Hackett: World-class IT organizations are more effective at outsourcing than peers
Atlanta, GA June 16, 2004 World-class information technology (IT) organizations spend 18 percent less than median companies overall and operate with 36 percent less staff, while still providing higher levels of strategic value to their companies, according to 2004 research into world-class IT performance from The Hackett Group, a business advisory firm and an Answerthink company.
One key strategy world-class companies use to decrease overall spending is outsourcing, Hackett said. World-class IT organizations dedicate 23 percent more to outsourcing, and outsource very differently than their median peers, focusing on technology infrastructure and other areas where they can reap the most benefit while avoiding areas where outsourcing is a riskier strategy, such as application development.
To receive Hackett's world-class designation, an organization must score in the top 25 percent of Hackett's database of best practices and process metrics in IT, finance, human resources, procurement, and other areas in both efficiency (cost and productivity) and effectiveness (quality and value) output metrics in a given functional area. In this way, Hackett defines "world-class" with empirical data, isolating the characteristics shared by today's world-class organizations.
Doing More with Less
Overall, world-class IT organizations are able to accomplish significantly more with lower cost and fewer staff than median companies, according to Hackett. World-class companies spend 18 percent less annually on IT costs per end-user than their median peers ($8,686 for world-class versus $10,532 for median). They accomplish this through a combination of practices, including outsourcing, simplification and standardization, higher levels of process discipline, and improved overall alignment with business objectives.
Hackett said their overall lower cost structure also enables world-class IT organizations to reinvest some of the savings they generate, dedicating more IT dollars to technology investments that add business value, and also potentially contributing to their company's bottom line.
World-class companies also find ways to dramatically cut staff, running their operations with 36 percent less staff than average companies (28 IT staff per thousand end-users for world-class versus 44 for median). In addition to leveraging outsourcing partnerships (onshore or offshore) to help reduce overall staffing, world-class organizations allocate their internal IT staff differently, dedicating a larger percentage of their staff to application management and less staff to addressing technology infrastructure issues.
Reduced costs and fewer resources are not synonymous with lower levels of service, Hackett found. World-class companies are actually more effective in their IT efforts. World-class companies deliver 91 percent of all projects to spec, on time and on budget, while median companies only meet these criteria 68 percent of the time.
World-class companies have also more effectively aligned overall IT spending priorities with corporate strategic goals, in part because chief information officers at world-class companies are also more likely to report to the CEO or other senior executive and less likely to report to the chief financial officer.
More importantly, Hackett said, IT executives at world-class companies have a "seat at the table" with senior management: 100 percent of world-class companies have made their senior IT executive a member of the senior management committee, compared to 69 percent of median companies.
"What we've found is that it simply doesn't require more money and more people to get better results in IT," said Hackett IT Practice Leader Beth Hayes. "What it takes is an intensive focus on a range of other issues, including standardization, simplification, service delivery model and ensuring that your IT efforts are synchronized with your company's overall business strategy."
Better Use of Outsourcing
According to Hackett, one key to the lower overall IT spending of world-class companies is more effective use of outsourcing. World-class companies commit 23 percent more annually per end-user to outsourcing than their median peers ($919/end-user for world-class versus $748 for median).
In addition to this large spending gap, there are significant differences in the way world-class and median companies spend their outsourcing dollars. World-class companies spend 60 percent more than their median peers outsourcing technology infrastructure activities, in an effort to improve efficiency and cut overall costs. World-class companies spend 34 percent less then median companies outsourcing application development and maintenance, areas that are more strategic and potentially much riskier to outsource, particularly in light of reduced standards compliance and increased environmental complexity generally seen at median companies.
"This is an excellent example of one of the most consistent trends that emerges from Hackett's research, in IT and virtually every other functional area. Simply put, outsourcing saves money if done right. But it can increase costs and business risk dramatically if it's done wrong," said Hackett Senior Fellow Allan Frank. "If companies begin by streamlining processes and implementing best practices, then outsourcing can be a strong follow-on strategy. But if outsourcing is driven by an attempt to fix problems that are not under control, it can be a big mistake."
Frank added that Hackett has seen median companies that have boxed themselves into a corner with their IT that forces them to make classic bad choices in outsourcing. "They don't focus on standardization internally, so it becomes very difficult to manage application development projects," he commented. "In a desperate attempt to keep their applications up and running, they outsource. Unfortunately, it's a strategy that's likely to fail."
World-class companies also source and manage their IT vendors more strategically in other areas, utilizing 5 percent fewer hardware vendors, 29 percent less contractor services and 65 percent fewer software suppliers than their average peers.
Standardization, Simplification and Process Discipline
World-class IT organizations focus on standardization and simplification across the board to achieve their superior results, according to Hackett's research. They rely on 50 percent fewer enterprise resource planning (ERP) systems than median companies (2 versus 1) and 29 percent fewer applications per 1,000 end-users.
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.
Hackett also found that world-class companies are more disciplined overall in their management of IT projects. The firm said half of all world-class companies manage IT projects through a formal, permanent Program Management Office, while only 25 percent of median companies make the same claim.
World-class companies also adhere to a common methodology 90 percent of the time, compared to only 56 percent for median companies.
"There's no question that in today's business world the combination of changing technologies, increasing corporate complexity and a constantly shifting business landscape have made even taking care of the IT basics a major challenge," said Hayes. "One key to achieving operational excellence is to take a much more rigorous approach in key foundation areas, like standards definition and enforcement and basic project and IT service delivery. This simplifies the world in which world-class companies operate and prevents many common IT problems from cropping up in the first place."
The Hackett Group conducts best practices research and process benchmarking. Hackett offers analysis backed by research at more than 2,400 client organizations, including 93 percent of the Dow Jones Industrials.
The Hackett Group's 2004 research into world-class IT performance is compiled in its Book of Numbers series, which offers analysis and recommendations based on Hackett's database of best practices and process metrics in IT, finance, human resources, procurement and other areas. The Book of Numbers series is offered as part of Hackett's IT Executive Advisory Program.