How Cios Can Increase IT Capability while Cutting Costs

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How Cios Can Increase IT Capability while Cutting Costs

How CIOs Can Increase IT Capability

while Cutting Costs

By Jeanne G. Harris, Allan E. Alter and Michael K. Nieves

July 2009

Point of View


How CIOs Can Increase IT Capability while Cutting Costs

Reducing IT costs while improving IT capabilities

may appear to be a paradox. But by focusing on fixed

IT costs and following a strategy of sustained cost

reduction, organizations can invest in new capabilities

and innovation and prepare for future growth, even

as they tighten their belts.

Reducing IT costs quickly has become

a top priority for IT leaders worldwide.

Surveys from North America, Europe

and Asia tell the same story: The

percentage of companies cutting their

IT spending has climbed from the teens

to over 50 percent since the recession

began, and those numbers are expected

to grow in the months ahead. 1 Further,

the magnitude of the cuts called for

can be astonishing—more than 20

percent in some cases. 2

CIOs, however, find themselves in a

quandary. Many have already reduced

the inflated budgets that were common

in the late 1990s, and have kept costs

under control in the years since. Having

already accomplished that streamlining,

some may now be tempted to attack

the discretionary part of their IT budgets,

the part devoted to improvements

and new projects. But that approach

brings into play the other half of

the paradox: How do we meet the

rising demand from the rest of the

organization to use IT to bring about

better business performance?

Without a doubt, CIOs have to become

experts at doing more with less. And

they have to become smarter about

just what that “less” is going to look

like. How to get started? CIOs must

look beyond their discretionary budget

and seek significant and sustainable

reductions in the much larger category

of fixed or non-discretionary IT costs.

Two activities are critical to this effort,

once an initial round of cuts to redundant

or no longer relevant activities

are made: first, the cost of IT must be

reduced by optimizing existing opera-

2 | Accenture Institute for High Performance | Copyright © 2009 Accenture. All rights reserved.

tions and second, to achieve the most

significant gains, the means by which

IT services are delivered has to be

restructured. Only then can organizations

continue to invest in new capabilities,

innovation and growth.

IT in Turbulent Times series

This point of view is one in a series of

publications from the Accenture

Institute for High Performance on IT

strategies for the downturn and the

start of the recovery. The next article

will be on using IT to reduce business

costs. Please send your comments to

allan.e.alter@accenture.com.


How CIOs Can Increase IT Capability while Cutting Costs

Cost reductions

appear in Q1

Cost reductions

appear in Q2

Cost reductions

appear in

Q3–Q4

servicelevel

agreements

telecom expense

hidden IT

thin-client computing

Lower costs, stronger

organization

procurement management

application renewal

consolidation and virtualization

process engineering

shared services

operating model and organizational redesign

sourcing strategies

There are three stages for eliminating

costs while making the company

stronger: minimization (rapid cost

reduction), optimization (getting the

most from current operations), and

redesign (strategic and structural cost

reduction leading to competitive

advantage). Companies that find

themselves in survival mode may focus

primarily on immediate cost reduction,

but those committed to strengthening

their competitive position or accelerating

their growth will use at least

some of the savings gained in the first

stage to continue along the path.

(See Figure 1.)

1. Minimize:

Create immediate IT cost reductions

Scale of Cost Savings

2. Optimize:

Make more efficient use

of current assets

Minimize for rapid cost reduction

Not every company has eliminated the

budget-bloat of the post-1990s, and

many still have some redundant costs

to wring out. The first order of business

is to seek out and eliminate any

remaining unnecessary fixed and discretionary

costs that have crept into IT

over the years. Traditional technology

clean-up activities include decommissioning

redundant systems, halting

projects with low-value potential,

renegotiating maintenance contracts

and selectively reducing services to

groups that have less need for them.

The first step on this journey is to

do a quick audit of IT costs, assets

and activities.

One example: The CIO of a US financialservices

firm saved $3 million simply

by turning off the company’s 44,000

PCs at night with the help of powermanagement

software. 3 Such “quick

wins” help create momentum as IT

leaders embark upon the more

3 | Accenture Institute for High Performance | Copyright © 2009 Accenture. All rights reserved.

3. Redesign:

Reduce IT costs for the long haul

while preserving and improving

IT service quality

Figure 1: The Three Stages of Rapid

and Sustained IT Cost Reduction

There are more than 100 IT cost-reduction

levers, each appropriate to a different stage in

an organization’s efforts.

involved work of application and

project-portfolio assessment and

contract negotiations.

In each area targeted for minimization,

CIOs can reasonably expect early savings

of 10 percent to 20 percent. If approached

as the first stage in a larger program

of cost reduction, these savings can

be used to fund changes that will

produce more significant and sustainable

benefits over the long haul. But it will

take a clearly articulated plan and

convincing metrics to make the case

for reinvestment.

Some management teams may be

tempted to simply push costs forward

at this stage, postponing planned

expenditures for the next quarter or

two. But such deferrals do nothing for

the company’s longer-term, sustainable

cost-reduction goals, and they certainly

won’t address the depth of the cuts

being called for.


How CIOs Can Increase IT Capability while Cutting Costs

Optimize to gain capability

All parts of the IT operation (hardware,

software, networking, services) are

ripe for optimization. The keys to this

stage include consolidating data centers,

rationalizing servers and storage, and

standardizing by limiting the number

of operating systems and versions of

enterprise applications in use. In addition,

the use of existing (or replacement)

assets must be improved in order to

achieve lower per-unit costs while

longer-term strategies are developed

and executed.

Most organizations can expect to see

cost reductions of between 15 percent

and 40 percent in each of the categories

they target, with benefits delivered

within three to 18 months. For example,

one large company achieved $13 million

in cost savings within nine months in

a server-consolidation project, as it

eliminated more than 300 of its

3,500-plus servers.

Pure cost reduction isn’t the only benefit

in this stage. Optimization work exposes

and reduces operating complexities,

making the enterprise better able to

respond quickly as business conditions

change. By reducing the number of

computing components (and thereby

increasing the staff-to-component

ratio), CIOs can increase control over

computing resources, with fewer

unmanaged servers and neglected

systems throughout the enterprise.

Similarly, service levels will improve,

because skills, knowledge, tools and

processes will be less fragmented;

rather than having just a few people

who are expert in each of hundreds of

systems, the organization could have

hundreds of people expert in just a few.

Finally, comprehensive optimization

efforts position the organization to

move into the redesign phase, where

the greatest benefits can be realized.

Redesign for long-term strategic

advantage

The third stage in the IT cost-reduction

journey is to permanently reduce nondiscretionary

costs and increase agility

through redesign—of IT processes, the

operating model, IT architecture and

sourcing. This stage ensures the longterm

sustainability of a lower cost

structure in order to better support

growth of the business. Companies

that get serious about strategic cost

reduction see decreases of 15 percent

to 45 percent in each of the areas

they tackle.

In this stage, CIOs will be looking to

redesign the mechanisms they use to

deliver solutions and their approach to

managing resources, services and procurement.

IT-enabled business process

reengineering also belongs in this stage.

Consider an approach to IT redesign

from Boeing. The airplane manufacturer

reduced its imaging services costs from

nearly $150 million per year to $110

million by having an outside firm own

and manage equipment at the company’s

195 domestic and 168 international

sites. Unlike the financial-services firm’s

power management solution, this was

not a quick win for Boeing; the company

spent a year and a half researching

vendors that included having them run

printing tests in Boeing's lab. Boeing

then ran a six-month pilot to prove

the project's value. And to put the

4 | Accenture Institute for High Performance | Copyright © 2009 Accenture. All rights reserved.

plan into practice, executives created

and enforced new policies and gave

the company time to replace some

32,000 imaging devices. 4

Another key to the redesign stage is

the availability of sophisticated new

models of IT service delivery: on-demand

services, software as a service, cloud

computing. CIOs are paying attention,

especially in the downturn: 37 percent

say they are more likely to consider

such alternative IT delivery models as

a result of the unfavorable economic

conditions. 5 Those who have already

been through the minimize and optimize

stages will be better positioned to take

advantage of these new offerings.

While recognizing that IT redesign

work is an important strategic goal,

many boards are pulling the plug on

major projects in the face of immediate

economic pressures. Only by making

this the last stage of a well-thought-out,

well-managed, largely self-funded plan

can CIOs hope to get these important

efforts back on the table. (To read

about how one company successfully

transformed its IT capabilities, see

“FinanzIT: a three-year transformation

of IT operations.”)


How CIOs Can Increase IT Capability while Cutting Costs

FinanzIT: A three-year

transformation of IT operations

In 2004, FinanzIT, then one of two remaining IT services

providers of the Savings Banks Financial Group in Germany

(“Sparkassen”), was facing some tough challenges. It was

experiencing serious operational problems and outages that

were affecting its customers. These issues were accompanied

by an overall cost of operations that exceeded benchmarks,

making it impossible to offer competitive pricing. Finally, the

company’s history of mergers left it with little that was

standardized within its technical infrastructure.

Under significant pressure from the company’s owners and

clients, senior management knew they had to undertake a

major IT transformation. The project began with a 12-week

opportunity assessment focusing on three areas: higher

quality, lower costs and improved standardization. This

assessment identified quick wins, defined the target operating

model at a high level, created the initial benefits case and

identified the preliminary IT transformation changes.

The program exceeded its goals in all three areas.

Quality

The company achieved sustainable improvement of availability

rates (exceeding its negotiated service levels) for all

relevant business services. It also improved the mean-time

between failures by 231% between January 2006 and

December 2007.

5 | Accenture Institute for High Performance | Copyright © 2009 Accenture. All rights reserved.

Lower costs

The transformation effort delivered sustainable cost reduction

of 20 percent, exceeding the initial target by two percentage

points. This included consolidating and renegotiating major

contracts with its vendors and outsourcing mass printing.

Standardization

FinanzIT moved to a new location concept of “only one

location per business function,“ closed two data centers

and standardized IT operations to just eight models for

delivering all IT services (using virtualization and open source).

In 2008, FinanzIT and Sparkassen Informatik merged to

create Finanz Informatik, providing IT-related services to

443 savings banks, ten state banks, ten building associations

and additional customers.


How CIOs Can Increase IT Capability while Cutting Cost

Figure 2: Assessing cost-reduction opportunities

All four steps, from examining the current environment to reaching agreement to proceed, can be accomplished in six-to-eight weeks.

assess current environment define opportunities

How to begin

IT Executive Review 1

What needs to change?

• Get early feedback on

IT challenges

• Identify long list of

cost-saving opportunities

• Confirm priority areas

Organizations that have committed to

a program of significant and sustained

cost reduction for the future will put

in the time upfront to lay out all

three stages before they begin. Think

of it as “architecting” rather than

slashing your way to lower costs to

create a more stable future.

The first step is to assess current

spending, projects, capabilities and

assets, and then to identify and analyze

opportunities for reductions. This

process should include a hard look at

factors outside IT (for example, killing

off struggling product lines that IT is

currently supporting), and so input

from business partners and the CEO is

a necessity.

IT Executive Review 2

What must we change to?

• Agree on short list of

cost-reduction opportunities

• Agree on cost-reduction

approach

• Review initial benefits case

Assuming you are using a structured

process of discovery and prioritization,

your team will have agreed to a short

list of cost reduction opportunities

for all three stages by the end of six

to eight weeks. (Large, complex organizations

will take longer.) It also will

have built the business case for the

program, agreed to key investments

and an implementation approach, and

obtained commitment from all parties

to proceed. (See Figure 2.)

A disciplined process will help you

identify the real opportunities and

risks. Successful CIOs take advantage

of established methodologies to

quickly and accurately identify the

risks of potential actions. For example,

server virtualization offers many

advantages, but it also adds a layer

of complexity to operations. Proceeding

without a good understanding of

potential implications will impair the

6 | Accenture Institute for High Performance | Copyright © 2009 Accenture. All rights reserved.

define IT cost-reduction

program

IT Executive Review 3

How will we implement

the changes?

• Agree on the key IT

investments required

• Review action plan

• Review business and

benefits case

commit to go on

with program

Authority to Proceed

Are we prepared

to proceed?”

• Obtain formal approval for

investment

• Agree on responsibilities and

commit to action

ability of CIOs, their teams and their

business partners to make good decisions

at a time of high stress.

Quick wins provide a great starting

point for the cost-cutting mandate,

but just focusing on the first stage

won’t deliver the lower costs and

other results organizations seek in the

longer term. By building on the savings

acquired at each stage to fund the

next, CIOs will be able to achieve

much deeper and more sustainable

cost reductions, thereby freeing up

money to invest in new IT-enabled

business initiatives.


How CIOs Can Increase IT Capability while Cutting Costs

About the authors

Jeanne G. Harris

(jeanne.g.harris@accenture.com)

is a senior executive research fellow

with the Accenture Institute for High

Performance, and is based in Chicago.

She is the co-author of Competing on

Analytics: The New Science of

Winning (Harvard Business Press,

2007) and, with David L. Hill, “Using

enterprise systems to gain uncommon

competitive advantage,” Outlook,

January 2007.

7 | Accenture Institute for High Performance | Copyright © 2009 Accenture. All rights reserved.

Allan E. Alter

(allan.e.alter@accenture.com)

is a research fellow with the

Accenture Institute for High

Performance, and is based in Boston.

He was formerly an editor with such

publications as CIO Magazine and CIO

Insight.

Michael K. Nieves

(michael.k.nieves@accenture.com)

is a senior executive with Accenture

Technology Consulting and is based in

Atlanta. He is the co-author of “ITIL

Service Strategy” (Accenture, 2009).

Notes

1. CIO Magazine IT Budget & Staffing Survey,

January 2009.

“Optimizing Operational IT,” Information Age,

April 9, 2009.

Australia’s IT Agenda 2009, Accenture.

According to the Business Cycle Dating

Committee of the National Bureau of

Economic Research, the current recession

began in December 2007.

2. Information Age, Ibid

3. “Save Money with PC Power Management,”

CIO Magazine, July 31, 2008.

4. “How Boeing Cut Imaging Costs,” CIO

Magazine, April 2009.

5. CIO Magazine IT Budget & Staffing Survey,

January 2009.


Copyright © 2009 Accenture

All rights reserved.

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