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Frugal Flyer

By Larry Dignan  |  Posted 2003-04-01 Print this article Print

Take a lesson on controlling costs from ATA, which means more than eliminating free peanuts.

Paul Smith, director of information services for ATA Airlines, doesn't particularly like the term "cheapskate" to describe the way he controls costs at the Indianapolis-based airline.

It's not strong enough.

Try penny-pincher, miser, or his own favorite description—Machiavellian. "It has been said that, given enough steel wool, I could knit my own servers," says Smith, a 19-year veteran of the aerospace industry.

In some respects, Smith only wishes he were joking about controlling costs. He'd love to have a massive technology budget, with money to throw at the latest and greatest computer hardware and software.

But the airline industry has been waging an all-out war to slash costs since September 2001. The crisis in Iraq has only increased the pressure. This may very well go down as the most difficult period ever to face the airline industry .

Smith is slashing costs by buying used or refurbished desktop computers, servers, routers and storage devices, canceling maintenance contracts and bringing those duties in-house, as well as renegotiating better deals with software and telecommunications vendors. ATA also is adopting the low-cost Linux operating system, whose source code is available to all users, for free.

"It has been a pervasive initiative. We have done almost everything within our control to reduce costs to never-before-seen levels," says Smith.

At least Smith isn't alone. A weak economy has forced many technology executives to cut costs in ways that they hadn't previously imagined.

According to Orlando-based Alinean, a return on investment (ROI) research and software firm, the most frugal yet effective companies have a technology spending-to-revenue ratio of about 0.8%, compared with an industrial average of 3.8%.

Frugality isn't a virtue to Tom Gaylord, chief information officer of the University of Akron, but it has been forced on him by a 34% budget cut since May, with another 5% to 10% being considered.

Gaylord's plight is made more difficult because his budget has three components—the university library, headcount and projects—and the first two are untouchable.

To cope, Gaylord has been stumping to get public and academic institutions to work together on centralized enterprise resource planning and customer-relationship management projects. He also has consolidated hardware, moved from Microsoft 2000 to Linux, and refinanced loans.

He also begged. "I was hit with a $3 million-plus cut in November and came away with more than $4.8 million in stuff," crows Gaylord, who got PeopleSoft to donate enterprise resource planning and customer relationship management software for use across University of Akron departments.

Houston-based CDB Software donated $1.8 million in database-utility software to be used with the PeopleSoft software. Gaylord also formed partnerships with IBM and Cisco Systems to research better ways to use technology and roll out wireless access at the school, respectively.

Being cheap chic, however, can have its pitfalls. Technology executives have to walk the line between saving dollars and doing what's right for the long run. Projects may be less expensive up front, but wind up costing more over time.

"You can't take a business risk to save a few dollars," says Kamil Alachi, vice president of StrategIT, a Westwood, Mass.-based consulting firm. "You're still investing to do what's right for the business."

ATA's Smith is adamant that his penny-pinching moves have not reduced the level of safety for the airline's passengers or its employees. "We are absolutely fixated on the safety element—that is our primary directive and on that issue we will not bend," he states.

But that doesn't mean ATA hasn't used every trick in its flight manual to try to reduce costs without jeopardizing safety.

According to Smith, ATA used to purchase hardware directly from "tier one" vendors such as Hewlett-Packard, Sun Microsystems and IBM, and when it did make purchases it usually opted for full-service contracts. On a $100,000 server, a full-service contract could add another $30,000 to the cost. Smith shopped around for better prices, and in the process began dealing with remarketers –essentially brokers of used equipment.

He found that the remarketers could offer him product pricing at least 30% percent less than going through vendors. He later discovered that the remarketers were often purchasing their equipment from a Minnesota-based firm called World Data Products, so Smith decided to start dealing with World Data directly.

Through the various initiatives, ATA has been able to hold the increase to its roughly $200 million technology budget to about 15% of what it was when Smith joined in 1996. At that time the company's revenues were about $800 million, compared to $1.3 billion today (a 60% increase). Most of ATA's technology budget is dedicated to communications costs, many of which are proprietary and cannot be avoided.

Smith says ATA has been able to slash its hardware purchasing costs in half. A high-end application server that would cost more than $100,000 if purchased directly from a vendor can typically be had for less than $60,000 at World Data.

Smith does not believe he is sacrificing on the latest computing power, nor has he noticed an appreciable increase in maintenance costs. In fact, whenever possible he forgoes maintenance contracts, and handles the maintenance in-house. "I made it a point of hiring people that don't mind taking the lid off a box," he says. The reduction in maintenance contracts has saved the airline a little under $1 million a year.

Steve McDowell, CIO of Holiday Retirement Corp., says he's wary of the refurbished route because eventually support costs rise. "I'm afraid of that," says McDowell. "I've done that in the past and it may be cheaper up front, but it can cost you in support costs."

Instead, McDowell sets up PCs as e-mail kiosks for nontechnical users in the company's 270 locations. Using Computer Associates' Unicenter software and Lotus Notes, he centralized support.

That setup allows Holiday Retirement to save on maintenance costs because he doesn't need on-site support at the company's locations, says McDowell. "Everything we do is viewed through total cost of ownership."

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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