Learn to Trim IT Costs Strategically

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While such separation is useful for strategic management, there needs to be communication among these two IT groups and the business to ensure that each does not go its own way and end up creating an environment where operations prevents innovation or where innovation strains the infrastructure. At the diversified manufacturer United Technologies, CIO John Doucette uses a CIO council to coordinate savings strategies among the company’s divisions.

5 Rules for Rationalizing the Infrastructure

While there are many ways to achieve efficiencies in IT infrastructures, they tend to be variations on one basic approach: reducing complexity. "The key levers are simplifying, standardizing, consolidating and centralizing," says John Balboni, CIO of International Paper, who has cut IT costs by 25 percent over three years even though his company has been involved in a number of acquisitions during that time.

"It requires standard processes to do real consolidation," advises KPMG’s Bell. So any infrastructure rationalization needs to start with understanding the underlying business and IT processes, making them efficient, then adjusting the infrastructure to support them. Part of that effort includes rethinking the service levels IT provides to the business, says McKinsey’s Kaplan. "Do you need 24/7 support for all applications?" he asks. "Do you need disaster recovery for all applications?" Service levels should reflect business criticality, since achieving high service levels adds significant labor and technology costs. "You have to show [business departments] what they can live with—service is really a level of gray," says Khris Hruska, technology director at child-care and education provider Learning Care Group. To do that, Hruska worked closely with business managers to help them understand what service levels they really needed. Then he tuned his resources accordingly.

1. Don’t Keep Multiple Systems One way Balboni has kept costs down is by not keeping acquired companies’ IT infrastructures. That allows efficient usage of technology and staff while also ensuring that the business has a unified view of its customers and operations. "You don’t want to serve the customer out of two systems," he says.

"You have to have the same system," agrees John Williams, CIO at retailer Party America, which has grown from 36 stores to 300 in three years through a series of mergers and acquisitions. During that time, his IT staff only doubled from six to 13, thanks to enforcing the same point-of-sales and back-end systems on all the acquired entities. "Every time you have a merger, you’re at a crossroads. Do you go with theirs, or do you go with ours?" he says. At Party America, Williams went with his. It wasn’t a question of which technology was better—both his Oracle-on-Linux environment and the acquired companies’ AS/400 environments could do the job. It was a question of what skills his IT staff had. They knew the Oracle-on-Linux environment. Williams is also reducing the number of broadband providers to his stores to make vendor management and support easier.

It’s not just companies dealing with mergers and acquisitions that can take advantage of platform reduction. For example, ADP’s Bongiorno expects ADP to save $50 million per year by consolidating 30 data centers into two by 2009. The company had been decentralized, with separate IT operations at each customer center. Centralizing the operations not only will reduce IT staff but also will allow higher utilization of equipment. "The biggest piece has been around getting more clients on a server," says Bongiorno. Doing so reduces labor, licensing and hardware costs.

2. Routinize the Routine The easiest way to save is to invest fewer resources in repetitive, predictable tasks, since labor is usually the largest cost in any IT organization (typically half the budget, says McKinsey’s Kaplan). There are several ways to reduce that labor cost: automation, simplification and outsourcing. Often, companies employ a combination of these tactics.

Outsourcing can save money, but not always. "A lot of companies don’t know the cost of a service before they outsource it," says AMR’s Gaughan, so they don’t know if their actual costs have gone up or down. For outsourcing to be effective, "you need to think through the control issues up front so you have the ability to hold them accountable," says B¿we Bell & Howell’s Ridge. "You need a higher degree of process management when you offshore," adds Kaplan.

CIOs should approach outsourcing in a nuanced way. For example, B¿we Bell & Howell found it cheaper to outsource desktop support and SAP hosting than to maintain its own staff and IT infrastructure for these tasks. But it manages its telecommunications systems because it doesn’t want to take any risks with the customer data that telecom brings in, Ridge notes. ADP has hired cheap staff in India and Brazil to code its applications, while retaining the higher-skill project management and development staff in the United States, says CIO Bongiorno. And ThyssenKrupp saved by outsourcing its mainframe and AS/400 operations, but it also saved by firing its network management outsourcer and bringing those operations back inside the company.

On the technology front, CIOs are often pitched automation systems and virtualization as ways to gain labor efficiencies. Both are new technologies and thus tend to come from startup providers focusing on one aspect of IT, says AMR’s Gaughan.

At International Paper, "we work a lot on automation," says Mark Snyder, the senior manager for connectivity solutions. But some of that effort has involved developing its own monitoring tools to ensure they map to the company’s specific processes.

Virtualization technology saves labor by simplifying the provisioning of servers, making it a software operation rather than a hardware setup task. Virtualization also promises to use more of your existing server resources, reducing the need for additional hardware. It does that by treating the hardware as a pool of computation and storage. So if an application needs just half a server’s capacity, the other half can be allocated to another application rather than sitting idle. But because virtualization is a new technology, it requires a more highly skilled staff to manage and can require additional overhead to maintain the load balancing, says Gaughan, adding, "That should decrease over time."

3. Shift to Cheaper Equipment and Services The rise of standards-based platforms has helped lower technology costs, and CIOs should take advantage of that. That’s why, as part of his data center consolidation effort, ADP’s Bongiorno is replacing expensive proprietary servers with cheaper standards-based ones. Similarly, when it was time for a technology refresh, ThyssenKrupp replaced its Cisco networking equipment with Adtran hardware because of a significant cost difference. And Crye Leike has shifted from installing dedicated T1 and DS3 data circuits at its new offices (it opens several each month on average) to using cheaper DSL connections secured through virtual private networks, says CIO Sodhi.

4. Only Pay for What You Use An easy way to save money, says AMR’s Gaughan, is to know what you have. "Often, companies have more licenses than they need," he says, because they manage licenses manually and sometimes they lose track. "You won’t get your [license] money back, but you might be able to stop paying for maintenance" on those unused licenses, he suggests. PharMerica’s Toole even got rebates for some leased equipment after his inventory revealed he was paying for equipment he was not using.

There are tools for asset management, but they tend to be fairly manual and lots of IT groups that use them still lose track. Providers include Absolute Software, Alloy Software, IBS, Computer Associates and Novell.

5. Broom that Closet Perhaps the most neglected cost-savings opportunity is junking old equipment and software. Companies often leave old applications running or use older hardware as hand-me-downs for noncritical use, such as archival storage or departmental file servers. That’s a mistake, as it just adds more stuff to manage, thereby driving up infrastructure and support costs. "Old stuff is evil," says United Technology’s Doucette. "Every asset needs to have a set life."

An added plus is that getting rid of old stuff makes room for new stuff. For example, The Options Clearing Corp. replaces its Solaris servers every three to five years with new models that have two or three times the previous capacity, typically for the same price. That strategy keeps the number of boxes to manage low, even as processing demands increase, says Scott Everhart, the company’s first vice president of technology services.

The Best Cutting Enables Innovation

To reduce costs in a way that supports the business strategy requires aligning IT costs to the value of the services they provide, says Forrester’s Cullen. "The solution to the CIO’s problem is not something he buys from his vendor," he says. "People and processes are the big issues."

The CIO should not expect to retain all the money he saves his organization, but routinely gaining efficiencies "builds credibility with the CFO, COO and the board," says The Options Clearing Corp.’s Von Stein. "So we get more latitude in getting a ’yes.’" At Crye Leike, CIO Sodhi has a seat at the management table, "so I have a say in how we will use some of the savings."

By having management trust and continually demonstrating a commitment to efficiency, some CIOs get a discretionary innovation budget. PharMerica’s Toole has such a budget, and so does ADP’s Bongiorno, who gets to keep any savings beyond a set target. "The only way we’re going to get more for IT is for us to find the savings," he says.

And that’s just fine with him.

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Copyright © 2006 IDG Communications, Inc.

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