Grinding Out The Fat
Even with "less is more" management styles and approaches to technology, companies can still remove more empty IT calories and make the most of their resources.
A cautiously optimistic economic outlook has prompted some technologists to pop celebratory corks to honor the end of an IT famine. But at the same time, many corporate executives have decided that a lean, mean, and slightly hungry IT department may be the ticket to profitability and enhanced competitiveness. Consider the following:
- Leveraging The Cloud For Business Resilience
- How crowdsourced testing has changed the game for innovative software companies
Given these views, it seems aggregate IT growth could remain dormant. This isn't to imply that IT will fall into a backwater of tactical commodity uses, but rather that IT users have begun to understand they don't need to spend a lot on technology to obtain a major business benefit. They know that by maximizing technology and processes already in place, they can build a more fiscally responsible IT department. Companies such as JetBlue, Harrah's, and Merrill Lynch have discovered the power of spending less and getting more from their technology assets (See Low IT Costs Let JetBlue Fly High).
It's well-known that throughout the 1990s IT budgets increased at double-digit rates. As projects were completed, they became part of companies' ever-growing IT capital structure that reached $1.38 trillion in 2001, up from $662 billion in 1991.
|Trimming The Fat|
|A review of the major spending areas in IT shows potential for savings|
|Technology||Factors driving costs down||Typical potential savings|
|Hardware||Microsoft, Linux, Intel-based processors, consolidation, increased usage||10% to 40%|
|Software||Open source, Microsoft, subscription-based pricing, increased competition, build internally, renegotiate licenses based on use||20% to 35%|
|Labor/internal costs||Supply of technologists, offshoring, automating technologies (for example, voice recognition)||30% to 50%|
|Services||Offshoring, strategic sourcing||30% to 50%|
|DATA: Wapiti LLC|
One key measure of business value is productivity. Unfortunately, IT's contribution to this metric is poorly understood and defined. IT's contribution has many nuances and aspects. To facilitate greater understanding, perhaps both technology and business executives should approach it from a simple perspective.
At a basic level, the definition of productivity gain is an increase in a given output at a constant or declining cost. When this definition is applied to IT and correlated with business benefits, two routes can be taken: Hold the line on IT spending, but increase the business benefit received from itfor example, lowered supply-chain costsor decrease IT spending for a fixed business benefit or functionsuch as taking an order from a customer.
Harrah's is taking the latter approach as it pursues its goal of cutting 5% to 10% from its IT operational budget every year for a given type of business function. On the other hand, Merrill Lynch reduced its IT spending by one-third between 2000 and 2003 by transferring responsibility and management of the IT budget to the business groups that use the technology. This new insight into the IT budget let the company remove waste and better use technology it already had installed, including hardware and software.
In the case of Harrah's, every year it combs through its IT inventory and contracts looking to cut operational costs through better sourcing, contract management, and asset-optimization techniques. Technologies no longer needed or used are quickly retired. Merrill Lynch, on the other hand, forced new discipline on its IT groups after enhancing its visibility into spending. For example, when the IT group wanted to buy wireless technology for no specific application or division, Merrill Lynch refused because IT couldn't associate a business benefit with the purchase. The company wasn't opposed to wireless; it was opposed to new-technology spending without a defined business need or potential ROI benefit.