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.

Gaining traction for your IT strategy

Developing an IT strategy that is understood and accepted by the business and IT practitioners is a major challenge for many businesses. A lot of effort is invested in developing an elegant strategy, the future state architecture is sound and the board is pleased. Still, beyond one or two new projects, the strategy fails to get traction and there is large gap between the strategy and quality of the results.

Unlike most strategy consultants Kogekar Consulting have extensive experience in execution planning. We have helped clients create IT strategies that are well understood and effectively executed. Here we summarise key learning from our experience – how to plan an effective IT strategy and engage stakeholders.

Executive Summary

Creating an IT strategy that is understood and effectively executed by the stakeholders has been a difficult challenge in many IT Groups.  This is rarely acknowledged but results in a lack of adoption or operationalization. There are many reasons for this:

  • Focus of the strategy tends to the board or C-level team, which make the document too high level for the typical middle manager whose support is needed for implementation.
  • Strategists and architects, who focus on big ideas, typically drive strategy development and complex concepts. These concepts are difficult to execute, thus they appear to be disconnected from the on the ground realities of IT. Practitioner involvement can provide a different type of thinking, which enhances the abilities to execute the strategy.
  • Strategy needs to take account of people and operational realities. Often there is little effort made to engage with stakeholders like key business managers, IT middle managers and experts during the strategy development process. Lack of engagement further reduces their buy-in. However, these stakeholders are absolutely essential for bringing realism and ‘owning’ strategy execution.
  • Few understand that a good strategic planning process also requires the utmost attention to the ‘hows’ of execution. It’s substance and detail must come from people who are closest to the action and understand their customers, resources and capabilities.
  • Many strategies underestimate the effort required to create the new organisational capabilities. Strategies also fail to provide a framework for identifying and developing talent – at all levels – talent that is needed to execute the strategies.
  • One key aim of the strategy is to establish a direction and state ‘how we shall operate”. The specific programs and initiatives get all the attention, and overshadow the underlying philosophy.

The successful execution of the strategy requires that not only the board and senior executives of the company approve the strategy. But also, other stakeholders like department managers, project leaders and key support staff understand the strategy and are clear about their role in the execution. Strategy execution requires going down from a 50,000 ft to may be 50 ft level. This requires identification, prioritisation and implementation of very specific actions. Many organizations don’t realise the contribution practitioners can make to a realistic execution planning.
Strategy planning is a great opportunity for engaging stakeholders. It provides a process to understand how well IT is supporting the business, where the business is headed, how the business and technology landscape is changing and what we must do to improve our effectiveness.  It is also an opportunity to communicate, “what we shall do differently” because if nothing changes, the new strategy becomes just a piece of paper.

Strategy Development Process

The strategy process is a four-step process:

1) Where are we now?

2) How is the business/ IT landscape changing?

3) Where do we want to be?

4) How do we get there?

  1. Where we are now? is a comprehensive analysis of the current state of IT in the organization including, what IT does well, how well IT supports the business, how our costs and services compare with others, how flexible or adaptable we are, what the major risks and shortcomings are? Understanding where we are and how we got there is critical to a sound strategy. In this conversation, input is sought from the business leaders, process owners, IT architects, managers and specialists.
  2. How is the business / IT landscape changing? This step is to understand the drivers of change. Often technologists focus only on technical changes e.g. SOA and not other areas. Changes to the business operating conditions and business strategies are an essential driver. Changes in the competition, their strategies and investment programs, and the advent and industry adoption of new technologies are other change drivers.  Emergence of new third party services and service providers can also change the IT landscape. Change in regulation such as GST, anti-money laundering or email discovery create yet another change dimension.
  3. Where do we want to be? Understanding of the current situation and the changing landscape leads us to choices about the desired future state. Stakeholder perspectives are important here as well. How can we best support the business in the future? What capabilities are needed? What do IT staff wants? These multiple perspectives the shape the future state. They will determine shape of the future organization, the technology architecture and what competencies are needed.
  4. How do we get there? Sub-strategies and roadmaps, which move the organization from the present to the future form the migration, plan. Organizations often become too focussed in the migration plans and tend to forget the underlying reasons or principles that guide the migration.

Key Lessons for IT strategy development

    1. IT strategy requires strong sponsorship and participation by the CIO or the IT head. Enterprise strategies driven by head of architecture or other such functional heads have limited chance of success.  Support from other C-level executives is necessary for a strong business engagement.
    2. It is a mistake to consider IT strategy development as an exclusive ivory tower exercise. Design it as a participative process, allowing stakeholder engagement. Identify key stakeholders at the start of the process.
      1. Strategy / planning managers in business and in the CFO’s office can provide great input on business strategy.
      2. Business process owners and project managers can provide input on the current state and help with a realistic migration plan
      3. IT managers and key specialists need to be convinced that the strategy addresses their challenges and is realistic. Getting buy-in from key opinion leaders helps greatly with the credibility of the strategy credibility in the eyes of the troops.
      4. Teams respond well when treated in a mature manner. Allow their manager to lead the communication/ feedback sessions.
    3. IT centric strategies don’t work. There needs to be a strong linkage with business strategy (written or unwritten).
    4. Current state analysis often focuses on architecture and technology issues and ignores organisational capabilities, risks, people and leadership issues. Understanding current service and project delivery capability would provide a stronger foundation for strategy.
    5. IT strategies tend to be too ambitious, hoping to achieve a major turn around in technology, people culture and processes in a relatively short time frame. Considering legacy systems and COBOL have been in place for nearly 40-50 years, one has be realistic about organization’s ability to change. Focus the effort on critical improvement drivers.
    6. The need to develop people capabilities is often forgotten in the rush to new applications or technologies. But without the right people these new technologies will not deliver to their potential.
    7. Strategy defines where we want to go. It must be followed by an operating plan, which defines the path, the one-year goals, programs and initiatives. If the operating plan is not based on realistic assumptions, there is little chance of success.
    8. Including guiding principles for architecture and operating models in the strategy allows greater clarity and provides guidance to the entire organization. Otherwise only the teams working on new projects are engaged in the strategy.
    9. Use of strategy themes and distinguishing high priority items from others will provide flexibility in implementation and allow adjustment as funding and priorities change over time.
    10. Use of balanced scorecards for managers and team helps track the implementation progress on a number of dimensions.

If you would like help with your IT strategy development or more information, please contact us.

Kogekar consulting has assisted banks, insurance companies and other major organizations to develop strategic plans, roadmaps and architectures. For these we integrate the strategy development steps with stakeholder participation and communication activities. Our approach moves the strategy development process out of the ivory tower and increases the organizations buy-in and improves adoption.