TECHNICAL INFRASTRUCTURE | Cost Reduction Strategies

Change the Game

Technology continues to advance. Oftentimes, implementing new technologies saves a considerable amount of money. Keep abreast of technology trends and objectively evaluate the true financial impact that each trend will have on your environment. Frequently, new technology in the infrastructure gives you the ability to do more with significantly less money. However, implementing new technologies will only save money if IT uses them to replace older, less cost-effective applications or if the technologies provide new functions. It is often challenging to retire older technologies. Without the elimination of older technologies, the net result is additional complexity and costs.

Advances in disk technology or CPU processing provide many times the storage or processing at significantly lower costs. Trends like cloud computing, virtualization, voice-over IP (VoIP), open source, software-as-a-service (SaaS), and business process outsourcing are all examples of current technology trends that, when implemented, hold potential cost savings. In times of pressure, changing the game and the technologies you use is an effective way to reduce costs. Think beyond what is familiar to what is possible.

Know the Impact of Business Changes

Any change in a business can have an impact on IT requirements and IT services. It is important to know the business, the cost drivers, and the applications, and to understand the impact of the changes. If a company changes its product and service mix, it could have a significant change on IT transactions, software requirements, or hardware requirements. For example, due to a change in customer needs, a company shifting from a few orders with large quantities to many small orders with smaller quantities cause havoc on master scheduling, production processing, wave distribution processing, and transportation costs. Other companies choose to focus on intensifying its sales efforts in a down economy. This drives an increase in lead management and overloads the Customer Relationship Management (CRM) system. What impact, if any, would this have on the IT processing requirements? A CIO needs to be involved with business discussions on how the business model will change and communicate the impact it has on the IT environment and costs to minimize surprises down the road. A turbulent time is not a good time for surprises. It is, nevertheless, the time when surprises are most likely to appear.

Delay Costs If You Can

Although you must look at the long-term strategic ramifications, it is often possible to delay or defer some costs without substantial strategic impact. For example, you need to replace the tires on your car, but if your budget is tight, you might be able to push it a few more months without substantially increasing your risk or causing danger. However, at a certain point, you must get new tires or cause significant risk to yourself and others, which could create significantly more costs in the future. Finding that point of necessary investment is tricky when it comes to IT investments. Business management must support the CIO when informed that this time has arrived. You can delay costs somewhat; just make sure you do not delay them too long.

A common example of delaying costs is putting off desktop hardware and software upgrades. Many experts advise organizations that it is a best practice to have a planned replacement refresh cycle for hardware. A reasonable rule of thumb has been three years for notebook PCs and four years for desktop PCs and that requires an organization to budget sufficient capital to replace 30 to 40 percent of its desktop hardware each year. Many companies have purposely decided not to follow this practice to save money and stretch more life out of PC hardware inventory. After all, the systems in place do the job they need to do, and the company may not feel the need to move to the most current generation of technology.

A company is able to stretch the replacement cycle only so far before it starts costing money. Manufacturers specify a particular life of equipment or warranty since components are designed to last a set amount of time. As component failure rates increase, the cost of maintenance and support rises along with the cost of lost productivity while the employee is without a PC. Old equipment has security vulnerabilities as hackers become more sophisticated. Additionally, older equipment is not always able to run new software, which is necessary to communicate with customers and vendors, solve business problems, or even handle basic chores like running a new printer or scanner. After years of delaying equipment upgrades, the company is facing the need to upgrade the entire environment within one year, which is very expensive compared to spreading the cost incrementally over three to four years. If you are upgrading several versions, the costs will be higher due to licensing and a greater need for user training.

Match Spending to Risk Appetite

For many companies, the cost of security is increasing as threats and vulnerabilities become more advanced. Security investments in data protection, endpoint security, threat management, external and internal data thefts, and vulnerability assessments are mounting. September 11, floods, hurricanes, and other natural disasters seem to have finally captured executives' and shareholders' attentions on disaster recovery and business continuance plans. Because many companies have been lacking in these areas for years, they are not able to cut back and must actually increase spending. However, it is an option for a company that has done a lot in this area in the past to dial back the attention in order to meet budget constraints. Continually review risk management, probabilities, and investments to ensure they match the risk profile your company is willing to assume.

Companies also face increasing costs for compliance mandates that are not optional, but there is flexibility in how you address the needs. Areas such as Sarbanes-Oxley (SOX), Payment Card Industry (PCI) compliance, data protection, data archiving, Health Insurance Portability and Accountability (HIPAA), and many industry-specific regulations require an increase in IT spending that necessitates even more of a decrease in other areas to meet budget constraints. Some IT projects are getting attention because of the claim that they are required for compliance. Be sure to examine what you are doing with regards to spending on compliance and reporting, and trim down on excess reporting processes in order to do what is truly necessary. Do not over invest in compliance-related programs.

Consider IT Investments

It is often said that the shoemaker's kids are often the last to get shoes. A plethora of tools is available to improve efficiency and effectiveness in IT. These tools reduce operational IT costs. Examples include tools to automate the testing process, capacity-modeling tools to forecast demand on equipment, prototyping tools to help define requirements, and systems management tools to proactively detect problems. Just like having the right tool when building a house is critical; having the right tool when working in IT helps you to be more efficient. Technology is continually improving and advancing, enabling IT to increase efficiencies. However, implementing IT tools typically require projects, resources, and money just like business-focused investments and projects. Business and steering committees comprised of executives often prioritize IT investments and projects according to those individuals who want their projects implemented. IT investments and projects are often given a lower priority when compared to business initiatives and do not get funding.

CIOs need to balance priorities and resources to ensure they implement critical IT-focused projects and investments. One way to do this is to reserve a portion of resources for IT-related improvement projects. Subtract these resources from the available pool of resources before a steering committee prioritizes projects and allocates resources. Another answer is to recognize and prioritize these IT-focused projects just like business-focused projects based on return and value to the firm.

Simplify, Standardize, and Consolidate

Over time, IT processes and environments can become too complicated. Typically, a company accumulates a mix of hardware and software types and vendors over the years for a variety of reasons. The more variety you have, the more it costs to support. Whether it is multiple databases, releases of databases, operating systems, operating system releases, brands of PCs, brands of servers, number of vendor packages, or multiple data centers, variety costs money. Maintenance processes for each server type are different, each piece of software can react differently to different conditions, replacement parts are unique and more costly, and the list continues.

In some cases, this variety is very necessary and worth the additional money, but in many cases, the variety grows over time and is not necessary or even desired. The scale and depth of issues and costs resulting from today's complex distributed infrastructures clearly require optimization and consolidation efforts. Many companies tackle major projects to standardize and consolidate the network, server, data center, applications, and application instances. These projects are typically well worth the time and money when comparing the total cost of ownership. Take a step back, take inventory, and evaluate your complete environment. Determine if the variety is adding business value. It pays to simplify and minimize the diversity of technologies that are supported.

In an environment with a lot of mergers and acquisitions, it is particularly challenging to simplify, standardize, and consolidate, but it is worth the effort. As companies merge or acquire, have a general strategy on what technology you will replace for the sake of standardization and simplification. If you are not able to do wholesale changes immediately, acknowledge the planned changes.

Only Pay for what You Use

It is amazing how many organizations pay for services or products that they do not use. A few examples are phone lines, maintenance for software that is not implemented, excess capacity on hardware because the business thought it would grow, and extra software licenses to support overestimated user counts. One company had virtually a room full of software tools that had never been installed, but it was paying maintenance fees for support. It does take a commitment of resources to understand what you have and to make sure that you align invoices and agreements, but it is worth the effort. You have an obligation to your organization to ensure that you spend funds appropriately.

Consider Green Initiatives

Green IT initiatives are good for environmental and cost-saving reasons because of reduced energy consumption. Automatically shutting down machines saves on power. Right-sizing power in a data center improves efficiencies. For example, instead of using air conditioners or chillers, one company found that by using an air economizer, which expelled hot air to the outdoors and drew outside air in, they were able to improve air quality and significantly reduce power consumption.

BUSINESS APPLICATIONS | Cost Reduction Strategies

Look at Cost Reduction Holistically

Rather than a myopic approach to cost cutting by reactively reducing IT expenses, management must look at cost reduction systemically and contemplate how technology can enable the business to cut costs in an even larger sense. Although the focus of this book is on reducing IT costs, one should view this perspective in the context of the overall goals of the company. IT must work proactively with the business units to achieve cost reduction in the appropriate areas. Reducing overall organization costs may be a combination of increasing some IT costs while reducing costs in other parts of the organization.

One company wondered why their IT costs were so high, but after an objective assessment they realized it was the result of an overly complex business model that IT was supporting. As they acquired new companies, they did not change the policies and business processes of the newly acquired business unit but had IT modify the application software to support all the various ways of doing business in different divisions, locations, and geographies. Over time, the variety in the business increased IT support and maintenance costs. It can be difficult and time consuming to simplify the business processes and policies to have fewer ways of doing things, but it can be well worth the effort and can significantly reduce costs.

Instead of taking a reactive approach to reducing IT costs, management must take a strategic approach to cost reduction by reviewing the total costs and the overall impact to the business. Although IT is a significant part of a company's costs, it is also a key vehicle to enable cost reduction across an organization. IT is required to implement and maintain efficiencies throughout all areas of the business. As such, management must view IT cost reductions within the context of overall business costs. CIOs face the challenges of reducing IT costs while maintaining or increasing the value that IT provides the business.

When a company reviews its end-to-end business processes, IT is able to assist in trimming costs out of all areas of business operations. Investments in technology can lead to significant overall business savings. Although IT savings are an important goal, be sure you do not affect business cost-savings efforts during the process of reducing IT costs. The challenge is to know where the key opportunities exist.

For example, in a company focused on being a low-cost provider based on operational excellence, technology is fundamental to improve overall efficiencies and reduce costs. A chain of beauty salons cannot improve efficiencies when cutting and coloring hair, so efficiencies must come from back-office functions. However, cutting costs in IT may disable the ability for IT to help make the business leaner. Cutting the IT budget may mean that IT has to turn down requests that would improve business efficiencies because it requires IT resources

Innovation is Better than Cutting

When the economy is in a downturn, the first instinct of many organizations is to freeze projects. However, halting projects can be the riskiest option for a business, and it can have a significant negative impact on a company's long-term success.

As every CIO knows, technology projects can have an impact on bottom-line profitability but can also have a positive impact on the revenue and top-line growth of an organization. Technology enables the business to innovate with new solutions to help the business survive or even to thrive in a crisis. Simply cutting IT costs and projects can be counterproductive for an organization. For example, in a company focused on customer intimacy, technology is instrumental in top-line revenue growth and improving customer satisfaction and retention. The wrong cuts in IT can damage a company's total value proposition and competitive advantage. Every CIO knows this and, in the absence of a crisis, most business executives know it too. The challenge for a CIO is to ensure that business executives do not forget this in the face of short-term financial pressure.

Nicholas Carr claims that IT is just a commodity that cannot help a company create differentiation and compete in the market. He views IT simply as a cost center. What Mr. Carr fails to recognize is that in many cases the strategies and tactics used by operational and customer-facing departments would not be possible without technology or the analysis supported by technology. We have seen technology provide a competitive advantage for many companies to the point of helping a company become a market leader. Three obvious examples include eBay, Amazon.com, and Wal-Mart. It was, and continues to be, serious investments in IT that have allowed these companies to dominate industry segments in a highly competitive market.

Technology enables companies by:

• Reducing expenses or the costs of doing business
• Increasing margins by changing the business model and relationship between a dollar of revenue and associated costs
• Opening new sales channels
• Defining new customer segments, acquiring new customers, or retaining existing customers
• Increasing cross-selling and up-selling
• Creating new business models
• Meeting customers' expectations and increasing customer satisfaction
• Improving customer service
• Delivering new products to market
• Optimizing the supply chain
• Increasing the speed of processes
• Improving quality
• Improving decision making
• Supporting the business strategy

In the past, the main focus of IT projects was to reduce company expenses in the business. Now, most companies have automated business processes and realized much of the obvious expense reductions. IT in many companies has turned their focus to opportunities to improve customer satisfaction, service, quality, speed, revenue, and other areas identified in the previous list. The CIO can help the business to recognize the opportunities created by a financial downturn by understanding the business strategy, market conditions, and competitive forces. Many technologies help a company increase its revenue, reduce company costs, and secure a competitive advantage. IT is able to do more than weather the turbulent economic conditions; it can actually help the business to be more agile and competitive. If you are not using technology to improve overall business success, now is the time to step up that mission rather than to retreat.

The following are just a few examples of how companies have used technology for overall innovation and strengthening the business model:

• IT-supported analysis helped automobile companies discover that the vast majority of U.S. residents interested in fishing, hunting, and boating also own a truck or SUV and typically choose a U.S. brand vehicle. As such, they are ideal for targeted marketing.
• Direct delivery companies have found that handheld computers with route accounting software reduce the end-of-day closing process from hours to minutes. They also provide previous orders and truck inventory at the driver's fingertips which increase revenue per customer.
• Many companies in the travel industry have used technology to increase customer satisfaction and affect their overall company performance. With technology improvements, we no longer take trips the same way we had in the past. Making reservations and getting the lowest fares with sites such as Orbitz or Travelocity are common, printing your airline boarding passes from home, checking in at kiosks and using the rental car mobile check-in when you return the car are all examples that have improved customer satisfaction and reduced total company costs.
• A simple screen to verify accuracy in the fast food drive-through reduces errors, improves quality, and increases customer satisfaction.
• Online Fed Ex package tracking provides improved customer satisfaction and fewer customer service calls.
• Online assistance when ordering from retail sites such as Lands' End improves customer service and increases sales.
• Modeling software is used by companies to predict product failures and improve product quality.
• Frequent buyer programs and e-commerce sites with cross-selling and up-selling all impact customer buying and increase sales.
• Web-based reservation systems, stock trading systems, or ordering of printed digital pictures are all examples of business models increased or created by technology advancements.
• Companies use software to identify fraudulent use of credit cards and reduce costs of improper use.
• Firms use software to take an order anywhere in the world and fulfill it anywhere in the world depending on inventory and cost of transportation.
• Software is used to improve the speed of processes, such as orders, manufacturing, fulfillment, and the delivery process. Companies automate the transfer of information between the ordering company and suppliers.
• Software is used to recognize revenue faster and to transact funds.
• Software routes delivery trucks for decreased gas usage and quicker deliveries.
• Process software communicates to the supplier the levels of available product and when additional deliveries are required.

Make Sure the Technology Supports Your Strategy

Technology is great. However, as everyone knows, improperly implemented technology can be costly and ineffective. Some people become enamored with the attraction of the latest technology without having a valid business purpose. It is the business equivalent of keeping up with the Joneses. Apple introduced the iPhone, and suddenly executives were requesting one without any real business justification. It is not questionable technology. Rather, the business function and costs are inappropriate for a specific business need.

Some companies jump to the conclusion that implementing technology solves everything. However, it might not always support the business strategy properly or cost effectively. Phone-response technology is a good example. Yes, at times phone response technology is a wonderful time-saver to get you directly to the right person who can help you. Have you ever been caught in a frustrating "press one for this, press two for that" cycle when you just wanted to talk to a human being? At times, it is impossible to get through the maze of response requests even though the company may have a customer intimacy strategy! Another personal frustration is when companies replace thinking, decision making, and logic with technology. An employee's response, "the computer will not let me do that," is frustrating for a customer. Be careful how and where you use technology. Make sure it supports the business strategy. Although CIOs are probably very well aware of this issue, they must continually remind executives who are making budget and priority decisions. Do not do stupid things with smart technology. Continually look for inappropriate uses of technology to eliminate and reduce costs. Better yet, make sure the company initially does not invest in inappropriate technology by having an effective governance process.

The organization must give employees tools that foster accountability, innovation, collaboration, and good decision making. Use technology that works for the company, not against the company. A company may have selected the wrong software, or the business needs have changed, and can spend a lot of money trying to make software work for the business when it may not be a good fit for the business from the beginning. At times it can be important to take a step back and objectively evaluate if it would be less expensive to implement new software rather than continuing to make the old software fit the new business model. For example, you would never convert your sports car to a van as your requirements changed and family grew, but rather you would purchase a new vehicle. One company initially selected software for the process manufacturing business. Over time its business model changed and it found itself in the discrete manufacturing business. They spent a considerable amount of money every year modifying the Enterprise Resource Planning (ERP) software for their needs. An objective assessment revealed that they had unsuitable software and could save a considerable amount of money and increase functionality by implementing software that was a better fit for their business model.

Have an Eye on the Long Haul

Although almost any software will work in the short run, in the long run you will see a difference in total costs, including business process inefficiencies, software changes, support, interfaces, data correction, training, and errors. IT must focus on both short-term cost reductions as well as long-term structural changes that will result in a lower total cost of ownership. Many technology improvements take significant time to implement, such as a new enterprise system that has a lower total cost of ownership. It takes time to achieve measurable and sustainable savings from some changes. One example is implementing e-commerce for customer self-service ordering in order to reduce or eliminate the clerical order-entry function. However, this will deliver savings only after customer adoption, which takes years. At times, focusing on reducing costs in the short term creates problems for the long term. Similarly, it requires an increase in costs in the short term to experience a reduction of costs in the long term. If your company is in a position in which it needs to make drastic cuts that will prove costly in the long term, ensure management understands this.

For example, one company knew they needed to invest in a new ERP system. However, due to the magnitude of the effort, the company continued to delay the investment and focused instead on short-term cost reductions. While trying to save money, the on-going maintenance and support costs continued to rise as the business grew. During this growth, the inefficient processes became even worse. Eventually, the company reached the point that the legacy applications and inefficient business processes stunted future growth. By the time the company finally invested in the new ERP system, the total costs were significantly higher than if the company had implemented it earlier. The opportunity costs from years of inefficient processes were enormous.

Implement Small, Select Projects

Divide programs and large projects into small manageable projects to realize more quickly portions of the results and cost savings. A program with a large return in five years is not helpful if you need to reduce costs this year to survive. Ensure a consistent strategic direction by designing the large-scope project but implementing it in small projects whenever possible. Place high-priority functionality into the first project to create larger cost savings earlier and to realize a quicker return on investment (ROI). Business and industry change too quickly to bet on risky, long-term returns.

Consider implementing only portions of a program rather than the entire one. Focus on projects within the program that garner the majority of the benefits by following the 80/20 rule, where 20 percent of the project realizes 80 percent of the benefits and ROI. When economic pressure is high, it is usually not a good time to launch expensive multi-year efforts. Some companies require that all projects have less than six- to nine-months' duration or that a project's ROI must be achieved in 12 months or less.