World-class IT organizations spend 18% less annually on IT costs per end user than their median peers, $8,686 versus $10,532, the study says. They accomplish this through a combination of using best practices, including outsourcing, simplification and standardization, higher levels of process discipline, and improved overall alignment with business objectives. Their overall lower cost structure also lets the top IT organizations reinvest some of the savings they generate, dedicating more IT dollars to technology investments that add business value and also potentially contributing to their company's bottom line.
Hackett maintains a database it calls the Book of Numbers, a catalog of companies' best practices and process metrics in IT, finance, human resources, procurement, and other areas. For this report, Hackett analyzed the best practices and processes metrics of some 200 companies, with fewer than 10% deemed world class.
A major factor in holding down IT costs, Hackett says, is outsourcing--employing contractors here and abroad. The top IT user companies commit 23% more annually per end user to outsourcing than the average company, $919 versus $748. But it's not just contracting outsourcers, but employing them smartly. World-class companies spend 60% more than the average company on outsourcing technology infrastructure activities, in an effort to improve efficiency and cut overall costs. But they spend 34% less then median companies on outsourcing application development and maintenance, areas that are more strategic and potentially much riskier to outsource, particularly in light of reduced standards compliance and increased environmental complexity generally seen at median companies.
"Outsourcing application development is effectively giving somebody else your company's jewels, the intellectual capital on how your company operates," says Allen Frank, Hackett senior fellow and president of IT consulting firm AnswerThink Inc., Hackett's parent company. "That doesn't make sense."
World-class companies also source and manage their IT vendors more strategically in other areas, using 5% fewer hardware vendors, 29% less contractor services, and 65% fewer software suppliers than average companies. "In IT, we see that median companies have boxed themselves into a corner that forces them to make classic bad choices in outsourcing," Frank says. "They don't focus on standardization internally, so it becomes very difficult to manage application development projects. In a desperate attempt to keep their applications up and running, they outsource. Unfortunately, it's a strategy that's likely to fail."
World-class companies also find ways to cut staff dramatically, running their operations with 36% less staff than average companies--28 IT staff per thousand end users, as opposed to 44 for the average company.
CIOs at world-class companies are more likely to report to the CEO or other senior executive and less likely to report to the CFO. More important, Hackett says, 100% of world-class companies have made their top IT executive a member of the senior management committee, compared with 69% of median companies.
"What we've found is that it simply doesn't require more money and more people to get better results in IT," Hackett IT practice leader Beth Hayes says. "What it takes is an intensive focus on a range of other issues, including standardization, simplification, service delivery model, and ensuring that your IT efforts are synchronized with your company's overall business strategy."
World-class IT organizations focus on standardization and simplification across the board to achieve their superior results, according to Hackett's research. They rely on 50% fewer ERP systems than median companies (two versus one), and 29% fewer applications per 1,000 end users. They are more likely to use data standards to a high degree across all systems and significantly more likely to have implemented a high level of standards enforcement across hardware, networking, and software applications.
World-class companies are more disciplined overall in their management of IT projects, according to Hackett. Half of all world-class companies manage IT projects through a formal, permanent program management office; only 25% of median companies do likewise. The best companies hold fast to a common methodology 90% of the time, compared with only 56% for other companies.
"One key to achieving operational excellence is to take a much more rigorous approach in key foundation areas, like standards definition and enforcement and basic project and IT service delivery," Hayes says. "This simplifies the world in which world-class companies operate, and prevents many common IT problems from cropping up in the first place."