Managing Information Technology Costs in a Challenging Economy

Four steps to right-sizing your IT budget and avoiding long-term harm to your company's bottom line

In these challenging economic times all companies are looking for ways to improve margin and overall operating performance. Many are just trying to hang onto the customers and businesses that they have. Achieving revenue lift is problematic, leaving the expense side of the ledger as the most obvious candidate upon which to perform financial triage or even radical surgery. When looking at the expense side of the ledger, the information technology (IT) capabilities of most companies quickly get identified as a potential area for cost restructuring.

In most companies IT represents a clearly visible slice of the operating pie and, as importantly, a very significant slice of ongoing capital expenditures. Yet, particularly for retail, wholesale and distribution companies, IT also represents the nervous system of the company. Its tentacles reach out to every aspect of company operations — from headquarters to distribution centers to stores and even to customers and suppliers. IT represents the sensing and responding mechanisms that allows or causes product to be ordered, moved, sold and shipped.

So messing with a company's nervous system requires more than a ham-fisted approach to "rewiring" the business. Yet when it comes to it, most companies employ a "tried-and-true" method when attempting to achieve IT cost reduction. Typically companies will resort to a time-compressed, myopic four-step process that results in fairly typical and traditional results —capital projects are either eliminated or significantly reduced in scope, all contractors are "thrown out the door," maintenance on existing systems is deferred and in some cases software licenses for maintenance are allowed to lapse, headcount (normally being a significant portion of the IT budget) is cut, training is canceled, and travel is restricted to the absolute bare minimum. These actions will result in margin improvement and often do achieve the mandated financial result.

However, many times these actions have unintended consequences that only result in short-term cost benefit and many times adversely impact the overall ongoing sustainability of the business.

After all, the capital projects were initially authorized for a reason (normally to improve the operational/financial performance of the business), and that need or issue continues to go unmet; people have gone away but many times the work hasn't, so the existing staff become overloaded, things fall through the crack, productivity suffers and operational efficiency deteriorates. Ultimately, after surviving the downturn, the projects get restarted, people get rehired, contractors get reengaged, licenses get reissued, and training gets back on track, many times at a higher cost level than before the cuts. In effect, most companies perform triage when radical surgery will yield longer-term sustainable results. There has to be a better way to approach IT management in challenging economic times. There ought to be a way to achieve short-term margin improvement yield while also positioning the company for long-term, sustainable operations and growth once the economy turns back upward.

Take a step back and examine the whole picture regarding information technology prior to assessing just how much can be done to improve financial performance.

The Four-step Approach

A company ought to utilize a very different four-step approach, which is best summarized as:

  • Get a good handle on the total cost of IT within the business — In most companies IT costs are normally associated with the budget for the company's MIS, IS or IT organization. Suffice it to say, there are many IT costs that are often overlooked in a traditional IT "cost-reduction" effort.

    Consider the "ripple effect" (e.g., a stone thrown into a pool of water) of IT costs. Deploying a server and application in the data center has a ripple effect elsewhere within the user organization (e.g., printers, mobile devices, energy, paper usage, licenses/seats), and many times this ripple effect is not fully considered (and associated costs traced and identified), so money may be left on the table. In other cases, the ripple effect is not fully identified, and the company is surprised by some adverse action detrimental to overall business operations when certain services are eliminated. Consequently, additional costs are later incurred to "repair" the impact of the initial cost reduction.

    Lastly, in times of very challenging economic conditions, few companies truly understand their baseline costs for IT. By not fully understanding the entire picture of IT across the entire company, few companies come to grips with what the most minimally accepted cost structure can be to "keep the lights on and the engine room running."

  • Focus on the cost drivers of IT — First and foremost, companies need to understand what drives the demand for IT services and capabilities within their company. For example, in a recent engagement with a $1billion plus enterprise, company management thought that approximately 250 "minor" projects were consuming IT resource time, effort and costs; in reality there were over 800 "projects" approved, many of them ongoing even though the immediate need driving the request had long since been eliminated or overtaken by other business events.

    Treat IT like it was itself a business, with a fundamental need to balance supply with demand. Since most of the demand is internally generated (recognizing exceptions for regulatory or market driven requirements) by a company's own resources, balancing that supply and demand becomes an effort of tenaciously evaluating the value equation associated with that demand and understanding whether it is truly needed for baseline operations or is a discretionary costs — and if it is a discretionary cost, what the true value-add is of meeting the demand. The bottom line is that many organizations pay for levels of service or equipment capability that are not needed to support the business. Lastly, we find that IT costs are many times, in the end, driven by personal or organizational preferences that, over time, become the "sacred cows" of providing "user friendly" IT services.

    In robust economic times, companies may choose to overlook these additional costs, but in challenging economic times allowing personal or organizational preferences to drive demand for overlapping or redundant IT capabilities is a luxury most companies ought not and cannot afford.

  • Be relentless in valuing the work done and the services provided by IT — Always examine your cost structure through the eyes of your suppliers and customers (while also balancing that view with an understanding of the company's vision, mission and performance objectives). This approach will yield a new and different perspective as to what may be "on the table" when considering adjustments to your company's IT cost structure.

    To achieve long-term, sustainable cost improvement within IT, it is essential to adopt this customer-market based perspective and be relentless in objectively segregating IT functions and services into their value-add and commodity like categories and then drive their associated costs accordingly.

  • Be creative in meeting the demand or sourcing the work — During times of plenty, IT, like most organizations, tends to move towards "safe" or risk adverse solutions and processes. One of the oldest adages in the IT community is "no one ever got shot for choosing the leading vendor — IBM, Microsoft, HP, Cisco, etc."

    Additionally, from the process side, during times of plenty most IT organizations (both shadow and "real') add layers of process (and sometimes layers of people) in order to ensure the uninterrupted delivery of IT services in an attempt to reach that long-sought-after paradise of "100 percent up time delivered 100 percent of the time…. Exceeding delivery expectations and making sure IT is always there when you need it." The issue that occurs over time is that many organizations end up with more complicated and complex (potentially over-engineered) IT environments than is needed, even taking business risk into account. During challenging economic times, companies ought to take the opportunity to examine that people, process and technology infrastructure to see if there is a more creative (though decidedly less traditional) approach to providing IT services.

There are two key actions that allow a company to achieve significant long-term results. First, adopt an unbiased, objective and tenacious examination of existing costs and demands and keep an open mind to assessing and applying creative solutions. Second, use a simple, yet rigorous approach that we label our ICE framework — which stands for Investigate, Consolidate and Eliminate:

  • Investigate — includes gaining an understanding of the business, its expected financial performance parameters and operating imperatives, as well as an inventory of all IT related assets (e.g., people/organizations, locations, equipment and applications) associated with supporting the business. Key to this is ensuring that any discovery effort goes well beyond the organizational structure labeled "MIS" to identify all the "shadow" capabilities.

  • Consolidate — includes identifying those like/compatible work functions and services that can be combined. During challenging economic times most companies cannot afford the luxury of having multiple solutions to the same problem, so acute emphasis ought to be placed on identifying those situations and achieving cost synergies through consolidation.

  • Eliminate — includes taking the customer and market perspective during this stage of the effort to focus the company's attention on just how much of a premium they may be paying to "do it our way." This effort requires relentless and almost "ruthless" examination of the rationale for why multiple instances of the same service, function or component exist.

Take a Team Approach

To achieve sustainable results the conclusions, decisions and actions to be taken must be owned by the stakeholders within the company. The best approach is a teaming approach that allows the company to leverage (and exploit) the objectivity and expertise of a third-party advisor while maximizing the inherent ownership of the problem and the solution by internal resources. A company's information technology environment can be a prime source for achieving immediate, yet sustainable margin improvement.

Yet most companies utilize an approach that results in limited cost improvement while potentially harming the company in the long term. By tenaciously focusing on understanding the true cost structure of IT and the drivers of those costs as measured through a value-add demand equation, and considering creative solutions to sourcing those services, functions and equipment, companies can achieve cost synergies that take them beyond the obvious and that yield longer-term sustainable improvements to both the IT environment and overall business operations.