The Cost Reduction Roadmap for IT

Today’s economy is on unsteady ground and the immediate future looks like more of the same. At times like these, executives pay a lot of attention to possible cost reductions. This applies to IT in particular.

Advice on how to approach IT cost reduction is regularly featured in many IT journals. That advice usually centers around ideas like renegotiating vendor contracts, offshoring, and deferring upgrades. Deferring systems development projects is yet another way companies attempt to reduce costs. But, unfortunately, most organizations have already gone down these roads. So what's next? How can substantial cost reductions be found in IT?

Two Big Opportunities

Business and IT executives should carefully explore IT projects capital & expense budgets as well as the ongoing IT expense budgets for opportunities for cost reduction.

(1) The Projects Capital & Expense Budget

We have found that most companies do not subject their IT project proposals to business-driven prioritization. Regularly prioritizing projects by applying portfolio management principles enables a company to identify low-value and no-value projects.

(2) The Ongoing IT Expense Budget

The biggest opportunities for cost reduction are in ongoing IT operations. The reality is that most IT expenses are in this "black box." The challenge is to have a suitable framework for uncovering cost reduction opportunities. Unfortunately, the traditional IT cost centers do not help; costs centers such as R&D, enterprise architecture, data center, operations, etc. do not connect well to the services IT provides, and so a cost reduction exercise based on those cost centers is also disconnected from the services provided. Organizations that attempt to characterize their service levels in "platinum," "gold," etc. fashion have some connection between cost and services, but these efforts typically are limited to a small percentage of the total IT spend.

And it's difficult for most executives to take a completely unbiased look at where the opportunities lay. Sometimes they're not provided the full picture, and sometimes political motivations get in the way.

IT Executives Need a Roadmap to Cost Reduction

To help IT executives identify "hidden" areas for cost reduction, Cutter Consortium Senior Consultants Bob Benson and Tom Bugnitz have developed a Cost Reduction Roadmap for IT that applies time-tested portfolio management principles. This simple roadmap has proven to be an effective framework for IT cost reduction, addressing both project budgets and ongoing IT expense budgets.

The Cost Reduction Roadmap for IT establishes the cost reduction framework:

• What are all the services that IT is providing?

• What are all the costs associated with these services?

• How do the costs compare with the value delivered and current performance of those services?

The cost reduction framework works by assigning 100% of IT costs to one or more IT services. No cost is excluded. In this way, the Cost Reduction Roadmap results in three fundamental categories of cost reduction opportunity that bubble to the surface:

1. Higher costs than expected. Uniformly, executives are surprised at how much certain applications, infrastructures, or services cost. This immediately leads to initiatives to either abandon/replace the unexpectedly high-cost applications or infrastructure services, or to take immediate steps to reduce the costs of those services.
2. Unnecessary costs. Our experience is that the exercise of assigning all cost centers to applications/infrastructures/services surfaces important questions about costs. The fact is that if you're uncomfortable assigning a cost center to a key application, it's most likely that you're incurring unnecessary costs.
3. Cadillac-level services. Applications and services can be running wonderfully -- at a high cost of support. Not everything needs to run perfectly, so balancing service and cost is critical to effective cost management.

The "So What?"

An effective Cost Reduction Roadmap combines elements of governance and common sense. The governance aspect provides considerable transparency of cost and performance that should be the basis for the relationship between IT and the rest of the organization. Common sense applies judgment about what IT is actually doing and connects the IT performance requirements to the cost of providing them.

Applying the Cost Reduction Roadmap

Applying the Cost Reduction Roadmap for IT is a straightforward application of portfolio management concepts, using standard and easy-to-use portfolio frameworks. Moderate effort can accomplish significant steps in the roadmap in a short period of time, particularly if common sense is applied. A critical point is that perfection is not required. While traditional costing can be tedious (e.g., an ABC approach), that isn't what's needed here. What's required are two basic common sense principles: (1) assign 100% of IT costs somewhere (but only 80% accuracy is required), and (2) address only the largest services/applications (leaving the 20% of the smallest applications or services to another time.)

Another critical point is the governance component. This Roadmap engages the business/ user side along with IT -- it is not a hidden, back-office exercise. And more importantly, it connects the issues of cost to the services actually delivered to the business.

The Roadmap requires four basic sets of work:

1. Establish the framework, based on three elements:

   (1) Identify the applications that represent 80% of total operations and support costs. Typically this is 10 to 20 applications; the rest of the applications are "small" and in total only reflect about 20% of the ongoing costs.

   (2) Identify the key infrastructure services, like e-mail, PC repair/support, that represent 80% of infrastructure costs.

   (3) Identify the key user services (like help desk) that represent 80% of the service costs.

2. Establish the cost base for each of the identified applications, infrastructure services, and user services. This must include all costs from all cost centers in the IT organization, and all cost centers must be assigned to either the applications/services or to the "small" (20%) category. When this is done, 100% of the IT spend is accounted for. Perfection is not required; 80% accuracy is fine as long as all costs are assigned somewhere.

3. Assess the performance of the applications, infrastructure services, and user services. This assessment includes alignment to strategic intentions, user satisfaction, and risk.

4. Compare performance to cost.

What's Unique about the Cost Reduction Roadmap?

Most organizations have previously done IT cost reduction exercises. Many have also implemented portfolio management. So what's new about the Cost Reduction Roadmap? The answer -- it's the practical and effective combination of experience and methodology:

1. The roadmap covers all areas of the organization's IT costs.
2. It connects the IT costs to the organization's strategies.
3. It takes the business perspective, with business management's input.
4. It applies service, quality, and risk factors.
5. The Roadmap uses what has already been done in the organization, whether in portfolio management, or in IT cost identification.
6. It smoothly addresses multiple business areas and business units.

With these factors, the Cost Reduction Roadmap is a powerful methodology that brings real insight about cost and opportunity to the business and IT management teams.

The Engagement

Cutter's Cost Reduction Roadmap for IT engagement provides you with very experienced, third-party perspective to help you break through the political barriers and find where the really meaningful cost reduction opportunities lay. Cutter Senior Consultants Bob Benson and Tom Bugnitz have decades of history helping organizations worldwide understand -- and act upon -- the opportunities that IT prioritization frameworks such as the Cost Reduction Roadmap uncover.

The Cost Reduction Roadmap for IT engagement is accomplished in two phases. First Bob Benson or Tom Bugnitz will perform a one-day evaluation, at the direction of the CIO or CFO, to establish the framework as described in the previous section. This session (Phase 1) will identify the key areas of cost reduction opportunities and lays out a roadmap for finding and acting on them. At the end of the day, company management will be able to determine whether it is useful to go on to Phase 2.

What Do We Do?

Phase 1: Evaluation of your organization's current IT budget and related IT management processes.

• We organize a project to achieve the four basic sets of work described above.

Phase 2: Implement the recommended work for cost reduction.

• Step 1: We establish a small team from IT and the business to work with the cost reduction roadmap.
• Step 2: We establish the portfolios, covering applications, infrastructures, and user services. This is based on the 80% rule: we only need to deal with those items that account for 80% of costs, thereby eliminating the minutia.
• Step 3: We assign costs to the portfolios. This is based on the 100% rule: all IT costs, including the minutia must be assigned somewhere.
• Step 4: We conduct a performance assessment.
• Step 5: We establish initial questions about costs, in the three categories: unexpectedly high costs, unnecessary costs, and Cadillac services.
• Step 6: We establish action plans for cost reduction.
• Step 7: We share the results with management, providing transparency into IT costs.

What Does This Take?

This takes only about one week (elapsed time) of work, over the course of a month for medium-sized companies, and about two weeks for large organizations. Given the opportunity to potentially reduce costs up to 10%, this effort provides an impressive return.

Start Uncovering Cost Reduction Opportunities Right Away

For more information or to schedule a Cost Reduction Roadmap for IT engagement for your organization, contact your Cutter Consortium Account Executive directly or call +1 781 648 8700 or send email to sales@cutter.com.

About Cutter Consortium's Senior Consultants

About Bob Benson
About Tom Bugnitz

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For more information on customizing a consulting engagement for your organization, contact Jack Wainwright, +1 781-641-5122 or jwainwright@cutter.com.