A little compromise can go a long way. Lesley Meall, FSN contributing editor explores the areas of technology where costs can be cut with minimal negative impact on the business, leaving more available to spend on transformational projects designed to bolster productivity and competitiveness.
IT cost reduction? Judgement calls
Shrinking budgets look likely to be a feature of the business landscape for some time to come, so it is no surprise that organisations are looking at their IT spend with a view to making cuts. Over the past couple of months, Bernstein Research, Datamonitor, Gartner, Goldman Sachs, and Yankee Group are just a few of the soothsayers to tell us something we all know already: very few organisations are planning to increase their IT budget during 2009.
For many, this translates into contract cancellations, headcount reduction, a freeze on capital spending, and various other cost cutting initiatives. But moves that save money in the short term, may seem like a false economy when the upturn comes – if they are not handled carefully. “Don’t throw the baby out with the bathwater,” says Neil Eastwood, a partner with PricewaterhouseCoopers. “Companies are understandably concerned about short term cash needs,” he adds, “but long term goals are more important,” and sometimes you need to speculate to accumulate.
Fortunately, if most organisations look at their use of information technology (from the right perspective), they will find plenty of options for cost reduction. And by focusing their remaining IT spend on the areas where it will result in the biggest benefit, their cost cutting efforts can have a positive impact in the short term, without having a negative impact in the longer term. Quick wins include: consolidating systems, economising on consumables, renegotiating contracts, improving asset management, increasing outsourcing, mothballing projects, and streamlining service support.
“Now is a good time to stand back and say: ‘What are we trying to achieve as a business and how does IT support this?’” suggests Eastwood, then look at how to sustain this going forward – though some organisations will be both horrified and encouraged by what they see. “The IT environments in many large organisations have become very unwieldy,” he says, because they have not been tightly managed during periods of organic and acquisition-fuelled growth. “Getting the right management information out of them is, on occasion, very hard,” he observes, “and now that cash is in short supply it has exposed the rocks”.
Simplify and streamline
Removing layers of complexity (such as multiple ERP systems) can help to alleviate this problem. The associated simplification can also reduce the cost of licensing and support, and because this also makes the IT infrastructure easier to manage and control, there are long-term benefits too. According to Eastwood: “It’s always worth asking your software vendors for cost-reductions,” and although some suppliers are more open than others, you may be pleasantly surprised by just how aggressive some are now being in respect of licensing charges.
Simplifying your project portfolio is another worthwhile exercise. “We are advising some clients to mothball some projects, and cancel others,” says Eastwood. “Many big organisations have pretty tight project controls, but even with good and robust governance in place they can afford to loose some big programs,’ he says, particularly where they have become too demanding to manage in-house, or simply lost their way.
“If you want to cut your IT budget without having a negative impact on the business, review your services,” suggests Paul Michaels, director of consulting with Metri UK. “A lot of organisations are delivering blanket service levels, where all employees get the same level of service,” he says, which is a waste of valuable resources. “Some parts of the organisation may need a ‘gold service’,” he explains, while others can manage fine with silver or bronze. “This is an area where organisations have taken their eye off the ball over the past few years,” he says, and management has become reactive rather than proactive.
Now, more than ever, it is vital to know what you are getting for your money, and at what cost - which can involve looking outside the organisation. “It’s important to know what ‘good’ looks like,” asserts Michaels, and benchmark your services against recognised best practice, “otherwise your organisation is like an athlete training in isolation.” So he sees a growing role for frameworks such as COBIT (Control Objectives for Information and related Technology) and ITIL (the IT Infrastructure Library). “They can help you to see how efficient your IT services are and mechanise the introduction of best practice.”
Rationalise and reorganise
Eastwood suggests also investigating the possibilities offered by rationalising technology across functional areas, such as HR, IT and finance (something we recently looked at on FSN), and doing a bit of nimble footwork when it comes to asset management. “There are a number of things you can do with equipment,” he says explaining: “Some organisations [such as IBM and HP] will buy hardware assets from the corporation and they can then be leased back, so companies can transfer assets onto their own balance sheet.” HP Financial Services, for instance, offers customised sale/lease-back and asset recovery solutions, which can provide cost savings and help with liquidity.
But do the maths thoroughly. “Make sure you don’t overpay,” says Eastwood. “The amount you pay for the money could be more than the cost from a bank,” he warns, “so it may deal with the short term issue, but create a long term problem.” Another option when it comes to hardware costs is contract renegotiation. “At the same time as there has been an explosion in the amount of information and data that organisations need to hold, the cost of hardware has fallen substantially,” he observes, so contracts that you negotiated a couple of years ago may no longer offer best value for money.
Take a closer look at telecommunications spend too. BBW Consultants is so sure that it can improve the telecom expense management of most organisations that when it takes on a client, it guarantees that it will not charge more than the client can save. “Cost savings can usually be realised on three levels,” says Craig Robinson, managing director, by cancelling services (such as lines for phones and faxes) that are no longer in use, reducing overall telecom costs (by better educating staff), and checking invoices to make sure that you are benefiting from the agreed tariff.
“Telecommunication billing is so complex that many organisations pay their bill as long as it is a similar amount to the previous one, when they could benefit from looking more closely first,” he asserts, because there can be a big discrepancy between what you signed up for and what ends up on your bill. “A typical telecom invoice can have thousands of items, so it’s impossible to do this manually,” says Robinson, and BBW Consultants (and similar organisations) automate the process using proprietary software and provide it as a service.
Minimise waste and maximise value
Perspective is everything, of course, and Eastwood suggests that if you look at all of your IT spend in a particular way, you can re-focus your budget to get the most bang for your buck. If 65-70 per cent goes on run spend (such as applications and data centres), 20 per cent goes on growth spend (adding new applications of hardware), and 13-15 per cent goes on transformational spend (the genuinely innovative stuff that will help you to run the business better), then careful prioritisation can be used to identify the areas that offer the biggest business benefits.
“Run spend represents a substantial chunk of your IT costs and really gives you something to aim at,” he says, and if you can operate in a more lean way, then you can reduce that 65-70 per cent without having an impact on business as usual. Not adding new applications, equipment or services is also a relatively painless win. “If the business doesn’t want or need more growth spend then this 20 per cent could be cut without having a negative impact,” adds Eastwood, and some of the money you save could then be put to much better use elsewhere.
“If you can reduce spend in the other two areas you can increase the amount you spend on transformational IT,” he suggests, where it could result in business cost savings and efficiencies, or help the organisation to gain a strategic advantage. “If you can increase the proportion of your IT budget that you devote to transformational spend, the investment could really benefit the business,” adds Eastwood. So you could end up increasing your IT spend where it matters most, and reducing your overall IT budget.
