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Hackett Group Research: IT Leaders Can Slash Nearly 40 Percent of their Spending

Recommendations from a new benchmarking study aim to help CIOs remove waste and weather the recession.

Efficiency Gains Through Budget Cuts Varies By Company

The total cost savings a company can achieve in IT specifically or G&A in general depends on a variety of factors, according to Hackett, including the level of efficiency at which the company is already operating; the extent to which it adopts best practices for managing G&A processes, eliminates redundancies (whether they be processes or systems) and standardizes technologies and processes; and the company's ability to undertake change.

Nevertheless, Hackett executives say, most companies are surprised by how much they can actually save when they examine their cost structures and compare them to best-in-class companies.

"I've seen companies take out 50 percent of their IT operating costs over a few years," says Erik Dorr, Hackett's senior IT research director and co-author of the report on G&A spending. "Going into that, people said, 'You've got to be kidding. That's going to shut us down.'"

IT leaders have this idea that their operations are already running efficiently because they dug so deep during the economic downturn of 2002, but Dorr notes, when the economy started growing again in 2004, some companies and IT operations lost their fiscal discipline.

"Take the example of investment banks, where in the good years, there was so much money going around that they [IT groups] could take on a lot of work without making sure the work should be done based on ROI," says Dorr. "We have seen many companies whose portfolio of development initiatives has not been managed sufficiently rigidly to make sure they should be doing them in the first place."

For companies and IT departments that got lax during this most recent period of economic growth, Dorr says the downturn can serve as a catalyst for "rationalization" and efficiency improvements.

"It could be the case that there are substantial inefficiencies that companies haven't been able to address because there wasn't the urgency to do so," he says. Some companies used the last recession to deal with inefficiencies."

Another reason why IT leaders should take a look at their spending and opportunities to cut is because there are new and more sophisticated ways for IT leaders to streamline their operations, says Dorr. He cites virtualization as an example.

"That's something that organizations didn't have a few years ago to the extent that they have it now to drive efficiencies in server utilization," says Dorr.

Hackett's recommendation to make targeted or focused cuts as opposed to arbitrary or across the board cuts may seem counter-intuitive. But according to Dorr and IT practice leader David Ackerman, many companies make cuts across the board because they lack the time to analyze which areas of their G&A spend are ripest for cuts or because making cuts is so politically charged that CEOs mandate, for example, 20 percent cuts from everyone to make the activity/initiative seem equitable.

The question is, do companies still have time in this economic climate to analyze their G&A spending and benchmark themselves against world-class companies to figure out what makes the most sense to cut? Ackerman says yes.

Dorr and Ackerman hope that the report gives IT leaders "some sense of the magnitude of potential savings." Adds Ackerman, "It shows CIOs there's a methodical approach they can use to address the need for cost reductions. There are comparative analytics they can use to find the low hanging fruit and make cuts that minimize the risk of damaging performance."