Presentation is loading. Please wait.

Presentation is loading. Please wait.

Can You Be Smart About Cost Cutting?

Similar presentations

Presentation on theme: "Can You Be Smart About Cost Cutting?"— Presentation transcript:

0 Penny Wise, Pound Foolish
GovTech 2013 George Ambler George Ambler GovTech 2013, Cape Town Notes accompany this presentation. Please select Notes Page view. These materials can be reproduced only with written approval from Gartner. Such approvals must be requested via Gartner is a registered trademark of Gartner, Inc. or its affiliates. This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other authorized recipients. This presentation may contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied, distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates. © 2013 Gartner, Inc. and/or its affiliates. All rights reserved.

1 Can You Be Smart About Cost Cutting?
From the Executive Management Team: Given current circumstances known to all, the board requires that all managers cut at least 10% off their budgets in the next 30 days, preferably for nonessential items. Countless managers in enterprises across the world have received messages similar to the one above. Enterprises are embarking on blind cost-cutting crusades, often with less than satisfying savings — and often with negative impacts on the business. Although the overall objective of cost management is to contain or reduce costs, it is not always possible to cut costs in IT initiatives without severe business impact. Given their identifiable contribution to the business, expenditures that deliver high business value will need to be kept, and a few will even earn increased funding levels. The key to the effectiveness of an IT cost management program is the analysis of the business value delivered by each initiative. Only a comparison of the business value of IT initiatives — with each other and with initiatives in other areas — will indicate what cost optimization alternatives to pursue. That process of going through such an analysis requires a structured methodology and broad organizational involvement. The focus of analysis is a business case that considers the cost optimization alternatives and their expected consequences in terms of reduced business value or increased business risk.

2 Intelligent Cost Optimization Is Required
Jenga Make sure you don't topple the business by removing the wrong costs!

3 Key Issues What is Cost Optimization and how should IT leaders use this to make cost savings decisions? How should the organization evaluate cost optimization options? What are the best practices for implementing a cost optimization discipline? The best IT leaders in large and small organizations will be challenged by the pressures put upon their IT budgets due to economic uncertainty. Some organizations will cut costs across the board, some will optimize their IT environments, and others will have limited ability to cut anything at all without changing the way the work is done. Once IT organizations cycle through the typical cost savings measures, the hard work of collaboration with business partners must ensue to meet cost, expense and productivity expectations to meet new business demands. For some IT organizations, this will mean switching gears from delivering world class IT services to being a cost leader in their industry, where service levels are changed to set expectations in times of austerity. What is the Gartner Framework for Cost Optimization and how should IT leaders use this to make cost savings decisions? What are the best practices for cost savings within IT, IT procurement and joint business and IT cost savings? How can IT organizations prioritize the areas of largest cost savings benefit to the enterprise and how does this relate to risk and time to benefit?

4 Cutting Costs Versus Cost Optimization
Cost Cutting Reactive Short-term results Across the board Decisions often made in haste Cost Optimization Strategic Decisions tied to business value Cuts made selectively Longer-term initiatives and longer-term results Key Issue: How should you think about cost optimization, and where should organizations look for cost improvement opportunities? In hard economic times, when revenue is harder to come by, companies often turn to cost-cutting initiatives to increase net income. Because cost cutting affects a company's bottom line directly, certain types of cost cutting can be the quickest way for companies to remain competitive. The typical revenue-to-cost ratio is about 3 to 1, which means, for example, that increasing revenue by $300 has about the same effect as cutting costs by $100. Cost-cutting initiatives are often reactive and across the board, and however necessary the cost cuts are, they create little long-term sustainable value. It can easily be argued that IT infrastructure and operations (I&O) groups should always be involved in cost optimization initiatives. However, during times of economic growth, many I&O groups focus more on other initiatives that help grow and transform the business. In the wake of the recent financial conditions and budget cuts, many I&O groups have become more focused on cost optimization projects. Cost optimization projects are strategic investments in people, process and technology that can deliver both short- and long-term cost savings. Cost optimization projects can take weeks or years to complete and do include an additional outlay of resources, but the cost-saving benefits are substantial and long term. Action Item: Develop a list of cost optimization projects across the IT organization and business and prioritize them based on ROI, ease and time to complete, just like any other IT project.

5 Six Pillars of Running IT as a Business From a Financial Perspective
IT Budget Mult Views Investment Planning Chargeback/Showback Benchmark IT Costs Cost Optimization Performance Metrics Opex versus Capex Region/BU Fixed vs. Variable Projects Services Resource Type Run vs Change IT vs Business TCO and Business Case Funding Tracking Project Cost Benefits Realization Post Project Audits Investment Prioritization Hard vs Soft Benefits Choices Allocation Methods Fairness Visibility Demand Mgmt. Cost Trans-parency Appl TCO IT Service Pricing Account-ability Defend or Justify Highlight Areas to Improve Per Unit Costs Trust Visibility Internal vs External Cost vs Price Business Value Run as a Discipline Frameworks Procurement Cost Savings Within IT Joint Business & IT Savings Process & Innovation Detailed Analytics Strategy Business Value of IT Balanced Scorecard Reporting Operations Financial Impact User Satisfaction Communi-cations Visualiza-tion Running IT as a Business requires IT cost transparency. The six pillars above enable effective IT cost transparency. The key is to understand each pillar, where your organization is within that pillar, what is required in your organization to succeed in providing effective IT cost transparency within each pillar, and what, if any, next steps are required to improve each pillar. The goal is to understand IT costs at the right level of detail within IT to effectively optimize costs and then determine the optimum level of IT cost transparency to the business so that they are informed and can make intelligent choices. Running IT as a Business Requires IT Cost Transparency

6 Gartner Framework for IT Cost Reduction
Business Restructuring and Innovation Process improvement, reorganization, new methods Joint Business and IT Cost Savings Implement cost-saving technologies with the business Cost Savings Within IT Identify opportunities to reduce IT costs IT Procurement Get the best pricing and terms for your IT purchases Difficulty Value To reach big cost optimization goals, CIOs and other IT leaders must combine strategy with action that includes high doses of IT service-level optimization (i.e., mission-critical and non- mission-critical differentiation), IT service industrialization, and a reconciliation of which technology capabilities the IT organization should continue to manage. In addition to other strategic shifts, CIOs and other IT leaders must shift their focus from just managing the supply of IT to improved direct and indirect demand management for IT services. This will reduce the enterprise pipeline of underperforming and unaligned initiatives, related capital expenditures and higher multiyear maintenance burdens. CIOs and other IT leaders must recognize that there is a finite list of strategic levers for big cost optimization goals; by just focusing on three or four of these levers, the IT organization will be able to deliver the focus and purposeful force necessary to reach once-in-a-lifetime cost optimization goals. IT Procurement. Partnerships with IT vendors means that each party benefits in the good times and make joint sacrifices in times of economic uncertainty. Each year, IT organizations spend billions of dollars for hardware, software, IT services and telecommunications services. How the IT organization approaches procurement issues will affect how much it can reduce spending to meet business goals. In the IT procurement element of the framework, we provide: guidance on getting the best pricing for your IT purchases; the best practices for contract negotiations and renegotiations; terms and conditions; selection of service providers, alternative delivery and acquisition models; and other issues related to procurement of IT inputs. Cost Savings in IT. A priority for many IT organizations will be to identify opportunities to reduce baseline IT costs from the enterprise, and not just move them to another budget center. Where IT organizations focus is where they will be successful with costs savings. In the cost savings in the IT element of the framework, we provide specific cost savings opportunities by technology and service area, ranges or specific percentages of savings that are typical, things you have to do to achieve these savings, alternatives to the current status quo, with pros and cons related to possible cost savings actions. Joint Business and IT Cost Savings. There is often a limit the amount of cost savings that the IT organization can achieve by itself without working with internal business partners to make decisions on the trade-offs and benefits to a specific course of action. Often, 100% of discretionary spending is based on direct new business demand. In this element of the framework, we provide specific guidance on implementing cost-saving technologies in conjunction with the business, that may include investment to reduce cost in the long term or alternatives to current technologies. Also explored are energy-saving strategies with technology, modernization, total cost of ownership, and alternative delivery and acquisition models. Enable Innovation and Business Restructuring. As the immediate emergency of economic uncertainty passes, cost optimization will be refocused on efforts to implement long-term process improvement and enable business structuring and innovation. This element of the cost optimization framework focuses on IT and business process improvement to reposition the business to competitive advantage using IT and the resumption of economic expansion. Businesses that do not focus on innovation in their business models are destined to the whims of a mature marketplace and this research area help IT organizations better organize to help lead their enterprises to competitive advantage. Different types of cost optimization involve different parts of the organization and varying IT department decision rights

7 Government Cost Optimization Initiatives — Meager Offerings Considering Big Goals
N = 70, 2Q 2009, Federal, State, Local Respondents. 20% Are Federal Govt. N = 13 to 30 for Savings; Anecdotal 7

8 Biggest Opportunities for IT Budget Reduction by IT Domain
Differences Between Average and Best Performers Overall IT Spend 38% difference in cost Application Development 53% difference in cost per function point Application Support 55% difference in cost per function point Mainframe 35% difference in cost per installed MIPS Unix Server 62% difference in cost per server Wintel Server 32% difference in cost per server Storage 44% difference in cost per TB Desktop 22% difference in cost per device Help Desk 33% difference in cost per handled contact Wide-area Data Network 43% difference in cost per device Local-area Network 51% difference in cost per active port Wide-area Voice Network 27% difference in cost per minute Voice Premise Technologies 34% difference in cost per active extension This is what we have found in surveying large numbers of Gartner clients. The point here is that when we compare the IT cost savings of "Average" Gartner clients with those who are "Best Performers," there are startling differences in the level of savings that they have achieved. There is a pressing need to ensure IT spending, which on average equals 4% of revenue, drives business value and financial performance not simply "keeping the lights on." Failure to do so limits IT's ability to support the enterprise's strategic shift from cost control to growth CIOs indicate IT is now more directly accountable for business results than it was 10 years ago when IT was seen as primarily responsible for providing technology results.

9 Barriers to Savings — There Are Many
Politics and Silos Poor IT Cost Transparency Lack of Accountability Money Low Tolerance for Risk Lack of IT Credibility Legal Constraints Resource Availability Technical Complexity

10 Treat IT Cost Optimization As An On-going IT Discipline
Traits of best-in-class companies: Create a culture of continuous improvement Operate from a basis of fact Look at the Demand side of IT as well as Supply side Alignment of the IT and business strategy Present a long-term vision, not short term Focus on successful execution, including a program in place for benefits realization to hold people accountable through measured performance Use working capital from IT savings to self-fund improvements towards business Evaluate Strategize Execute Optimize Manage Strategize Our services constantly evolve with clients' changing needs, but our focus on results never changes

11 Create Cost Optimization Team
Key Issue: What tactical cost optimization activities can organizations pursue with short payback periods? Assign some of your best staff Include a financially qualified professional Strengthen relationship management roles Define cost-cutting goals and project timelines Establish rapid go/no go approval process Meet weekly Many of the low-risk and low-effort cost optimization initiatives have already been completed by most IT organizations. New cost optimization initiatives can sometimes seem limitless, but each has varying levels of understanding, risk, rewards, required resources and involvement from all IT departments. Identifying, categorizing, choosing, planning and completing a combination of tactical and strategic cost optimization initiatives requires a strong, cross-functional team. This team should not only be able to ferret out cost optimization ideas and understand the risks and rewards of each, but also to drive the initiative through IT senior management and staff, develop goals and timelines and see projects through their completion. Without a strong team in place to drive cost optimization initiatives, IT senior management is much more likely to resort to reactive and sudden cost-cutting programs when revenue and budgets fall.

12 IT Cost Optimization Program Formulation
Capture all IT service delivery costs — current year and five year forecast Categorize by asset class — HW, SW, personnel, services, occupancy costs, and so on Allocate into services — establish unit cost baseline for market and business tests 1 Establish Baseline 2 Identify Opportunities Analyze spend gaps against market peers Identify high-value opportunities for cost reduction, service improvement, and business enablement Assess benefit against risk to change (as well as time, investment) 3 Develop Strategy Develop strategy and road map for most viable opportunities Analyze organizational change needs to manage people impact Create communications plan 4 Track Benefits Create an IT cost optimization (ITCO) program office Monitor, measure, and report Identify opportunities to accelerate while managing out risk

13 Business Consumption View
1. Establish Baseline IT Investment Metrics 2013 Spend IT Spending as % Revenue 3.5% IT Spending as % Opex 4.4% IT Spending per Employee $13,197 IT Spending Distribution IT Capital 28.0% IT Operational 72.0% IT Spending, by Asset Class Hardware 17.1% Software 20.5% Personnel/Occupancy 41.2% Outsourcing/Third-party Services 21.2% IT Spending, by Strategic Category Run the Business 64.9% Grow the Business 20.4% Transform the Business 14.8% IT Spend, by Technology Domain Data Center 22.2% End ­User Computing 10.5% IT Service Desk 7.4% Data Network 9.0% Voice Network 5.8% Application Development 18.6% Application Support 15.9% IT Management 6.4% IT Finance and Administration 4.2% Complete the Gartner IT budget tool to help establish an initial baseline (view at left). Such views (options below) help form insights from which to better manage IT spend and set context for IT cost optimization efforts. Business Consumption View Chargeback/ Showback Productivity Measures Complement IT Budget Analysis: Infrastructure: OS Instances per FTE TB Storage per FTE Handled Contacts per Client Service Rep. Applications: Function Points per Developer Defects per Thousand Function Points

14 2. Identify Opportunities & Assess Viability
For each opportunity generated: What's the upside? Is it worth the effort? ? Costs, Time, and Risks Benefits Potential Benefit: How big is the saving if the action is implemented and how does it affect cash flow? Benefits Small Medium Large Business Impact: What impact will this have on the business? Negative None Positive Time Requirement: Can you capture the savings in this fiscal year? >18 months 6 to 18 months <6 months Degree of Organizational Risk: Will your leaders ensure the changes are made? Is your organization capable of adapting to the changes? High; staff redundancies, and re-engineering of processes and structures Moderate; limited changes in roles, structures, and processes Low; no staff reduction, nor changes in organization and processes Degree of IT Technical Risk: Is there a risk that the change will undermine the ability of your systems to deliver? High; impacts OS, DB, middleware, and applications Moderate; impacts few components of the architecture Low; little more than "moving boxes" In doing IT cost optimization, it must be recognized that not all ideas are worth the effort. To this end, Gartner recommends a decision framework that takes into account all of the categories listed in the graphic above. Potential benefit must be measured to get a sense as to whether the effort might be worth it. Customer impact must be assessed (though not necessarily quantified) to determine if an effort might have large financial benefits, but create ill-will with customers and thus undermine the value of moving forward. This is especially important in the public sector where customer impact is often a primary concern of elected officials. But, in assessing the options, the IT governance decision makers must also take into account how long it will take to accomplish the reduction, whether the technical and organizational risks are so high that it may not be worth the effort, and whether an upfront cash investment is required to achieve downstream savings. The issues of time, risk and investment requirement may be so severe as to diminish the likelihood of ever achieving any of the desired benefits. Advice: When considering IT cost optimization, do not focus just on benefits. Create a decision framework that assesses the impact on customers and the actual achievability of the intended reduction. Investment Requirement: Does the change require a large upfront investment before savings can be captured? Is the organization willing to make an investment at all? High Moderate Low/None

15 3. Develop Strategy & Ready Change Program
Application Portfolio Optimization Is the risk worth the reward? $8.0M Outsource Application Development and Support Improve Application Delivery $10.5M $5.7M Reform IT Governance and Demand Mgmt. Implementation Risk/Time $6.0M Improve ILM and Data $1.5M Optimize Infrastructure Service Delivery $8.0M Optimize End User Support $1.5M $2.0M Re-compete Data and Voice Networks Opportunities likely taken as natural part of business Benefits/Cost Savings Note: All figures are in millions of dollars

16 4. Track Benefits & Watch for Lower Yields
Large Program Benefits Predicted Mature S/W Asset Mgmt. Practices Rationalize Applications Increase Virtual-ization Lack of Org. Change Mgmt. Deploy Info. Life Cycle Mgmt. Unanticipated Business Changes Mature Key ITIL Processes Re-negotiate S/W Poor Estimation (Benefit Size, Investment) Complex Technical Solution Often Smaller Than Predicted Program Benefits Realized

17 After You Leave Here … Immediately…
Assess which of the tactical cost opportunities are still worth trying. Determine how best to get executive engagement in your IT governance process to ensure the right decisions are being made. Evaluate your IT optimization decisions across all of the dimensions listed. Argue for pursuing cost optimization that can be done and has appropriate organizational support that will not do long-term damage to the enterprise. In the Next 90 days…. Determine if your IT demand governance process is working and, if not, create a plan to fix it Create an ongoing IT optimization program to ensure long-term efficiency.

18 Penny Wise, Pound Foolish
GovTech 2013 George Ambler George Ambler GovTech 2013, Cape Town Notes accompany this presentation. Please select Notes Page view. These materials can be reproduced only with written approval from Gartner. Such approvals must be requested via Gartner is a registered trademark of Gartner, Inc. or its affiliates. This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other authorized recipients. This presentation may contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied, distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates. © 2013 Gartner, Inc. and/or its affiliates. All rights reserved.

19 Related Gartner Research
"Decision Framework for Prioritizing Cost Optimization Ideas" G , Barbara Gomolski, John Kost, 13 May 2009 "Cost Cutting in IT: Findings and Recommendations, October 2008 to March 2009" G , Ken McGee, 2 April 2009 "Method to the Madness: Applying a Methodological Approach to Cost Optimization" G , David W. McCoy, Barbara Gomolski, 13 May 2009 "How the IT Organization Handles the Three Stages of a Downturn" G , Jorge Lopez, 17 February 2009 “IT Cost Optimization Round 2: Strategic Shifts and Doing Less With Less” Kurt Potter (G ) “CFO Advisory: Enterprise Cost Optimization; Overview” Barbara Gomolski, Kurt Potter (G ) “The Four Levels of Cost Optimization” Barbara Gomolski, Kurt Potter, Mark Raskino (G )

20 IT Procurement Contract renegotiation — the first line of offense in saving money. Large enterprises have huge buying power. Act like it. Organize to achieve it. Procurement Opportunity Financial Benefit Time Organizational Risk Technical Risk Investment Required Renegotiate Network Rates Moderate Low Renegotiate Contract Labor Rates Consolidate Desktop Hardware Contracts Consolidate Desktop Software Contracts Renegotiate "Shelfware" Maintenance Renegotiate HW/SW Maintenance and SLAs Consolidate Commodity (Non-IT) Purchases Consolidate Purchasing Staff (Shared Service) Consolidate IT Contract Services Vehicles Hire Lower Rates Than Contract Staff High Enable Shared Risk/Reward Contracts Defer Desktop Purchases This is a specific list of opportunities to reduce the cost of IT by centralizing buying and procurement across the enterprise and renegotiating rates with vendors. Source: Gartner Research.

21 Cost Savings Within IT Opportunity Financial Benefit Time
Organizational Risk Technical Risk Investment Required Stratification of Desktop User Types Low Automated Software Distribution Moderate Desktop Printer Rationalization Standardize Desktop Products High Cell Phone Audits Centralize Portal Management Telecommunications Line Audits Consolidation of IT Infrastructure Server Virtualization Storage Migration to SAN and NAS Reduce Business Continuity Capability Info Management, Capture DB Capacity Application Audits Application Maintenance Outsourcing Turn off Legacy System Maintenance Outsource Repetitive Software Testing Assess internal IT Staffing Needs This is a specific list of opportunities for IT to help reduce the cost of IT across the enterprise.

22 Joint Business and IT Cost Savings
Opportunity Financial Benefit Customer Impact Organizational Risk Technical Risk Investment Required Emergency Call Centers (Government) High Negligible Moderate Nonemergency Call Centers (Customer Service) Positive Teleworking Low Videoconferencing Create/Expand E-learning Capability Create Data Warehouse to Mine Opportunities Enterprise Self-Service Integration Workflow and Handoff Analysis and Automation Asset Utilization Analysis HR Self-Service Expansion Deploy E-procurement Catalogs Examine Storage Policy to Reduce Storage Size Consolidate Radio Systems Consolidate Geospatial Systems and Data Enforce Modularization of Large Scale Procurements This shows a specific list of opportunities for IT to assist business units with reducing operating costs.

23 Shared Services Opportunities
IT capability Financial Benefit Customer Impact Organizational Risk Technical Risk Investment Required Call Centers (Emergency and Nonemergency) High Moderate Electronic Document Management System Back-Office Applications Low Computing Centers (Mainframes, Servers, Storage) Networks Non-administrative Applications Middle-Office Application Support IT Contract Vehicles Desktop Applications (Acquisition, M/A/C) IT Help Desk Self-Service Web Sites Reassess Internal IT Staffing Needs This shows key opportunities for consolidation or creation of enterprise or cross-enterprise shared services.

Download ppt "Can You Be Smart About Cost Cutting?"

Similar presentations

Ads by Google