IT Complexity Seen Directly Linked to Increased SG&A Costs

More applications leads to higher spend on finance, HR; selective standardization drives significant savings, Hackett reports

More applications leads to higher spend on finance, HR; selective standardization drives significant savings, Hackett reports

Atlanta — August 12, 2005 — By reducing information technology (IT) complexity, companies can generate significant savings, including lowering the overall cost of finance and human resources functions, according to new research from The Hackett Group, a business process advisory firm.

Hackett's new Book of Numbers analysis and research volume, "Optimizing a Return on Business Complexity: Performance Metrics and Practices of World-Class Companies," focuses on the value of complexity reduction in back office and administrative functions. The consultancy found that to successfully reduce business complexity, IT leaders must convince business unit executives of its value and combat the oft-held belief that unique IT configurations are critical for a business unit to effectively compete.

The challenge of defeating this "need to customize" can be significant, but the potential benefits are substantial. According to Hackett's research, companies that fail to reduce the complexity of IT spend 30 percent more on finance operations and 18 percent more on human resource (HR) per employee than companies that succeed in this area.

In addition, IT complexity reduction can help to improve the efficiency and effectiveness of a company's IT operations. According to Hackett, world-class IT organizations spend 18 percent less than their peers and operate with 36 percent fewer staff, while bringing in projects on time and under budget over 25 percent more often. In virtually every area, world-class companies show reduced complexity, with fewer customer and supplier databases, less software and hardware suppliers, more consistent use of data standards, and higher overall levels of standards enforcement.

"The bottom line is simple: our empirical research shows that companies which embrace IT complexity reduction as a mission spend less across virtually every area of the back office," said David Hebert, Hackett's IT practice leader. "But this can be a tough sell. CIOs are constantly faced with business leaders who truly believe that their particular group or unit is 'different' and has unique requirements. These leaders will resist standardization efforts, fearing they will lose their competitive edge. IT leaders need to hold the line, sell the value of standardization and simplification, and at the same time be aware of situations where a valid business case exists to support customization."

Value of IT Complexity Reduction

Hackett data reveals a clear correlation between the cost of the finance function and the number of primary applications in use. Dividing companies in Hackett's benchmark database into two groups based on those with the more than 10 applications and those with the less than 10, the former report 30 percent higher finance costs as a percent of revenue (1.3 percent of revenue versus 1 percent).

According to Hackett, the median HR cost per employee also rises substantially as the number of applications per 1,000 employees increases. HR functions that report no common software applications see a median HR cost per employee that is 18 percent higher than companies that have a high level of commonality ($2,338/employee versus $1,976). Overall, world-class HR functions are 87 percent more likely than typical companies to deploy common applications globally.

The cost implications of moving to a common infrastructure and applications are marked. In finance, companies with less than 10 applications spend $3 million per billion in revenue less than companies with more than 10 applications. In HR, companies with no common software applications spend more than $3.6 million/year more for every 10,000 employees than companies with a high level of common software applications.

Complexity Also Impacts IT Cost

To make this complexity reduction approach work, top companies typically redefine their approach to the application-development process. Typical companies often start with the development of their "unique" requirements and then build or purchase and customize an application to meet their internal requirements. In contrast, world-class companies find the application with the closest fit to the requirements, then map their business processes to the selected application. Customizations are done only when a solid business case can be made for doing so.

Hackett found that within IT, infrastructure complexity is highly correlated with cost. The median total IT cost per end-user rises with the number of database platforms in use per 1,000 end-users, and world-class IT organizations rely on 69 percent fewer customer databases per 1,000 end-users and 67 percent fewer supplier databases than typical companies. They also rely on 67 percent fewer software suppliers and 43 percent fewer hardware suppliers.

Complexity reduction at world-class companies clearly extends to application development activities as well. According to Hackett, world-class IT organizations use 80 percent fewer programming languages per 1,000 end-users than typical companies. They are also more likely to use data standards to a high degree across all systems and significantly more likely to have implemented a high level of standards enforcement across hardware, networking, and software applications.

Automaker Reduces Complexity

During a recent Hackett Webcast, one global automaker described how it executed a two-year effort to simplify its enterprise resource planning (ERP) environment as part of an upgrade. In its original implementation efforts, driven by IT leadership, attempts to accomplish Y2K goals and be highly responsive to individual business units led to a 24 percent customization level. This significantly affected IT operating costs by increasing the level of IT staffing needed to maintain the system.

As part of the upgrade, the automaker created a three-tiered review process for all customization that was to be carried forward, requiring business units to justify and re-justify any requests to deviate from a standard implementation. Business unit leaders and senior management played an active role in the review process and developed an understanding of costs tied to customization and process reengineering that could be used to eliminate the need for it.

By the end of the project, the automaker had reduced customization to just 3 percent, well below the initial 10 percent target recommended by PeopleSoft. The de-customization effort enabled the automaker to immediately reduce IT support staff and significantly cut total cost of ownership. Current estimates are that the next ERP upgrade will cost the company 50 percent less to execute.

Telecom Giant Consolidates, Standardizes

A telecommunications giant also shared with Hackett advisory members how it reduced the cost of its finance operations through an application consolidation and standardization effort. After a Hackett finance benchmark identified room for improvement across a range of metrics, the company implemented an application standardization and simplification effort that was driven by business transformation objectives.

For this initiative, a dedicated team was assigned to focus on improving business value from applications, and procedures were put in place to do follow-up audits to ensure that business case and cost savings objectives were met for ERP upgrades. As a result of its efforts, when the company re-benchmarked with Hackett as part of its ongoing improvement effort, the company achieved first-quartile performance. The company also estimated that the changes were generating over $50 million in annual savings.

The Hackett Group's research into world-class performance is compiled in its Book of Numbers series, which provides senior executives performance metrics and insights based on Hackett's database of best practices and process metrics in IT, finance, HR, procurement and other areas.

Additional Articles of Interest

— How are outsourcing and supply chain tasks such as purchasing and inventory management tied to "network-centric operations?" What is a network-centric operation? Read the article "The Future of Supply Chain Management: Network-centric Operations and the Supply Chain" to find out.

— One chief procurement officer sees a looming talent shortage hitting the purchasing field. Read more in "An Interview with Patricia Moser: Selling Transformation," the Interview column in the June/July 2004 issue of Supply & Demand Chain Executive.

— Impending Baby Boomer retirements, a widening skills gap driven by declining educational standards, and outdated and ineffective approaches to talent management are combining forces to produce a "perfect storm" that threatens the global business economy, according to new research from Deloitte. Read the article here.