processes to assess emerging technologies on an ongoing basis, evaluating both the maturity of the technology and its potential value to the organisation.

Determine the Best Time to Implement New Technologies
The current recession and budget constraints shouldn’t be an excuse to ignore new technologies; their implementation may result in more savings. Companies should use trial periods to assess which technologies have a viable business case and which vendors are willing to put their clients’ interests at the forefront. “Even if a decision is made to reprioritize investments for now, the knowledge gained will allow quick movement when funds become available,” Shehadi commented.

Assess New IT Operating Models

The current downturn will reshape many industries. How companies navigate it will affect their competitive positioning in the long term. CIOs must therefore focus on the IT department’s future operating model. Evaluating the future IT operating model is unlikely to save money in the short term, but it will prepare IT to support the business’s attempt to streamline and adjust to any industry disruptions. Determining and prioritising the IT operating model requires the CIO to remain in close contact with peers in the organisation, so all understand the changes underway.

“The strategic nature of the CIO’s role comes to the foreground—shaping the direction of both IT as well as the company,” said Shehadi. They should focus on building the required flexibility to respond quickly to changes, entailing focus on five main components of an IT operating model:

  • Governance: How will IT investment decisions be governed in the future? Do robust governance frameworks exist to manage an acquisition or divestiture? Should governance policies and processes differ by region, or standardized globally?

  • Demand management: What is the projected future demand profile of IT assets and services? What is the best way to address the backlog of IT requests that may have stopped due to the recession? How will the overall demand management process handle potential acquisitions and divestitures?

  • Supply management: What impact will a dispersed geographic footprint have on the service levels offered to the business? How many units are required to satisfy the service levels?

  • Supply delivery: Will outsourcing be pursued more aggressively in the future? What is the ideal onshore/offshore mix for the company? Are proper vendor and procurement controls in place to allow capacity to be scaled up or down quickly, based on business demand? How should services be bundled?

  • IT organisation and management: Should IT be centrally or regionally managed, or more widely distributed? Where should resources be located? How will talent be sourced and managed, especially in emerging economies? How standardised are the core processes of the organisation and how standardised should they be?

Progressive IT companies are using this crisis to transform IT operations to be leaner, more flexible and more strategic than their competitors. They have a near-term focus on getting in order to generate significant short-term savings and support the business as it changes. They have developed a systematic way to explore new technologies to determine visibility and improve their business case, so they can be better positioned to help their companies in the future. These actions will lay a successful foundation for a long-term, holistic IT transformation. IT departments that successfully implement these measures will conserve much needed cash for today, and will help their companies gain a considerable competitive advantage and a platform for growth when times improve.