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

The weakening economy is beginning to effect the earnings of companies outside the industries that have been hit hardest by the mortgage crisis (financial services, real estate and construction). Yesterday, UPS attributed a nearly 10 percent drop in its earnings per share to the “sharp decline in U.S. economic activity.” Starbucks’ newly reinstated CEO Howard Schultz revised downward his earnings outlook for 2008, citing weak economic conditions and a decline in consumer spending.

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To minimize the effects of a recession on corporate profits, benchmarking firm The Hackett Group recommends in research it released earlier this week that companies make targeted cuts to their general and administrative (G&A) spending (IT, finance, HR and procurement) that quickly impact the bottom line without compromising the quality and service the company provides or its ability to grow when the economy picks up again. The study is available on Hackett’s website (registration required.)

According to The Hackett Group’s research, a typical Global 1000 company can remove between 15 percent and 41 percent of its total G&A costs by focusing on certain processes, such as IT infrastructure management, purchase order processing and accounting, where the largest opportunities to improve efficiencies exist. These savings can offset a decline in pre-tax profit during a recession by between 21 percent and 45 percent. Hackett defines a typical Global 1000 as a company with $23.4 billion in revenue, 56,000 employees and $862 million in G&A spending.

The potential cost savings for IT are also noteworthy. According to Hackett, a Global 1000 firm that spends $444 million on IT can remove between eight percent ($34 million) and 39 percent ($171 million) of its baseline spending by making application maintenance, application development and implementation, end user support, and infrastructure management processes more efficient.

Five Specific Recommendations for IT Leaders

1. Focus on big ticket items like telecom spending.

2. If outsourcing contracts are coming up for renewal, renegotiate them at a lower cost.

3. Consolidate and standardize data centers, help desks and applications.

4. Improve efficiency of application development and implementation processes.

5. Halt the development of certain projects temporarily or permanently. If any of these projects are outsourced and your paying the outsourcer for time and materials, stopping the project, even for just a few months, can immediately save you money.

Source: Erik Dorr and David Ackerman, The Hackett Group

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.”