IT Spending Meets C-Suite Expectations
Given our turbulent economic environment, cost reduction is a top-of-mind issue for executives. Many organizations are aggressively working to reduce their technology spend; many are also working to drive costs out of their business functions by improving the way they use IT. And almost every enterprise is looking for ways to optimize the value delivered by its IT spend. Regardless of the desired outcome, cost-reduction imperatives are easier said than done.
In fact, a 2007 study by Tata Consultancy Services (“IT Effectiveness: Leading IT Practices in Successful Companies”) showed that 62 percent of organizations experienced IT projects that failed to meet their schedules; 49 percent suffered from budget overruns; 47 percent had higher than expected maintenance costs; and 41 percent failed to deliver the expected business value and ROI. Given statistics such as these, how can business executives expect to reduce their IT costs and reconcile their IT spend with the business value it delivers?
Many times, reconciliation of cost and value becomes a source of conflict between the business and IT organizations. As the role of IT continues to evolve—and new technologies continue to add capability and complexity to an already challenging landscape—it is critical for executives to come to terms with IT costs and develop a game plan to maximize the value derived from their IT spend. To understand how IT supports their businesses, executives need answers to the following questions:
• Do our IT projects reflect the goals and objectives of our enterprise?
• Are IT programs and project sponsors held accountable for the success of the programs?
• Is there a way to reduce IT costs without negatively affecting our operations?
• Are we realizing the value we expected from our information technology investments?
• What actions can we take to better predict and control our IT expenditures?
The answers to all these questions can be found by using a process commonly called “IT cost optimization.” This process can take many forms, but we believe the most significant and sustainable results are achieved when a strategic, data-centric assessment of an organization’s IT function is performed to uncover the roots of the IT spend. The result provides a transparent view of historic and current IT costs, and identifies practical and attainable ways to optimize it.
IT cost optimization is a process that identifies problem areas and then recommends changes to IT cost drivers that will achieve one or more of the following outcomes:
• Reduction: Reducing the cost of nondiscretionary items and redirecting that cost to discretionary/business growth areas.
• Redirection: Increasing the number of variable cost categories to allow flexibility in a changing economic environment.
• Reinvestment: Linking IT costs to specific business growth strategies and programs with measurable results.
Determining the appropriate target mix will optimize the IT spend and rebalance the IT investment portfolio.
There are three distinct phases in IT cost optimization.
Phase One: Identify and Diagnose. Many companies do not understand the full extent of their IT costs, nor are the costs organized in a way that supports root-cause and comparative analyses. Phase One establishes the objectives of IT cost optimization, and identifies and categorizes all IT costs. Using a bottom-up approach, the organization inventories its IT spend and its drivers in the context of industry-leading practices and benchmarks. This phase also involves targeted interviews with both IT and business leadership to gain a top-down perspective of IT spend and financial management.
By understanding all IT costs and their drivers, the organization can identify practical and sustainable improvement opportunities and define a set of cost-optimization initiatives targeted at specific spending pools.
Phase Two: Design and Deliver. Once Phase One findings have been discussed with business and IT management, areas for improvement are confirmed and the cost-optimization initiatives are understood, enterprises can begin Phase Two—the efforts to optimize IT spend. In Phase Two, optimization projects are formally approved, funded, scheduled and implemented. Our experience with companies that have implemented optimization programs shows us that the most successful of them are managed, financed and administered as an integrated program of improvement projects.
Phase Three: Sustain Benefits. In Phase Three, ongoing progress reports and updates to senior management keep the cost-optimization projects focused on meeting their goals. Performance monitoring and a focus on continuous improvement increase the chances that the program will yield its expected results.
This three-phase IT cost-optimization process can position an organization for immediate quick wins, which can fund the ongoing program, as well as significant and sustainable long-term improvements in the value delivered by IT.
Beginning A Cost-Optimization Journey
A global firm realized that a significant portion of its operating expenses were invested in information technology. As it began its IT cost-optimization journey, it learned that IT expenditures and policies were in silos across various lines of businesses and geographic regions. It also discovered that, while its global IT organization provided technology services, the regional IT functions did not have input on decisions concerning global spend. In addition, it found that its IT governance processes lacked a systematic review of initiatives across the organization to identify common requirements and potential synergies.
The goal of the firm’s IT optimization initiative was to assess and improve IT effectiveness in cost, performance value and spend. Through initial due diligence in Phase One, the project team identified five issues that needed exploration:
1. Are we spending our IT investments in the right places?
2. Should we be providing an “anything to anyone at anytime” level of service?
3. How should we organize regional IT to support our various lines of business and geographies?
4. How should we leverage relationships and optimize investments with the global IT organization?
5. What are the best ways to control application and project spend sourced through the global organization?
These five questions focused project activities and established a common view of the desired result.
The team’s next step was to gather the global and regional IT data. An automated tool designed for this purpose compiled data from each organization’s disparate sources into a standard model. This model aggregated data about IT operations and expenditures for comparison against industry benchmarks.
The analysis was comprehensive, with metrics related to cost effectiveness, workforce productivity, process efficiency and cycle times. Through this analysis, the organization came to a shared understanding of the cost drivers underlying the supply and demand of its IT services. The project team then summarized the key drivers and determined specific opportunities to reduce IT costs and improve its value to the business.
There was one especially significant discovery: The IT help desk was spending 35,000 hours a month closing trouble tickets. A closer look revealed that the same set of incidents was reported month after month because the causes of the incidents had not been investigated. An analysis found that the vast majority of the calls related to 10 user issues. Armed with this information, IT addressed the issues, decreased ticket volume, increased user satisfaction and reduced help-desk costs.
Another important finding was that most of the company’s software applications were customized to user needs. There was very little in the way of off-the-shelf applications. Through the analysis, it became clear that the shift from “as-needed customization” to standardized software would be a difficult but highly valuable and necessary cultural adjustment.
The company identified 24 initiatives, which promised potential cost reductions of 18 percent of total IT spend over three years. Of these, four were implemented within the first six weeks of the analysis, producing immediate savings of $10 million. The team also identified $100 million in “shadow” IT spend — spend that was not accounted for in the IT operating budget. This discovery prompted changes in processes, policies and organizational alignment, and reduced total IT spend.
Perhaps most important, the findings exposed the need for a stronger IT-governance structure. It became clear that IT was a service organization and that one of the keys to optimizing its spend was making prudent service choices based on well-defined policies and practices. For this organization, the assessment underscored the importance of IT governance, resulting in new investment policies requiring joint decisions by the requesting business units and the CIO.
Ultimately, senior leadership and the IT organization recognized the value of the assessment because the findings were tightly linked to the firm’s business imperatives. As a result, IT received C-suite buy-in to accelerate the opportunities uncovered by the IT cost optimization.
This demonstrates that organizations can reduce costs and improve overall business performance with IT cost optimization. The process positions them to better understand their data, align strategically, govern effectively, operate efficiently and, most of all, continuously measure the value of IT.
Leslie Blair leads the Advisory practice for Ernst & Young LLP’s West region. The views expressed here are those of the author and do not necessarily reflect the views of Ernst & Young LLP.