Use IT to Reduce Business Costs

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Use IT to Reduce Business Costs

Use IT to Reduce Business Costs

By Jeanne G. Harris, Allan E. Alter and Marshall J. Wells

September 2009

Point of View


Use IT to Reduce Business Costs

The IT function should be at the heart of an

organization’s efforts to reduce the cost of

conducting business. Here’s what CIOs and

other business leaders should focus on.

Information technology is now so

pervasive and essential that it must be

treated as a lever for reducing overall

business costs—not only as overhead to

be slashed. And the downturn, despite

all its accompanying pain, also presents

CIOs with a significant opportunity to

help the entire enterprise emerge

stronger during the recovery. Thanks

to their cross-enterprise view of company

operations, IT executives can

lead and carry out a comprehensive

approach to cost savings throughout

the business.

Figure 1: The three categories of cost reduction

Through Accenture’s extensive research

and experience, we’ve identified steps

executives must take to save money

through the use of IT. The key is following

Accenture’s three-stage framework

for rapid and sustained cost reduction.

(See Figure 1.)

In the first stage, rapid cost takeout,

companies find quick wins that can

fund higher-impact initiatives. In the

second stage, process optimization,

they make current processes better,

faster and cheaper. They rationalize,

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

simplify and automate capabilities to

improve cash flow and margins. In the

third stage, structural change, they

build for the organization’s future

success. Initiatives launched at this

stage reduce the cost and complexity

of the company’s overall operating

model while also driving long-term

profitable growth.

A systematic review of each area of the

business touched on by IT is essential

to identify opportunities for each stage.

After the review, business leaders

should set priorities by using a portfolio

approach. Throughout it all, the CIO

should step up to the challenges and

show the way.

Quick cuts provide short-term relief, but over the long run organizations can save more by optimizing current

operations and restructuring processes to permanently operate at lower cost.

size indicates scale of cost reductions

Rapid cost takeout

Optimize current

operations

Structural change

Rapid cost takeout

Find quick-hit process improvements

Streamline organization

Consolidate procurement

Optimize current operations

Improve processes and activities

Eliminate activities that add little value

Establish shared services

Outsource non-core activities

Structural change

Restructure enterprise-wide processes

Redesign enterprise organization

Integrate enterprise-wide technologies

Outsource business processes

Implement operational excellence capability

Segment sales and service strategies


Use IT to Reduce Business Costs

Identify cost-reduction

opportunities

Business leaders must start by looking

throughout their entire enterprise for

opportunities to reduce costs, starting

with customers, suppliers and processes.

The IT organization, in its role as

supporter of people and operations

throughout the company, should partner

with the business and lead this analysis.

The opportunities below are meant to be

illustrative; the best and most specific

opportunities will vary by industry and

business model.

To reduce sales and service costs:

Adopt technologies such as iPhone

applets that support customer selfservice

for simple transactions. In addition,

segment customers by their profitability

and future value. Segmentation

enables managers to invest more in the

company’s most profitable customers

and spend less on lower-value ones.

For example, a bank that conducts a

sophisticated analysis of a customer’s

financial situation could use it to modify

the terms on her mortgage, enabling

the customer to keep her home and

credit while avoiding a foreclosure.

These tactics require reliable, comprehensive

data on customers’ preferences.

To gather such data, conduct a

“voice of the customer” exercise, use

surveys and focus groups and monitor

Facebook, Twitter and live chat on the

company website. Make this an ongoing

effort. Front-line employees at the

Vanguard Group, a financial services

company, are trained to recognize and

capture voice-of-the-customer comments,

which are stored in a central

database. A “client insight” team then

analyzes the data to identify immediate

cost-reduction opportunities. 1

To eliminate costs in the product

portfolio: Reduce the number of product

families the company supports, and

improve product-development efficiency;

for instance, by streamlining the

number and mix of products. This isn’t

easy. Products are often launched at a

local level, and it takes a top-down, disciplined

review of the portfolio and the

use of stringent criteria to evaluate

competitive position, brand strength

and other factors to find the most profitable

mix. They must also help maximize

product revenue through “yield

management”—using technology to

squeeze more revenue from a perishable

product with fixed costs, such as airline

tickets, hotel rooms and seats at live

performances.

To reduce labor costs: Use technology

to improve productivity. For example,

corporations are improving workers’

productivity by providing technology

that enables mobile employees to set

up their schedules without coming into

the office, and that allows managers to

reroute workers on the fly when a new

job pops up. In addition, cut costs by

automating processes. Pacific Gas &

Electric’s SmartMeter technology automatically

transmits customers’ energy

usage via power lines or a public wireless

network to a PG&E data center,

eliminating the need for more expensive

human meter readers. 2 PG&E uses this

data not only for billing purposes but

also to closely monitor usage trends—

a help in setting rates (higher rates for

peak usage times) and eventually in

pinpointing power outages as they occur. 3

Management should also examine

critical processes for additional

cost-reduction and value-creation

opportunities:

Procurement: Standardize and centralize

the purchase of raw materials, parts,

goods and services. Procter & Gamble

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

has saved hundreds of millions of dollars

a year with its Corporate Standards

System, a single repository of technical

standards data for each of its 55,000

products. The system lets P&G standardize

materials and processes worldwide,

and then obtain volume discounts by

aggregating purchases spanning all

business units. Better access to technical

standards has also reduced the time

required for the company to bring new

products to market. It’s enabled P&G

to shorten new-product discovery and

formulation, and reduce product specification

approval time by 70 percent. 4

Order management: Order fulfillment

can be an inefficient mess for companies

that have grown through acquisition.

One medical products manufacturer

was using 22 different systems to manage

orders. The standard lead time to

install a new piece of equipment was

120 days, delaying the time until revenue

from the sale could be recognized.

The company also made numerous orderfulfillment

errors, as employees had to

enter orders by hand to get data from

one system to another. Errors slowed

cash flow and frustrated customers. By

standardizing on one ordering system,

the company expects to reduce its

order-to-cash cycle by 33 percent, shrink

in-transit inventory by 40 percent, improve

order accuracy to more than 95 percent,

and reduce its field-service parts inventory

by 25 percent.

Supply chain management: To reduce

inventory costs and increase sales, use

technology to keep shelves stocked at

the right levels. An end-to-end inventory

management and replenishment

system enabled Argos, a £4.2 billion

(US $8.1 billion) home products retailer

in the UK, to go from weekly to daily

stock management. The company reduced

store and warehouse inventories while

increasing the range and availability


Use IT to Reduce Business Costs

Figure 2: The portfolio management process

Sorting projects by reward, category and risk helps organizations choose the best mix of opportunities.

Uncover savings

opportunities

$ $ $$$

$ $ $$$

$ $ $$$

$ $ $$$

$ $ $$$

of products on store shelves. Executives

expect the reduced inventory to generate

more than £100 million (approximately

US $196 million) in savings by 2010.

Financial control: Use technology to

gather large volumes of financial data

and manage expenses to levels of detail

unheard of in the past. One global brewing

company achieved over €300 million

(US $424 million) in savings by implementing

zero-based budgeting (building

budgets from scratch, without regard to

the previous year’s budget) and then monitoring

spending on a monthly basis down

to the item and vendor level across the

organization. The SAP-based tools used

for this monitoring are integrated with

the company’s other financial systems,

so data easily flows where it’s needed.

Finally, executives need to look at

specific functions for even more

opportunities to root out costs:

Sort opportunities

to categories

$ $ $$$

$ $ $$$

$ $ $$$

$ $ $$$

$ $ $$$

high

Shared services: Use technology to inject

new efficiencies into shared-services

operations (for example, sharing payroll

systems among business units). Such

moves can reduce the cost of backoffice

activities by 25-50 percent by

eliminating redundancy.

IT: Lower the cost of IT itself; for

example, by consolidating data centers,

standardizing enterprise applications,

redesigning IT processes and taking

advantage of software as a service and

cloud computing. (For more on reducing

IT costs, see another article in the

Institute’s IT in Turbulent Times series,

“How CIOs Can Increase IT Capability

while Cutting Costs.”)

Set priorities with a portfolio

approach

Such an abundance of opportunities can

overwhelm executives. Which ones

should they focus on? Executives need

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

Reward

Assess reward

and difficulty

Difficulty/Risk

high

Prioritize

projects

Do-it

Consider

if $

available

Find $

and

address

risk

Discard

Set portfolioto-target

mix

$

$

$

$

$

$

help prioritizing opportunities according

to their potential return and risks. CIOs

can provide that help—by facilitating

application of portfolio management.

In portfolio management, executives

examine the cost-reduction opportunities

they have uncovered. (See Figure 2.)

They identify where spending is creating

value for their organization and where

it’s losing money, where they’re operating

efficiently and where they need to

improve. CIOs must make sure the

organization’s leadership team agrees

on how to measure the value of IT

investments and activities, and make

certain that IT value is measured

regularly and well.

Executives then place the opportunities

in categories that make sense for their

business. Typical categories include

functions (marketing, HR, procurement),

processes (order to cash, procure to pay),


Use IT to Reduce Business Costs

and geography. CIOs have to ensure

the executive team agrees on which

categories to use.

Next, executives weigh each opportunity’s

potential benefits against its full

array of risks—financial, operational,

regulatory and strategic. Few initiatives

worth doing carry no risk at all. The more

ambitious the effort, the more planning,

communication, leadership attention and

change management are required to

ensure success. Again, CIOs can help. For

instance, the head of the IT organization

might point out that future support costs

and added architecture complexity

might add more total cost of ownership

than the business value generated by

the new application. A simpler, lower

cost version offered through a software

as a service provider may provide a more

attractive balance of risk and return.

The cost-cutting power of

technology

Key technologies for reducing costs

include the following:

Analytical technologies: Organizations

can manage and interpret large volumes

of data using a broad array of

statistical and quantitative techniques.

Many analytical capabilities save money:

Operational dashboards depict current

processes’ performance, enabling managers

to identify and improve inefficient

processes. Embedded analytics put

business intelligence directly into

operational applications and processes

to automate them. These analytics are

best suited to decisions where the

knowledge and decision criteria are

well understood and can be saved in

a database, and where reliable and

accurate data is available.

In addition to risks, executives should

also consider potential organizational

barriers. For example, an opportunity

to cut costs by automating a procurement

process might generate high

returns. But if the head of procurement

has recently had a bad experience with

IT and is skeptical about automation’s

benefits, the barriers to acceptance

would likely be high. Executives might

do better by initiating automation in a

function where the benefits are a little

lower but the appetite for IT-enabled

change is stronger.

Insight to action

CIOs must first provide insights into

how IT can enable their organization

to achieve rapid and sustained cost

reduction—insights informed by their

Business process management tools:

BPM tools take process management

to the next level—providing software

and modeling that help managers

hone processes with an eye toward

cost-effectiveness.

Cloud computing and software as a

service: Companies can now rent systems

or applications over the Internet when

they need them, and pay only for what

they use. That allows companies to avoid

upfront capital expenditures on hardware

and software. Clouds are especially

useful for large, one-time tasks that

would otherwise need many computers

to complete, such as digitizing large

numbers of images or analyzing a large

set of data, while software as a service

(which is usually lumped under cloud

computing) lends itself to commonplace

applications like word processing, email

or information about customers.

Consolidation and integration: New

infrastructure technologies can cut

hardware, maintenance and overhead

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

cross-functional, process-oriented view

of company operations. But to turn

insight to action, CIOs must excel at

several skills. They need to understand

the business’s processes, strengths

and weaknesses well enough to have

other executives’ trust. They need to

articulate their ideas in ways that the

CEO, CFO and others find convincing.

And they must not only point out the

risks inherent in cost-reduction opportunities

but also help manage those risks.

Organizations that work with and

through their IT departments to score

quick cost-cutting wins, optimize

operations and make valuable long-term

structural changes will emerge from this

downturn stronger than when they

went in. Even better, they will have a

solid platform for future success.

costs. Virtualization makes it possible to

run systems on less equipment. Serviceoriented

architecture enables structural

change by providing a platform for

sharing data across the enterprise.

Collaboration tools: Large companies

like Accenture are using a variety of new

communications tools to cut travel costs.

In a given month, Accenture consultants

use video and web conferencing to avoid

hundreds of international and domestic

flights, saving millions of dollars each

year. With integrated voice, IM, video

and presence, employees can see if their

colleagues are available and connect

quickly and easily, regardless of location.

Enterprise systems: Organizations can

use their existing ERP, CRM and supply

chain management systems to reduce

costs and optimize processes. In addition

to consolidating and integrating data,

these systems can improve efficiency

by standardizing and automating

processes across the organization.


Use IT to Reduce Business Costs

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. Previously

published titles in the series include

“Technology in Turbulent Times:

Creating an IT Updraft” and “How CIOs

Can Increase IT Capability while Cutting

Costs.” Please send your comments

to allan.e.alter@accenture.com.

Can’t earn more? Spend less

WIND, a leading Italian telecommunications

operator, was running a complex

network with a lot of duplication as a

result of its growth through acquisition.

As the market for new telecommunication

customers slowed, executives

knew they needed to improve operating

efficiency to increase WIND’s profits.

The company embarked on an ambitious

cost-reduction effort that included

redesigning, automating and centralizing

core business processes and better

managing use of leased lines. Altogether,

WIND reduced operating expenses

by more than €130 million (about

$187 million), or 10 percent. It also

saved more than €4 million (about

$5.76 million) on reduced office space.

WIND was running two separate provisioning

operations. By moving to one

system across the company’s wireless

and wire-line businesses, WIND took

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.

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.

out significant operational and IT costs,

and was better able to negotiate rates

with network providers. Automating

and centralizing key business processes

also enabled WIND to eliminate four

of its six network operations centers.

Field workforce management provided

another significant opportunity. The

company’s maintenance workers used

to go to an office to get their first

assignment, stop at a warehouse to pick

up parts and then travel to the repair

site to do their work. After that, they’d

return to the office for their next

assignment and start the process all

over again. This not only wasted time;

the company was needlessly spending

money on office and warehouse space.

WIND used a workforce management

tool to change the process. Now, the

company sends field workers their first

assignment through a mobile device

before they leave home in the morning.

WIND also equips workers with a van

filled with 90 percent of the spare parts

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

Marshall J. Wells (marshall.j.wells@

accenture.com) is a senior executive

and Global Strategy Lead for

Accenture’s Technology Consulting

Group, and is based in San Francisco.

Notes

1. The Vanguard Group’s nomination for

Forrester Research “Voice of the Customer”

award, http://blogs.forrester.com.

2. Presentation by PG&E CIO Pat Lawicki at

SAP Sapphire 2008 conference, May 5, 2008.

3. CIO Magazine, January 1, 2008.

4. 2004 CIO Enterprise Value Awards,

http://www.cio.com.

they’re likely to need on a given day.

Thanks to these changes, maintenance

worker productivity has improved by

80 to 120 percent.

Information has provided the means

to realize the most significant savings

at WIND: €71 million ($102 million)

on the company’s leased lines. An

application to manage the network

asset lifecycle gives WIND visibility

into the use of lines and services at a

detailed level so it can better manage

costs. For example, the company

immediately stops payment on a line

when a customer cancels service. The

tool also lets managers negotiate

better deals with suppliers and take

advantage of volume discounts.

By simplifying its operating model, WIND

saved millions of euros. It also became

more agile and better able to respond

to market conditions—without adding

to back-office and network complexity.


Copyright © 2009 Accenture

All rights reserved.

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High Performance Delivered

are trademarks of Accenture.

About Accenture

Accenture is a global management

consulting, technology services and

outsourcing company. Combining

unparalleled experience, comprehensive

capabilities across all industries and

business functions, and extensive

research on the world’s most successful

companies, Accenture collaborates

with clients to help them become highperformance

businesses and governments.

With more than 177,000 people

serving clients in over 120 countries,

the company generated net revenues

of US$23.39 billion for the fiscal year

ended August 31, 2008. Its home page

is www.accenture.com.

About the Accenture Institute

for High Performance

The Accenture Institute for High

Performance creates strategic insights

into key management issues and

macroeconomic and political trends

through original research and analysis.

Its management researchers combine

world-class reputations with Accenture’s

extensive consulting, technology and

outsourcing experience to conduct

innovative research and analysis

into how organizations become and

remain high-performance businesses.

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