1 Can You Be Smart About Cost Cutting? From theExecutive 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 JengaMake sure you don't topple the business by removing the wrong costs!
3 Key IssuesWhat 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 CuttingReactiveShort-term resultsAcross the boardDecisions often made in hasteCost OptimizationStrategicDecisions tied to business valueCuts made selectivelyLonger-term initiatives and longer-term resultsKey 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 ViewsInvestment PlanningChargeback/ShowbackBenchmark IT CostsCost OptimizationPerformance MetricsOpex versus CapexRegion/BUFixed vs. VariableProjectsServicesResource TypeRun vs ChangeIT vs BusinessTCO and Business CaseFundingTracking Project CostBenefits RealizationPost Project AuditsInvestment PrioritizationHard vs Soft BenefitsChoicesAllocation MethodsFairnessVisibilityDemand Mgmt.Cost Trans-parencyAppl TCOIT Service PricingAccount-abilityDefend or JustifyHighlight Areas to ImprovePer Unit CostsTrustVisibilityInternal vs ExternalCost vs PriceBusiness ValueRun as a DisciplineFrameworksProcurementCost Savings Within ITJoint Business & IT SavingsProcess & InnovationDetailed AnalyticsStrategyBusiness Value of ITBalanced ScorecardReportingOperationsFinancial ImpactUser SatisfactionCommuni-cationsVisualiza-tionRunning 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 InnovationProcess improvement, reorganization, new methodsJoint Business and IT Cost SavingsImplement cost-saving technologies with the businessCost Savings Within ITIdentify opportunities to reduce IT costsIT ProcurementGet the best pricing and terms for your IT purchasesDifficultyValueTo 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; Anecdotal7
8 Biggest Opportunities for IT Budget Reduction by IT Domain Differences Between Average and Best PerformersOverall IT Spend38% difference in costApplication Development53% difference in cost per function pointApplication Support55% difference in cost per function pointMainframe35% difference in cost per installed MIPSUnix Server62% difference in cost per serverWintel Server32% difference in cost per serverStorage44% difference in cost per TBDesktop22% difference in cost per deviceHelp Desk33% difference in cost per handled contactWide-area Data Network43% difference in cost per deviceLocal-area Network51% difference in cost per active portWide-area Voice Network27% difference in cost per minuteVoice Premise Technologies34% difference in cost per active extensionThis 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 growthCIOs 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 SilosPoor IT Cost TransparencyLack of AccountabilityMoneyLow Tolerance for RiskLack of IT CredibilityLegal ConstraintsResource AvailabilityTechnical Complexity
10 Treat IT Cost Optimization As An On-going IT Discipline Traits of best-in-class companies:Create a culture of continuous improvementOperate from a basis of factLook at the Demand side of IT as well as Supply sideAlignment of the IT and business strategyPresent a long-term vision, not short termFocus on successful execution, including a program in place for benefits realization to hold people accountable through measured performanceUse working capital from IT savings to self-fund improvements towards businessEvaluateStrategizeExecuteOptimizeManageStrategizeOur 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 staffInclude a financially qualified professionalStrengthen relationship management rolesDefine cost-cutting goals and project timelinesEstablish rapid go/nogo approval processMeet weeklyMany 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 forecastCategorize by asset class — HW, SW, personnel, services, occupancy costs, and so onAllocate into services — establish unit cost baseline for market and business tests1Establish Baseline2Identify OpportunitiesAnalyze spend gaps against market peersIdentify high-value opportunities for cost reduction, service improvement, and business enablementAssess benefit against risk to change (as well as time, investment)3Develop StrategyDevelop strategy and road map for most viable opportunitiesAnalyze organizational change needs to manage people impactCreate communications plan4Track BenefitsCreate an IT cost optimization (ITCO) program officeMonitor, measure, and reportIdentify opportunities to accelerate while managing out risk
13 Business Consumption View 1. Establish BaselineIT Investment Metrics2013 SpendIT Spending as % Revenue3.5%IT Spending as % Opex4.4%IT Spending per Employee$13,197IT Spending DistributionIT Capital28.0%IT Operational72.0%IT Spending, by Asset ClassHardware17.1%Software20.5%Personnel/Occupancy41.2%Outsourcing/Third-party Services21.2%IT Spending, by Strategic CategoryRun the Business64.9%Grow the Business20.4%Transform the Business14.8%IT Spend, by Technology DomainData Center22.2%End User Computing10.5%IT Service Desk7.4%Data Network9.0%Voice Network5.8%Application Development18.6%Application Support15.9%IT Management6.4%IT Finance and Administration4.2%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 ViewChargeback/ ShowbackProductivity Measures Complement IT Budget Analysis:Infrastructure:OS Instances per FTETB Storage per FTEHandled Contacts per Client Service Rep.Applications:Function Points per DeveloperDefects 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 RisksBenefitsPotential Benefit:How big is the saving if the action is implemented and how does it affect cash flow?BenefitsSmallMediumLargeBusiness Impact:What impact will this have on the business?NegativeNonePositiveTime Requirement:Can you capture the savings in this fiscal year?>18 months6 to 18 months<6 monthsDegree 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 structuresModerate; limited changes in roles, structures, and processesLow; no staff reduction, nor changes in organization and processesDegree 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 applicationsModerate; impacts few components of the architectureLow; 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?HighModerateLow/None
15 3. Develop Strategy & Ready Change Program Application Portfolio OptimizationIs the risk worth the reward?$8.0MOutsource Application Development and SupportImprove Application Delivery$10.5M$5.7MReform IT Governance and Demand Mgmt.Implementation Risk/Time$6.0MImprove ILM and Data$1.5MOptimize Infrastructure Service Delivery$8.0MOptimize End User Support$1.5M$2.0MRe-compete Data and Voice NetworksOpportunities likely taken as natural part of businessBenefits/Cost SavingsNote: All figures are in millions of dollars
16 4. Track Benefits & Watch for Lower Yields Large Program Benefits PredictedMature S/W Asset Mgmt. PracticesRationalize ApplicationsIncrease Virtual-izationLack of Org. Change Mgmt.Deploy Info. Life Cycle Mgmt.Unanticipated Business ChangesMature Key ITIL ProcessesRe-negotiate S/WPoor Estimation (Benefit Size, Investment)Complex Technical SolutionOften 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 itCreate an ongoing IT optimization program to ensure long-term efficiency.
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 ProcurementContract renegotiation — the first line of offense in saving money. Large enterprises have huge buying power. Act like it. Organize to achieve it.Procurement OpportunityFinancial BenefitTimeOrganizational RiskTechnical RiskInvestment RequiredRenegotiate Network RatesModerateLowRenegotiate Contract Labor RatesConsolidate Desktop Hardware ContractsConsolidate Desktop Software ContractsRenegotiate "Shelfware" MaintenanceRenegotiate HW/SW Maintenance and SLAsConsolidate Commodity (Non-IT) PurchasesConsolidate Purchasing Staff (Shared Service)Consolidate IT Contract Services VehiclesHire Lower Rates Than Contract StaffHighEnable Shared Risk/Reward ContractsDefer Desktop PurchasesThis 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 RiskTechnical RiskInvestment RequiredStratification of Desktop User TypesLowAutomated Software DistributionModerateDesktop Printer RationalizationStandardize Desktop ProductsHighCell Phone AuditsCentralize Portal ManagementTelecommunications Line AuditsConsolidation of IT InfrastructureServer VirtualizationStorage Migration to SAN and NASReduce Business Continuity CapabilityInfo Management, Capture DB CapacityApplication AuditsApplication Maintenance OutsourcingTurn off Legacy System MaintenanceOutsource Repetitive Software TestingAssess internal IT Staffing NeedsThis 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 OpportunityFinancial BenefitCustomer ImpactOrganizational RiskTechnical RiskInvestment RequiredEmergency Call Centers (Government)HighNegligibleModerateNonemergency Call Centers (Customer Service)PositiveTeleworkingLowVideoconferencingCreate/Expand E-learning CapabilityCreate Data Warehouse to Mine OpportunitiesEnterprise Self-Service IntegrationWorkflow and Handoff Analysis and AutomationAsset Utilization AnalysisHR Self-Service ExpansionDeploy E-procurement CatalogsExamine Storage Policy to Reduce Storage SizeConsolidate Radio SystemsConsolidate Geospatial Systems and DataEnforce Modularization of Large Scale ProcurementsThis shows a specific list of opportunities for IT to assist business units with reducing operating costs.
23 Shared Services Opportunities IT capabilityFinancial BenefitCustomer ImpactOrganizational RiskTechnical RiskInvestment RequiredCall Centers (Emergency and Nonemergency)HighModerateElectronic Document Management SystemBack-Office ApplicationsLowComputing Centers (Mainframes, Servers, Storage)NetworksNon-administrative ApplicationsMiddle-Office Application SupportIT Contract VehiclesDesktop Applications (Acquisition, M/A/C)IT Help DeskSelf-Service Web SitesReassess Internal IT Staffing NeedsThis shows key opportunities for consolidation or creation of enterprise or cross-enterprise shared services.