Take control of your IT costs

Introduction

These days there is increasing pressure on the IT group to contain costs. Being a smart manager, you have already negotiated reduced rates with your suppliers, cut headcount, tightened travel / entertainment expenditure but the organisation still needs to find more savings. While resources are cut, the demand from business for IT services continues to grow unabated.

As organisations begin to exhaust the supply side cost reduction opportunities, controlling consumption and demand offer the next level of cost savings.  Organisations have achieved additional long-term savings of 10-20% by managing consumption on top of the supply side savings.

Executive Summary

The challenge of managing costs means that the IT group must look for cost savings beyond the supply side costs controlled within the IT department. Demand Management aims to control consumption of resources by helping the business managers understand how their decisions drive costs, and how IT can help find ways to optimise demand on IT resources.

  • As IT has become an part of business, demand for IT services and resources, continues to grow. Requests for business process changes, enhancements and procurement of new technologies and e-commerce means the demand for services continues to increase unabated despite business cycles.
  • The demand for IT resources appears to be poorly controlled. Most organisations don’t appear to have the right information on the total demand nor credible costs. Appropriate information and incentives for the business to cut the demand do not exist. Two common reasons are:
    • Inadequate IT cost transparency
    • Inadequate responsibility on business heads to control consumption
    • While most organisations have processes to control the demand for the new projects; in areas such as applications support, infrastructure operations and help-desks, such controls are hard to find.
    • Even when there are controls on the discretionary project initiation, once underway, there is limited control and almost no incentive to stop the distressed or wayward projects.


IT Demand management

Figure 1 – IT demand management

While there are many benefits, demand management is also more difficult because, according to Forrester Research, it is not just about assessing the business appetite. For effective demand management IT has to put in place processes and people who can understand the business needs and strategies; and then begin a meaningful dialogue on cost and performance tradeoffs. Demand management requires an ongoing focus. It thrives with a continuous improvement approach. Reducing IT supply costs has many one-off activities and is usually quicker. Increasing the scale helps bring the unit costs down. While demand management is a longer-term initiative, it can offer much larger savings beyond what is achievable by the scale alone. Once managers understand what they are paying for their focus quickly changes. When organisations become wise consumers of IT resources, they begin to have robust control over projects and capital investments. There is a reduction in the redundant applications and reduced maintenance. Hence there is more money available for the strategic initiatives. There is also the benefit of also improving IT’s credibility as responsible managers.

Successful demand management needs a high level of cost transparency from IT in a form and language that is understandable by the business customers. Some form of charge-back / user-pays mechanism too is necessary to create the right incentives. Care should be taken that the charges don’t create unintended consequences such as maverick buying. Benchmarking charge back costs with external providers ensures that they are reasonable.

Some organisations believe outsourcing of IT services and the resulting cost transparency will drive demand management. But the reality can be quite different.  First, the service provider is looking to increase revenue and reduced consumption is against their interest. Secondly, there is very little collaboration between the business and the service provider to optimise costs and increase value. In fact, we have seen one business asking staff not to call help desk to cut charge back but with a possible reduction in the productivity.  Care has to be taken to avoid such unintended consequences.


Tips for successfully managing business demand and consumption

There are three drivers of IT costs. Namely, the demand caused by the business changes, the demand (often unrecognised) resulting from the past business changes/ decisions and the business driven consumption of IT services. Here are a few tips to address each of these three.

Demand created by the business changes

  1. Business case discipline: Question whether the business change will deliver value greater than the costs. Establish a project / investment governance board with business.  Apply the filters of business case, strategy alignment, ease of implementation and risk assessment to weed out low value/ high-risk proposals and to prioritise high value changes. Select only the promising ideas for further detailed analysis. Ensure ongoing support costs are included in the business case.
  2. Revisit business cases: The project scope and risks change over the project life cycle. Reassessing the business case and risk /benefits at critical life-cycle points helps find unviable projects early. Reduce scope, look for increased benefits or stop projects that don’t pass the hurdle.
  3. 80-20 solutions: Avoid gold-plated solutions and always demand alternative solutions that would meet business needs. If 80% functionality can be provided with 20% costs, very good justification is required to go for the 100% solution. Leverage and reuse the functionality already provided by existing applications.
  4. Pilots and trials: Using trials and pilots instead of a full-blown project is a low-cost way to confirm new ideas. It is also easier to end a pilot than a big project.
  5. Benefits realisation: Hold sponsors accountable for the realisation of project benefits. Seek help from CFO/ finance department to make sure that the benefits are tracked and are built into the future budgets. Check if the IT department has fully realised benefits from it’s own past investments.
  6. Realign maintenance: Focus maintenance dollars on high value/ strategic business applications while cutting the budget for changes to others. Eliminate duplicate applications.

Demand (unrecognised) created by the past business changes

  1. Outdated features and applications: Work with the business users to rationalise outdated product/ features that add cost and complexity but little value. Analyse the applications portfolio to find and cut duplicate or obsolete applications thus reducing complexity and the support costs.
  2. Shared Services: Duplicate applications and services increase complexity and cut agility. Consider a shared services function to end the duplicated IT services and functions across business lines.  Virtualization would allow sharing servers for different applications.
  3. Standardisation: Past decisions may have resulted in greater variety of hardware, operating systems and divisional applications, which significantly increase the complexity, need multiple skill-sets to support and add costs.  Aim to standardise and simplify the environment.

Optimise business consumption of IT resources

  1. Adjust service levels: Rewrite service levels based on real business process support requirements. E.g. credit card authorisation within 5 seconds, Order processing completed by 8PM.  Discuss trade-offs between costs and service levels. E.g. 7 / 24 support vs. a lower cost weekday only support.
  2. Business friendly IT service costing: Help the business users understand the cost of IT services and what they can do to optimise the use. Define the service in business terms and use business friendly usage metrics such as ‘number of days’ retention for email, rather than MB. Create ‘service catalogues’ with information about the service; it’s costs and tactics for optimising use. Provide reports to the business on usage and costs.
  3. Realise the savings: As business adjusts IT consumption, IT department needs to adjust related resources and expenses to make sure the resultant savings are realised. Changes to contracts and staffing arrangements may be required to realise the savings.
  4. IT Asset management: Many businesses have unused equipment (PCs, printers, data links, software tools and servers) for which costs are being incurred. Work with business to reclaim/ recycle the surplus equipment and cut costs.  “Sweat existing assets” before acquiring new ones.
  5. Account managers as “buyers”: Use IT savvy “account managers” as “buyers” of IT service and place them within business units. Task them to find ways to rationalise demand and remove duplication.  These “buyers” must have strong knowledge of the business and IT processes to be effective.

For a detailed discussion and/or information on how you can start demand management in your organisation please contact the author.