Telecommunications Cost Management

Strategic Planning | MANAGE RESOURCES

2012-01-26T07:24:00.000-08:00

This section will not provide the process and details for developing an IT strategic plan. There are other texts that can provide this information. However, this section will outline the components that should exist in an IT strategic plan and planning process that are important to enable cost reduction in your organization.

Having a solid strategic plan helps a company quickly focus on where to reduce IT costs. It also identifies and prioritizes the ways that technology is used to enable cost reduction throughout the business. For IT, the plan is essential to get the company's infrastructure and application portfolio as a whole to a cost-effective state for on-going maintenance and support. The plan provides overall direction and priorities to help the entire organization make sure it is marching toward the end goal even in light of cost reduction needs and initiatives. The clarity and prioritization that the plan provides will set the stage for easier and quicker identification of needed cost reduction as both the business and IT will know what is important. The following are key components to use as a checklist or self-assessment for your IT strategic plan and planning process:

The IT strategic planning process involves the business and is regular, rigorous, thorough, and complete.
The IT plan identifies strategic business opportunities with a thorough review of the business direction and the industry; it is not just a list of requested projects. The strategic business opportunities include areas where the business is able to use technology to make cost reductions. Having identified these opportunities may actually help make the case to keep or increase IT investment as it is an enabler for cost reduction within the business. The plan will help identify how to make the business more agile to improve the ability to react when cost reductions are necessary.
The IT plan clearly communicates the current IT situation and includes an objective assessment of strengths, weaknesses, opportunities, and threats in terms the business community understands.
The IT plan outlines guiding principles that you use on a regular basis to evaluate options. Key business drivers are the foundation for the principles. Review these guiding principles when making cost reductions to ensure the reductions are in alignment with your principles and business drivers.
Top Tip: Have an IT strategic plan
"Have an IT strategic plan in place before budgeting begins. Line up your budget over a three to five year time horizon. Use portfolio management and engage with the business to manage the demand."
—Colleen Mlecoch
Amherst H. Wilder Foundation
The IT plan includes a detailed plan, or roadmap, on how to get to the stated direction. The plan should not be only high-level glossy statements of direction but the specific prioritized projects and action plans. When cost reductions are required, go back to the prioritized projects and determine the impact in timing.
The plan provides key IT metrics so you know where you want to get to and where you are on the path to the desired destination. These metrics are important when making cost reductions as you are able to ensure that you continue to provide value to the business and do not cut too much.
You communicate the IT plan to all areas of the business and IT. When making cost reductions, it is important to communicate, discuss, and have common expectations. Conveying a detailed IT plan across the organization provides that basic understanding. As you start planning and making cost reductions, you are able to use the plan to communicate the impact of changes and reductions.
Use the plan on a regular basis to determine direction; make sure it is not just a book on the shelf. Use the plan to identify cost reduction actions and determine the impact on your overall plan and direction. Having a plan as a framework will ensure that the organization does not get too reactionary in a cost reduction mode and cancel active projects that are critical for the strategic direction of the company.
The applications, systems, and tools resulting from the plan are easy to use, meet the needs of the business, and provide key business metrics and information necessary to make business decisions.

After going through a cost reduction phase, be sure to go back to your IT strategic plan and update it based on your changes. The overall direction probably did not change substantially, but the timing to achieve some of the objectives and tactics may have due to cost reduction priorities. It is important to communicate and document these changes in expectations and plans.

Project Initiation and Feasibility | SYSTEMS IMPLEMENTATION

2012-01-23T03:52:00.000-08:00

Obviously, the cheapest time to cancel a project is before it begins. It is well worth your time to scrutinize projects before beginning investments. Ensure every project has a business case for action; specific, quantifiable, and validated benefits; a business sponsor; and alignment with the business goals. Be sure that you identify risks and costs objectively and thoroughly. The following are examples of risk factors to consider when evaluating a project as they could affect the project cost:

Size
Organizational structure
Number of parties involved
Technical complexity
Length of schedule
Knowledge of technology being used
Experience of project management team
Skills of staff
Experience with tools being employed
Data conversion
Implementation complexities
Flexibility in schedule
Number of interfaces
Amount of new infrastructure components required
Amount outside of project team control

Identify actions to mitigate risks and establish procedures to monitor them as the project progresses. Have a strong governance process to review and prioritize projects based on the feasibility and business case.

Requirements

Clearly documented requirements reduce waste and ensure that applications meet the needs of the business. Verify that you have documented standards that are followed when requirements are defined. Use prototyping tools or process modeling tools to help develop and visualize the requirements. Redesign the business processes as that is where you find the majority of cost savings.

Design and Development

Chapter 4—Business Applications—outlines options for doing custom development and advantages to having a buy before build strategy. Whenever possible, do not develop an application unless it is required and unless there are no vendor packages or other options available. In the event you are implementing a vendor package, the design and development phase consists of configuring the software package and designing minimal customizations, interfaces, and conversions.

Design and develop applications with reusability in mind. Every time you reuse a portion of code, you save money. Look at the needs of the entire enterprise rather than the needs of one specific department. The more you leverage a solution, the less expensive it is by functionality or user. Review the design with others for additional input.

Document and follow concise standards for coding and development. Minimize the number of development languages as each additional language bears costs and resources to support. Plan development tasks with schedules and date commitments for tasks that are less than one week in duration in order to minimize the 90 percent-done syndrome (90 percent done for 90 percent of the project schedule).

Reduce development cycles and costs with agile development methodologies to get faster results with less cost and effort. Compared to traditional waterfall methodologies with agile software development, companies have improved time to market and quality with increased collaboration and productivity.

Pay particular attention to interfaces and have an overall interface strategy or application architecture. In fact, most application problems that occur can be found in bridges and interfaces between applications. Many companies that have a strategy to purchase vendor packages find themselves in the legendary plate-of-spaghetti interface dilemma where 80 percent of effort and projects go to figuring out and maintaining all the interfaces rather than adding new functionality.

Test and Validation

Detecting and fixing errors early cost much less than fixing errors at the end of the process or when the system is in production. Depending on your development methodology, introduce testing as early into the development process as possible. Testing small units of code along the way is much more efficient than waiting until completing an entire system before finding issues.

Have clearly documented test plans. Typically, it is cost beneficial to automate testing with test tools, particularly for regression and stress testing. Ensure the test environment is an accurate representation of the production environment as struggling with incomplete test environments is time consuming and costly. Having a quality assurance program with checkpoints to minimize downstream errors saves time and money and provides consistency in testing in all areas. Identify and report quality metrics to improve processes and quality. Complete user training and certification as an untrained user costs the company money. Document the system to minimize support costs.

Post-Implementation Review

Many companies have great intentions to review projects after completion but often do not do so as they rapidly move on to the next project. Carefully reviewing project successes and issues helps to reduce costs in the next project if you implement corrective action. Take time to survey users and review project metrics to track quality, delivery, and satisfaction. Document lessons that you have learned and apply them to subsequent projects. Mistakes cost money.

Although the post-implementation survey or interview should include many aspects of questions related to the project, the following are questions related to cost reduction that the review should include:

Did the project deliver the projected savings identified in the project justification proposal?
If no, what savings were not achieved?
What savings have been realized from the project?
Have any savings been realized that were not anticipated?
Will any additional savings be realized in the future? If so, when?
What must we complete to achieve the savings identified in the initial project proposal?
Was the project completed on time?
Was the project completed on budget?
What could have been done to complete the project more efficiently?
- How efficient and effective were project team meetings?
- Were the objectives of the project clearly defined?
- Were the objectives for your work and tasks clearly defined?
- Was your role clearly defined?
- Were you adequately involved in project decisions and activity?
- Did the executives sufficiently support the project?
- Was cross-functional participation adequate?
- Was the team committed to the project schedule and budget?
- What were the main bottlenecks or frustrations in the project? How could they be avoided in future efforts?
What suggestions do you have for improvement? What would you change in the next project?

Managing Changes and Releases

2012-01-20T04:24:00.000-08:00

Properly managing and controlling changes improves quality and reduces errors, costs of rework, and costs of fixing errors. Bundle work into releases with established release dates to maximize efficiencies. Have a procedure and process for changes that you follow for all changes whether they are applications, hardware, system software, network, or desktop changes. Some companies claim to have a great change management process but then admit to not using it for infrastructure changes. Have a process in place for emergency changes that still allows for review and approval of changes.

Ensure proper and thorough testing of changes with the amount of testing variable depending on the risk of the change and the level it could affect the business. Make sure you have a complete test environment to accurately test changes. Complete stress tests and regression tests as necessary. Review capacity planning and the impact on capacity for changes that have a major impact. Assess the impact on availability and performance.

A different individual than the person making the change should review and approve the change. Sometimes, multiple sets of eyes can spot quality problems or potential ramifications. Many companies have formal change advisory boards to review changes and to communicate to all areas of the organization. For any change, identify risks and determine an appropriate back-out plan or rollback process for changes that go wrong. Improvising during the stress of a rollback is not a good practice.

Communicate changes to all areas of the organization, including both IT and the business areas that are affected. Properly train users for any changes that affect them or their business process. Companies have found automated tools to help manage changes to be very useful. Whether you use tools or manual methods, document all changes. Use scripts, utilities, or tools to automate the installation process of changes and releases. Track metrics that report the quality of changes or issues resulting from changes.

Asset and Configuration Management

2012-01-17T00:20:00.000-08:00

Having up-to-date information on assets with basic asset management software provides the help desk with complete information when the user calls for support, which saves time. There is significant cost savings in implementing inexpensive automated tools (e.g., LANDesk, Zenworks) for inventory of hardware and software. Inventory information is most helpful in an environment with diverse hardware and software. If you do not have asset management software, keep an inventory of hardware and software components in a spreadsheet.

The inventory should include demographic information, such as the person responsible, the location, and the area of the organization using the asset. Inventory information should also include product information, such as vendor, version, release, serial number, maintenance, license, value, and cost. Update and verify the information as the asset moves throughout the life cycle or is used in other processes, such as the problem management process when issues are reported. Also, report and review asset information on a regular basis. If you lease equipment, make sure you keep accurate records so you are able to account for and return equipment at the end of the lease period if necessary.

Top Tip: Standard image

"We saved money by standardizing our operations area. All PCs were a global standard and imaged the same. This saved money with volume discounts, reduced support headcount, as well as realized productivity savings."

—Gail Farnsley
Purdue University
(former Cummins CIO)

Use asset information for inventory management, asset and hardware refresh planning, service history, and license management. Also, have a documented list of standard hardware and software with controls in place so unapproved software or hardware cannot be used. Having effective asset management of software helps in avoiding inflated licensing fees, cost-effectively reallocating licenses, and using only what you need. One company saved a significant amount of money by implementing a tool that provided automatic visibility to installed software and monitored the usage, or lack thereof. They used this information to ensure compliance with software licenses, to monitor adherence to corporate policies, to redistribute software licenses, and to assist with renewal negotiation with the vendors. In fact, some companies reported a cost savings of up to 30 percent of software licenses by having a good asset management process in place.

Have an up-to-date network configuration chart and picture of the business applications environment. It saves time since many people need this information to do their jobs more effectively.

Help Desk Reporting Metrics | SERVICE SUPPORT

2012-01-13T07:18:00.001-08:00

Use monthly reports to evaluate and compare monthly activities and high-frequency problems as well as to track cost reduction and call avoidance measures. For example, you could identify a piece of hardware that is breaking down on a regular basis and proactively replace the hardware. At a minimum, track:

Costs per user
Calls per user
Cost per call
Abandon rate
First call resolution
Calls by type
Call volume by day and time
Calls by agent
End-user satisfaction

Do not just produce reports; use and analyze the reports to take actions to reduce your support costs. Getting trends on calls allows you to determine root causes and proactively solve issues. Also, use reporting metrics to view staff performance.

Knowledge Management and User Self-Service

Creating a database of frequently needed solutions and workarounds assists help desk agents to be more productive by quickly solving the same problems over again. Use resolution templates and scripts to address recurring problems, or better yet, fix the root cause of the those problems. Providing users with access to this database of knowledge management empowers employees and helps them solve their own problems, thereby reducing calls and costs. Through interviews, some companies report that self-service capabilities allowed them to reduce calls by 10 percent. If the cost to service a person with self-help is 15 to 20 percent of the cost of traditional calls, it results in an overall cost savings for the help desk of 8 percent. Self-service solutions must be easy to use, easy to navigate, easy to understand, and quick They need to be faster than picking up the phone and making a call to the help desk. To generate savings, publicize self-service tools and options.

Help Desk Software, Call Logging

2012-01-08T02:30:00.000-08:00

There have been significant improvements in tools available for the help desk that are usable for all sizes of companies. Additionally, there are many examples of help desk software such as Track-It and Heat. The software tools vary in cost from free to very expensive and elaborate. They typically have scalable price points. By using improved tools in the automation of support, you can reduce the costs and size or increase responsibilities of the help desk.

Companies that track all calls and incidents, complete a regular analysis of types of calls, and implement changes to reduce calls are able to realize significant cost savings. Several companies mentioned doing a Pareto chart to find the most common help desk calls to then determine solutions to those problems and drive down future calls. For example, one company found the largest percent of calls was to fix or replace printers. They took a proactive approach and ordered 400 printers over a two-month period resulting in reduced calls and huge savings. Another company found the majority of calls was for password resets and implemented password reset software.

Centralizing all calls to a help desk reduces costly interruptions of expensive resources focused on other projects and work. Receive requests for help via the phone, web, or e-mail. If you can log calls into a database where end users will see their status, you can automatically notify them of changes to their issues. This reduces calls back to the help desk by end users seeking status checks. Prioritize and classify incidents to focus on the high-priority items rather than on a first come, first served basis. Make sure you have a procedure for dealing with high-impact incidents as well as escalation procedures. Formal end-user feedback through automatic surveys when tickets are closed provides useful information to improve services and ultimately reduce costs.

Help Desk Process Improvements | SERVICE SUPPORT

2012-01-04T07:06:00.000-08:00

Companies should complete a thorough analysis of help desk costs to identify areas of improvement appropriate for their environment. The analysis should include staffing costs (and where they are spending their time), training costs, software costs, and other operational expenses. Companies reported that the majority (i.e., 75 percent) of help desk costs is typically personnel, so process improvements have a major impact. The cost per user varies with the size of the organization, industry, and level of IT maturity but can be improved and reduced with a focus on process improvement.

Start by establishing the help desk as the point of contact for all requests. Simple process improvements such as providing communication to users on service availability helps decrease support calls and improve service. Depending on the size of your organization and level of maturity, many companies that have done ITIL training and implemented ITIL in their help desks have realized significant cost savings. In fact, some companies report saving 10 percent total cost of ownership by implementing ITIL-recommended practices. Additionally, there are ITIL supporting technologies that provide a complete suite of tools such as Altiris or BMC Remedy.

Top Tip: Follow-the-sun approach

"We implemented a follow-the-sun approach when outsourcing the help desk. This saved a lot of money as we did not have to pay overtime to handle nightly calls. Someone is always awake in another part of the world."

—Gail Farnsley
Purdue University
(former Cummins CIO)

Making improvements in help desk processes can garner decreased costs per user, decreased costs per call, and decreased costs due to lost productivity for business users, among many other benefits. Do this by improving processes, making better use of people, and improving technology. Bettering the effectiveness and efficiency of the help desk also affects the costs to the organization as a whole as IT problems interfere with users achieving business objectives.

However, keep in mind that attempts to reduce help desk costs easily turn into false economies, i.e., if the cost reduction translates to a service reduction that increases the duration or impact of a service incident. In fact, in CIO interviews, when asked what areas would not reduce costs, many of them replied, "the help desk." The help desk is IT's face to the business. Be aware that decreases in service level in this area are immediately apparent to the business. Not only is it typically apparent, but it is perceived rather negatively if customers have gotten used to a certain level of service and expertise. Specifically, companies that had attempted outsourcing of the help desk admitted that it caused problems and did not garner the anticipated savings.

IT Service Continuity and Disaster Recovery

2012-01-01T04:04:00.000-08:00

Be cautious when reducing costs in the disaster recovery area. Many companies interviewed said that disaster recovery and security are areas in which they would not look for cost reduction due to the vulnerability and risk to the organization. Match the disaster recovery solution to the business risk tolerance for that service. Not every system requires the same level of disaster recovery investment. Develop a tiered structure for your applications. Tier 1 would include the most critical applications which help make other decisions, such as redundancy and recovery. Let the business determine the application rating within the various tiers.

Review the business impact analysis by application to determine if you are able to reduce services and costs. Review business recovery objectives to determine if objectives are too stringent based on costs. Match the disaster recovery solution to the business need. Potentially, this allows you to scale back your overall disaster recovery and realize cost savings. For example, one company was able to adjust from mirrored sites to a 48-hour recovery model to save $200,000 per year.

Complete a full cost-benefit analysis to compare external disaster recovery options to internal options. Consider using other sites, locations, or divisions if you have other data centers and are able to reduce costs by backing up each other. Consider reducing the number and frequency of business continuity tests as each test costs the organization money. Determine if you are able to reduce costs by decreasing the requirements for access to backup tapes. One company saved time shuffling and shuttling tapes by moving to disk backups rather than tape backups.

Security Management

Reduce support costs and significant costly vulnerabilities by having securely configured PCs and servers as well as coordinated deployment of software, updates, and patches. Having knowledge and visibility of compliance status of all assets across the company can help manage risk and prioritize remediation efforts. Be sure you support security processes with proper tools and technology, such as firewalls, monitoring software, web filters, virus detection, spam protection, key fobs, and encryption to protect against attacks. Make sure you review security reports and act upon issues. Have clear steps in place for handling security breaches. It is important to balance the costs of providing security against the value of the information that you are protecting. If you have too much protection, reduce it in order to balance with the business risk if it also allows you to reduce costs.

All areas of the organization must follow up-to-date and accurate security procedures and processes. Ensure there is a focal point in the organization that is responsible for controlling and monitoring security and audit compliance, plans, and procedures. Audit security processes to ensure you delete security access for terminated employees on a timely basis. External audits, scans, and risk assessments are very helpful to ensure your security processes are complete, and the environment is secure.

Automated Password Reset

A key cost reduction strategy is to decrease staff time spent on repetitive tasks that you are able to automate, such as password resets. Various industry reports on help desk costs show that 25 to 40 percent of calls are typically password resets with each reset taking 6 to 15 minutes, and each help desk call costing $25 to $50. Depending on the number of requests you receive for password resets, companies have realized significant savings by implementing tools to automate password reset. Some companies interviewed have experienced a 25 percent decrease in calls through automated password reset capabilities. Companies have also reduced password resets by implementing software to provide single-sign-on capabilities or software to synchronize passwords so the user has to remember fewer passwords. As mentioned in Chapter 3, one company reduced password resets to one-third of the previous amount by simply altering the password change window from 30 to 90 days. This was a simple change resulting in a significant reduction in calls while still meeting compliance requirements and remaining within an acceptable risk level.

Capacity Management | SERVICE DELIVERY

2011-12-29T02:03:00.000-08:00

When managing capacity, some companies make the mistake of only reviewing and managing server use while ignoring network, disk, and tape capacity. Disk space often goes unmanaged in organizations. With the decreasing costs of disk space, many think it is easier to continue to purchase more rather than spending the time to manage it closely. However, with budget cuts, take the time and make the effort to review file management, file retention, and disk space to ensure optimization. One company did not have a good policy on tape retention; however, they saved $70,000 per year by developing a policy that met the business requirements, eliminating many tapes and avoiding the need to buy new tapes.

Revisit capacity projections in light of a downturn in business. Review network bandwidth and usage, server utilization, and disk use to determine if you are able to realize cost savings by downsizing or shifting equipment.

Implementing technologies that allow capacity pooling (e.g., server visualization, multi-tenanting, and clustering with load balancing for servers, or SAN and NAS for storage) frequently yield savings by moving to a single safety margin for all uses instead of separate safety margins for each component. Server virtualization has somewhat reduced the importance or emphasis on capacity planning as it also is much easier to add incremental capacity.

Service Level and Availability Management

2011-12-25T07:01:00.000-08:00

Service level agreements (SLAs) balance the users’ desired service level and expectations with the associated costs. Therefore, if you need to reduce costs, it is prudent and logical that you should revisit service levels for possible reductions. Review metrics to determine actual service level performance to see if you exceed agreed-upon service levels. If you reduce service while still meeting the service level, do so if it allows you to reduce costs. Keep in mind that IT can improve service either by increasing the average level of service or by reducing the variability in service delivery. Be sure to communicate and obtain agreement for any changes in planned service to the business.

In light of necessary cost reductions, revisit service levels with each area of the business. You may be able to reduce required service levels and scale back resources or contracts. Review service levels with business value to ensure the costs and benefits are in alignment and the users do not establish service levels on emotion. It is easy to say you need everything available all the time with immediate response until you put a price tag on the request. Whenever possible, determine the actual costs of the requested level of service and various options. If you change the service level provided to the business, be sure to go back to vendors’ underpinning contracts and get price reductions for changes in service levels. Consider reductions to all components of service levels including:

Service hours
Availability
Throughput
Support levels
Top Tip: Match response rate to business need
"Reduce services by matching the response rate to the business need. For example, review your response to network monitoring. If it is an empty office building, do, you need to dispatch someone at 8 p.m? Monitoring doesn't cost you, but your response does."
—Lynn Willenbring
City of Minneapolis
Responsiveness
Restrictions
Functionality
Contingency
Security
Data retention
Backup requirements
Problem escalation
Costs

Calculate and communicate potential cost savings if you were to reduce the availability or performance requirements. Review changes to anticipated user volumes to determine potential impact to service levels or potential cost reduction areas.

Complete a regular review of current infrastructure components against required availability requirements with a view to optimizing equipment and lowering costs. With advances in infrastructure technology, it is often possible to upgrade components to new technology and increase availability while actually decreasing costs.

Continue to review metrics, availability, performance, and actual service levels to be sure that you are meeting the business requirements in light of cost reductions, delaying hardware upgrades, or other reductions that you have taken.

Process Frameworks | PROCESS OVERVIEW

2011-12-21T00:00:00.000-08:00

Although quality initiatives have existed in businesses for many years, process improvement in IT is a newer area of focus for most organizations. While companies in Europe focused on IT process improvement slightly earlier, U.S. organizations did not jump on board until the late 1990s and early 2000s. There are various frameworks and guidelines that companies use for IT process improvement, including:

Information Technology Infrastructure Library (ITIL). ITIL is a high-level framework or foundation of recommended practices for IT operations. It is a customizable framework of checklists and procedures. You adopt and adapt ITIL in different ways according to the needs of your organization. Version 3 was released in 2007 and includes service strategy, service design, service transition, service operation, and continual service improvement. ITIL information is available at the user group itSMF www.itsmfusa.org, www.itsmf.com, the Office of Government Commerce www.ogc.gov.uk, or www.itil.co.uk
Control Objectives for Information and Related Technology (COBIT). First released in 1996, COBIT is a set of recommended practices for IT governance and control. COBIT ensures that services and information meet quality, fiduciary, and security needs. COBIT 4.1 has 34 processes that cover 210 control objectives organized in four domain areas. The domains are planning and organization, acquisition and implementation, delivery and support, and monitoring and evaluation. It is a control and audit framework providing a set of key goal and performance indicators, and critical success factors for each of its processes. COBIT leverages ITIL to identify control points. COBIT information is available at http://www.isaca.org/cobit.htm.
International Organization for Standardization (ISO). ISO provides international standards for quality management systems and specifies the requirements for products, services, processes, materials, and systems. It is a global network ensuring quality, ecology, safety, economy, reliability, compatibility, interoperability, efficiency, and effectiveness.
Capability Maturity Model (CMM). CMM is a method for evaluating and measuring the maturity of the software development process. It identifies five levels of process maturity: initial, repeatable, defined, managed, and optimizing. Within each of the maturity levels are key process areas for goals, commitment, ability, measurement, and verification.
Capability Maturity Model Integration (CMMI). CMMI provides guidance for improving processes to manage the development, acquisition, and maintenance of products or services. CMMI information is available at http://www.sei.cmu.edu/cmmi.
Six Sigma. As you are probably aware, Motorola originally implemented Six Sigma to improve quality by controlling and removing defects and variation. Sigma is a standard deviation and notes that if you have six standard deviations between the mean and the limit, you will have practically no failures. As the process standard deviation increases or moves away from the center of tolerance, fewer standard deviations will fit between the mean and the limit, increasing the likelihood of items outside of specification. It is about improving and innovating processes. Six Sigma information is available at www.isixsigma.com or http://www.ge.com/sixsigma.
Lean IT. For years, manufacturing has used lean techniques. IT is recently adopting lean techniques to eliminate the waste from the value stream and improve the cost, quality, speed, and agility of IT processes. Individuals such as Henry Ford, Edward Deming, and Kaoru Ishikawa, and companies like Toyota, defined and perfected these principles. Core principles of lean include focusing on the customer, continuously improving, planning for change, automating processes, empowering the team, designing quality in the processes, and optimizing the whole.
Sarbanes-Oxley (SOX). Initiated in 2002, these are standards for accountability in business practices for public companies valued at more than $75 million. It includes the requirement that the CEO approve the verification of financial numbers, an annual assessment of internal financial controls, and real-time reporting of events that could materially affect financial results. Although SOX is usually extra work when compared to process efficiency improvement, it is a requirement and a methodology to integrate with your processes.
Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO is a framework for financial controls to address regulatory compliance. It provides guidance on governance, business ethics, internal controls, risk management, fraud, and financial reporting. Find COSO information at www.coso.org.
Microsoft Operations Framework (MOF). MOF is a structured approach to help customers achieve operational excellence on the Microsoft platform. It includes recommended practices, principles, and models for high availability, reliability, and security for mission-critical systems. ITIL is the foundation for MOF. Release 4.0 was completed in 2008 and integrates governance, risk and compliance activities, management reviews, and recommended practices. MOF includes three phases: plan, deliver, and operate, with a foundational layer for managing. MOF information is available at www.microsoft.com/mof.
ISO/IEC 20000, British Standard (BS 15000). This is an international standard for IT Service Management. It is complimentary with ITIL but also uses components of COBIT and MOF. It includes a specification and a code of practice. It is based on the ISO principle of document what you do and do what you document. BS 15000 information is available at www.bsl5000certification.com or www.bsl5000.org.uk
Project Management Body of Knowledge (PMBOK). PMBOK is an internationally recognized standard that provides fundamentals for project management. It uses five process groups: initiating, planning, executing, controlling and monitoring, and closing. Information on the project management institute and PMBOK is atwww.pmi.org.

Rather than adopting any single framework, use elements from all these frameworks and methodologies as there are useful components from all of them to help you. ITIL and COBIT seem to be the most used frameworks at this time. Figure 1 shows how one company integrated the various frameworks and explained how they would each apply to improve processes and reduce costs. Bob Lewis, in his latest book, A Manifesto for 21st Century Information Technology has several excellent chapters discussing processes and practices.

Figure 1: Process Frameworks

Areas of Waste | PROCESS OVERVIEW

2011-12-16T09:00:00.000-08:00

In the context of process improvement, waste refers to any expenditure of time, effort, or money that does not result in a corresponding increase in value in the eyes of the company's external paying customers. Process improvement reduces costs by improving the following areas of waste typically found in IT organizations:

Repeatedly fixing the same incidents; duplication of effort
Reworking failed changes, cost of errors
Reinventing the wheel; solving problems and writing software that already exists elsewhere
Maintaining data in multiple places
Maintaining assets (e.g., software, applications, network lines) that are not used by the business
Late detection of errors leading to an excessive expenditure of time, effort, and money in remediation
Misallocation of resources or confused employees, resulting in time spent on less important work
Customer outages impacting customer satisfaction or revenue
Unreliable, inconsistent service, business disruptions, poor system availability and performance, or missed project delivery dates resulting in lost revenue, lost opportunity, or lost productivity in the business
Missing project budgets resulting in additional costs to deliver
Misusing investments or assets, or perhaps not using them to their full potential
Lost time dealing with preventable problems and firefighting
Demotivated employees not achieving full productivity
Completing tasks that can be done through automation, such as physically printing and delivering reports
Penalties and fines

DATA CENTER

2011-12-13T06:26:00.000-08:00

Data Center Consolidation

Whenever possible, consolidate data centers. Data centers are most cost-effective and efficient when running at a high capacity. A newer highly efficient consolidated data center has much lower total costs (per square foot or per delivered watt) than many smaller data centers. Every data center costs money in space, power, cooling, bandwidth, administration, maintenance, and support. You may be able to save a building, floor, or room by consolidating data centers. The cost savings in consolidating data centers might not be short term, but it has a significant long-term impact. Several large companies are consolidating worldwide data centers into a few super data centers that service their facilities. One company estimated savings up to $2,000 per square foot of consolidated data center space.

Automation and Remote Management

New tools and utilities are being continually developed to automate support of the data center, improve efficiencies, provide remote management, and improve availability of your infrastructure. These tools save a considerable amount of labor costs and reduces costs of outages. They move from reactive maintenance to proactive and preventive support services, which significantly improves the efficiency of the IT support staff. Remote diagnostic tools reduce IT support costs and enables consolidation of data centers and cost reduction.

Power Usage and Green IT

Companies spend a lot of money on wasted energy including servers or desktops that sit idle at night. Each minute that a computer uses less power translates to reduced electricity costs. One company estimated that powering and cooling one server cost them an estimated $3,000. Managing power usage results in cost savings. One company saved millions of dollars by implementing a power management tool, while another estimated cost reductions of around 20 percent. By turning off unused desktops, laptops, and servers, they saved $40 per machine per year and received utility company rebates of over $10 per computer. They also improved security as turned-off machines cannot be infected or compromised. Synchronize power management with maintenance and update schedules.

Top Tip: Power usage

"We significantly reduced power usage through data center improvements and replacing old equipment with newer, more efficient equipment. We implemented best practices with hot and cold aisles, raising the temperature in the data center, shutting down computers, and making people more power conscious. We found out that the cost of cooling machines can be more than the cost of buying a machine."

—Anne Agee
University of Massachusetts,
Boston

Another company saved cooling costs by raising operating temperatures in the data center from 75 to 77 degrees, using variable-speed fans in the computer room air-conditioning units, optimizing the airflow under floors, and implementing cold-containment techniques. Consider implementing more energy-efficient servers, disk, and other hardware. Audit and review energy bills to find overcharges. One company estimated a 60 percent savings in energy costs with consolidation, virtualization, installing newer and more efficient equipment, and implementing tools providing power management.

Industry averages show that servers account for the most of data center energy costs (31 percent), followed by heating, ventilation, and air conditioning at 17 percent, storage devices at 14 percent, and network equipment at 13 percent. Virtualization and consolidation are two of the most popular and beneficial green initiatives with companies estimating approximately 15 percent savings each.

Desktop Virtualization and Thin Clients

2011-12-10T04:44:00.000-08:00

Virtualization of the desktop is not as prevalent at this time as server virtualization, but many companies are investigating desktop virtualization and implementing pilots. Virtualization actually provides a layer between the hardware and software and provides a logical view of the computing resources. Therefore, each server acts like a group of servers, each disk drive functions like a pool of disks, and each desktop uses centralized computing power. Machine virtualization actually inserts a virtualization layer (hypervisor) between the operating system instances and hardware, whereas application virtualization inserts the layer between the application and the operating system. Therefore, when the user needs an application, the server software downloads the application to the machine and it runs as if it were installed. When the user is done, it is uninstalled and available for another user.

Top Tip: Desktop virtualization

"We used desktop virtualization to be able to run applications remotely during a disaster. We were able to do this during hurricane Gustav. This provided an up-time gain with minimal costs that we did not have in place for Katrina."

—Roger Champagne
Laitram

Top Tip: Desktop virtualization savings

"We are starting a desktop virtualization program. We anticipate a minimum of 15-20% savings"

—Paul Kay
Long Term Care Group

Desktop virtualization moves the end-user operating environment from a dedicated piece of hardware in a local PC to a virtual machine on shared hardware. You can virtualize applications by hosting, updating, and patching a single application instance and delivering the functionality over the network rather than deploying and maintaining instances on each individual PC. It is a viable option for cost reduction depending on the application and business needs. You are able to realize cost savings in virtualizing clients by decreasing support and maintenance costs, and reducing downtime due to desktop issues. One company reduced desktop total cost of ownership by an estimated 20 percent by virtualizing desktops and centralizing desktop management. With a virtualized desktop environment, you are able to access a desktop from any location using any device, which increases functionality and supports remote use.

Virtualizing desktops can be a major endeavor, and you should proceed slowly. Although the virtualized client hardware and software is significantly less expensive than a full PC, you need to consider the additional costs of the back-end infrastructure required. It has a significant impact on the network capacity. Be sure you review the network to ensure it is robust enough to carry the additional traffic, and include network and server upgrade costs in the return on investment calculation. Desktop virtualization may require a significant up-front investment, and cost savings will be long-term rather than short-term. A partial implementation of desktop virtualization may actually increase your overall costs as you have to maintain the overhead of both methods. During an interview, a CIO was not convinced of the cost savings of desktop virtualization and he commented, "You have the additional blade in the data center, and you have the additional costs of the blade in an expensive facility, which has to be less expensive than that of a PC for any benefit to be realized. You also have introduced a single point of failure."

Top Tip: Desktop virtualization and the network

"We did a pilot for desktop virtualization. The problem with desktop virtualization is that any latency on the network is very painful. Every network has some latency. As you lower the costs on the desktop, the provisioning costs on the network can go up. However, there are some places that it does make sense."

—Samuel J. Levy
University of St. Thomas

Investigate alternative client architectures and other methods to reduce the requirements for desktops to provide a more thin-client approach, which reduces support costs, maintenance costs and delays the need for upgrades. Citrix is a common example of software that many companies have deployed to reduce desktop costs. Another example is VMWare's ACE product, which still virtualizes the desktop but runs the result using the desktop CPU and dramatically reduces the data center footprint of desktop virtualization.

Microsoft Licenses | DESKTOPS

2011-12-06T08:43:00.000-08:00

Microsoft license fees are a major expense and financial commitment for companies, whether it is for Microsoft Windows, Office, server operating systems, or even Microsoft back office applications such as Customer Relationship Management (CRM) and ERP. Negotiating with Microsoft is a challenging prospect, particularly for small- and medium-sized organizations. Many companies poorly understand Microsoft licensing and do not manage Microsoft licenses as effectively as they could, which costs a significant amount of money. Microsoft has unique terminology, licensing and pricing structures, policies, software bundles, and frequent changes. For example, Microsoft removed Outlook from Exchange Server 2007 and put it in the Office 2007 suite, which changed licensing fees for some companies.

It is well worth your time to understand Microsoft's products, roadmap, and licensing, or hire a company to assist you. Before starting negotiations, know the products you are licensing, the volume of purchases, and your upgrade plans. It is also beneficial to centralize software license purchasing and negotiation to take full advantage of cost savings opportunities. As mentioned in an earlier chapter, make sure you are compliant with licenses at all times as hiding overuse results in significant fines and loss of negotiation leverage.

Top Tip: Desktop licenses

"Reduce costs of the desktop by having multiple licensing strategies. For example, the cost of desktop operating systems is high. Unless you are going to upgrade, you don't get much value. Consider not having maintenance on certain products that you do not intend to upgrade."

—Mike Degeneffe
Ceridian

It is important to calculate the financial impact of the various options provided by Microsoft and other upgrade scenarios. Compare a la carte pricing to product bundle pricing and the options for various client license types. For example, Microsoft's Client Access License (CAL) is assigned on a per user or a per device basis. Each CAL gives either one user or one device rights to access all instances of the Microsoft product. It is more cost-beneficial to apply user CALs when you have several devices used by one user. Device CALs are more cost-beneficial when you have devices shared by multiple users such as workstations in a 24-hour manufacturing plant or call center. Although Microsoft recommends that companies standardize on one type of CAL, this actually increases costs for organizations with both types of users. You may be able to save costs by purchasing a mix of user and device CALs.

In July 2008, Microsoft announced the Select Plus program which allows business units to receive volume discounts from the enterprise level without submitting forecasts of demand, with no expiration date for purchases. As there is no expiration date, it means that terms are not renegotiated. This means terms are critical when negotiating the first time. Qualifications for discount levels are based on the previous year's actual purchases, which mean that the timing of transactions is important because you move up a tier as soon as a transaction puts you over the volume threshold. Companies that consolidate demand may be able to achieve a better discount. Negotiate other terms in addition to price, such as planning or upgrade services and training.

Microsoft's maintenance agreement—Software Assurance (SA)—is expensive, as it is typically 25 percent for server products and 29 percent for desktop products, which quickly doubles the acquisition cost of software. In other words, in four years you pay 100 percent of the server price in maintenance costs and 116 percent of the desktop price. SA provides version upgrades, the ability to spread license payments over the terms of the agreement, support, training, and desktop optimization. Microsoft packages some enhancements at an additional cost. It is a major decision for a company considering whether to purchase SA as you need to consider your own upgrade strategy as well as Microsoft's future releases. For example, SA may not be cost effective for you if you plan to implement Microsoft's next release more than three years out as it will cost between five and six years of SA payments to qualify for the new version. If you skip a version, you end up paying twice the license fee than if you bought the licenses when needed. For example, one company purchased an enterprise agreement and upgraded to Windows XP in 2003. They decided to skip Vista and planned to implement Windows 7 in 2011. They purchased three, three-year SA terms to get upgrade rights. Therefore, they paid 261 percent of the original XP price for the Windows 7 licenses.

Review the cost of various options to SA maintenance and enterprise agreements, such as:

Buy or renew a component of an enterprise agreement for a subset of products and combine remaining purchases with a SA.
Renew an SA only for certain products or for some users. SA is not all or nothing. For example, if you upgrade products or users at different rates, apply SA coverage only to those products or users.
Purchase licenses when needed under an SA.
Consider not renewing the enterprise agreement if upgrades are more than four years apart.
Consider deferring expenses and buying licenses when needed. For example, if you need to cut costs now, it may not make sense to pay for three more years of SA coverage to obtain Windows 7 upgrade rights.
Consider the business version of Windows operating system. Vista comes in business and enterprise versions with the business version coming standard on equipment purchased. If you do not need the enterprise version of Windows, you may not want to involve those licenses in volume purchasing or SA coverage. When you upgrade the operating system, you may need a new upgrade of hardware anyway.
Implement improved software asset management processes rather than purchasing an enterprise agreement.
Do not consider SA the same as purchasing premier support, nor is SA a requirement for premier support.
Centralize license purchasing to achieve larger discounts and increase negotiating leverage.
Consider reassigning licenses to eliminate the need for purchasing new licenses.
Consider purchasing a mix of user and device CALs.
Assign CAL licenses to minimize spending.
An enterprise agreement evenly spreads out payments with predictable annual costs rather than upfront costs but may not make sense in times of budget cuts.
Re-evaluate the costs and benefits of unpredictable upgrade cycles and skipping versions particularly if you have SA.
Do not pay SA for unused products. If you do not use all the software that is covered in the agreement, you may be wasting money. For example, if you purchase Core CAL or Enterprise CAL bundles and only use some of the software, you are paying more when factoring in the cost of SA than if you would have purchased each CAL under an agreement without SA.
Top Tip: Audit upgrades
"Although standardizing is a good move, you do increase risk and reliance with one vendor. Take each renewal or upgrade and audit against the business roadmap to make sure it is worth it."
—Roger Champagne
Laitram
Evaluate if virtualization saves money (discussed later).
Negotiate discounts for SA.
Wait for operating system upgrades with a hardware refresh.
Consider open source alternatives (discussed below).

There will continue to be changes in the pricing of Microsoft licenses and maintenance agreements. The point is that you need to understand current Microsoft license terms and costs to determine the most cost-effective option for structuring maintenance and upgrades as the difference in total cost is substantial. You may have more leverage than you think with Microsoft negotiations if you consolidate your negotiations for no-choice software (like Windows and Office) with negotiations for software in categories where Microsoft has to compete aggressively (e.g., ERP SQL Server).

Storage Consolidation, Virtualization, SAN, and NAS

2011-12-02T08:42:00.000-08:00

There are continual advances in storage technology that drive down storage-related costs, including storage consolidation using storage area networks (SAN), network-attached storage (NAS), and storage virtualization. Improved disk drive performance and storage utilization provide ways to get more for less. Implementing new storage technology allows you to sunset lower-end storage and saves costs in footprint, power, maintenance, and support.

Top Tip: Disk technologies

"We experienced tremendous cost avoidance by implementing new technology for disk archiving, de-duping, and compression. It took two and a half months to realize the value, but we experienced a 90% reduction in disk space. This also saved rack space, power, maintenance, and depreciation."

—Greg Hayhurst
Tennant Company

Storage virtualization makes various separate hard drives act like one large storage pool. With virtualized storage, you spend less time managing storage devices, storage is more efficient, and you are better able to manage utilization. You can add or replace drives without affecting other storage devices as the virtualization software manages traffic. Backup and mirroring are faster as you only copy data that has changed. Rather than having small, unmanaged pools of storage located throughout the company, you are able to realize significant cost savings by consolidating storage in a SAN and virtualizing storage. The control layer of virtualization allows the data to be physically located in a remote site or at multiple sites, which provides options for backup and disaster recovery.

Some companies have also reduced costs with storage virtualization by doing thin provisioning, which is fooling a drive into thinking it has more capacity as excess data is stored on another drive.

Array-based virtualization also provides expansion to an entire array of disk Network-based storage virtualization manages storage over the network.

Advancements in virtualization and SAN technology will continue to provide more storage at reduced costs. Storage is definitely one area where retaining older technology is actually more expensive than implementing newer state-of-the-art options.

Disk De-Duplication

De-duplication is another storage technology that is saving companies money. It searches for duplicate files and consolidates to a single file. This is possible with storage virtualization.

Tiered Storage

Often, companies assign storage based on what is available rather than analyzing the right storage based on business needs. Tiered storage provides lower cost storage for applications that access storage less often or for areas that require lower performance or reliability. This can save 30 to 50 percent of storage needs. Match the business needs to the storage performance and reliability in order to provide overall storage at a lower cost.

Manage Use of Storage

2011-11-29T08:41:00.001-08:00

Similar to network bandwidth, you can never have enough storage. In a cost-conscious environment, it is not prudent to continually purchase additional storage without proper management of the storage you have. Ensure that you properly manage your storage usage and report storage costs. Companies often use only a percent of the allocated storage leaving hidden pockets of unclaimed storage. The following are ways that companies have saved money in the management and use of storage:

Report and analyze how much storage you have, how much is allocated, and how much is used. Right size file allocations to only what you need for the next six months or less.
Limit personal storage volumes. Have and enforce a policy on storage use.
Follow policies for storage left from terminated employees as reclaiming even a few gigabytes per employee amounts to savings.
Enforce archiving policies that are consistent with records management policies.
Reduce tape volumes. Review backup and retention policies. Implement de-compression and de-duplication technology. Eliminate third party, off site tape storage if possible. Eliminate legacy tape cartridges.
Review and clean up storage on a regular basis.
Examine the possibility of using storage in the cloud services that many WAN and Internet services provide. This can save on acquisition and support costs.

Cloud Computing | SERVERS

2011-11-14T08:24:00.000-08:00

Cloud computing means that services are delivered through the Internet rather than through an in-house data center. Cloud computing has built-in scalability, efficiency, economies of scale, and cost savings. Applications run on fewer machines and you are able to consolidate servers. Operating system virtualization and other software helps companies create private clouds that improve utilization of computing resources. With cloud computing, you pay as you go, without large initial investments. Cloud computing can be hardware clouds (e.g., Elastic Computer Cloud offered by Amazon Web Services), software clouds (e.g., SaaS or salesforce.com), or desktop clouds (e.g., Google Docs, Yahoo's Zimbra, and Microsoft Live). As mentioned in Chapter 4, additional options and variations in cloud computing are emerging, such as platform-as-a-service (PaaS) and database-as-a-service (DaaS). Companies are creating their own in-house cloud services.

Currently there is a lot of hype about cloud computing. However, cloud computing seems to be in the early stages of implementation for most companies. Several firms interviewed had plans to make major moves, such as moving e-mail and collaboration to cloud computing and they hoped to realize savings as high as 50 percent. Some companies tried moving to cloud computing with test and development environments.

Top Tip: Cloud computing

"Using cloud computing for hosting services has created significant reduction in costs."

—Larry Bonfante
USTA

Top Tip: Cloud computing is an inexpensive option

"We are looking at cloud computing. It can be a good inexpensive option for certain things. We will save $120K by outsourcing student e-mail to the cloud as e-mail is a utility. We are looking at moving test and development environments to the cloud. We hope to develop a collaborative private cloud."

—Anne Agee
University of Massachusetts,
Boston

The following are cost implications to review when considering cloud computing:

Older applications may not be able to operate on a cloud and modifying them could be cost-prohibitive.
Mission-critical applications may not be the best place to start with cloud computing as you might want to prove reliability and performance.
Highly regulated industries may have compliance issues, concerns, or additional measures related to cloud computing and may not be the best candidates. No matter what industry you are in, address data protection and content management challenges.
Reliability and availability is an issue affecting costs. Understand your business needs and make sure the vendor meets your requirements. Some vendors allow you to pay less for noncritical applications.
Define requirements and commitments including availability, performance, reporting, incident resolution, backup, disaster recovery, capacity, and bandwidth in SLAs. Include contractual obligations with penalties for failure to deliver.
Have various levels of security, such as company-based security, role-based security, and Virtual Private Network (VPN) transport-level security.
Look at high-cost, underutilized parts of your environment to consider for cloud computing. For example, test environments may be a good place to start.
Understand your roles and responsibilities relative to cloud computing because it does not necessarily mean that everything is done for you.
Although the upfront investment for hardware and software is low, the costs may be spread out over months and years. Be sure you calculate the long-term cost of ownership when comparing costs. In addition, make sure you are comparing similar levels of high performance and best practices, such as content delivery, load balancing, and caching.
Pay attention to usage terms and fees because they can be a factor in mounting costs.

Hosting Services | SERVERS

2011-11-11T09:30:00.000-08:00

Analyze the impact of running applications on hosted external servers or doing the opposite and bringing hosted services in-house. With the competitive pressures of on demand services like software-as a-service (SaaS) and cloud computing as well as decreasing infrastructure costs, the cost of hosting services are expected to decline considerably over the next few years. Consider the following cost reduction possibilities relative to hosting services:

As outlined in cloud computing, have requirements documented in SLAs with penalty clauses for noncompliance. Renegotiate if there are constant service shortcomings.
If allowable in the terms of your contract, renegotiate your contract for lower costs. To realize a lower price, you may need to sign a longer contract, include broader services, have a lower SLA, or use of offshore resources.
A strong and close partnership and relationship with your provider is also helpful when renegotiating a win-win solution given your cost reduction goals.
Include a clause for annual rate review in order to obtain reductions in market rates.
Carefully review baseline volume commitments given a decrease in business volume.
Include a business downturn clause in the contract to account for layoffs or the sale of a division.
Top Tip: Hosting
"We were able to save a significant amount of money by changing hosting partners. We did this by taking advantage of virtualization, using cloud computing for non-production environments, and restructured the landscape using the QA environment for our disaster recovery environment. We also kept multiple players in the mix to get favorable pricing."
—Lina Shurslep
Navarre Corporation
There continue to be changes and increased flexibility in how hosting, application, and managed service providers charge for services. For example, some providers are moving to utility-based pricing model with charges per user per month over a three-year period rather than fixed costs over the three-year period. Review options on a regular basis and determine the most cost-effective option given your business needs.

Linux and Open Source | SERVERS

2011-11-09T08:22:00.000-08:00

Open source has come a long way toward being strong enough for enterprise-wide mission-critical use. Many good open source alternatives save upfront costs, development effort, and on-going support costs. You must evaluate if open source software is right for your organization. It depends on several factors, such as:

Top Tip: Open source

"Open source is not as easy as it looks at first glance. You trade license and maintenance costs for in-house staff to support the application."

—Samuel J. Levy
University of St. Thomas

Compliance and security requirements
How broadly the application is used
How widely you support the application
The activity and size of the user community
How much risk the organization is willing to absorb
How much cost savings would result

Of course, the Linux operating system has grown in popularity as many companies have significantly reduced costs while addressing security and reliability issues and avoiding single-vendor environments. There are several different flavors of Linux. Although cost comparisons vary from environment to environment, the following are ways that some companies have reduced costs and total cost of ownership using Linux:

Free, open-source systems with advanced versions still significantly less expensive than the Windows server operating systems
Fewer administration, maintenance, and support costs and a quick learning curve
Increased flexibility and adaptability with open source
Fewer hardware costs, improved performance
Less system downtime, improved reliability, higher end-user productivity
Fewer security and virus attacks, less security holes, free online security updates

Many companies start in the open-source area for noncritical applications and expand their use as they gain more comfort and experience.

Consider open source for a variety of areas. For example, there are lightweight components such as Spring, Jetty, and Tomcat that are options to JEE application servers like Weblogic. There are also alternatives such as MySQL rather than expensive database licenses. Many integration solutions (for example Jitterbit) can lower costs and development time.

Server Virtualization

2011-11-05T04:21:00.000-07:00

Virtualization provides companies with cost avoidance savings as it improves the use and scalability of the entire infrastructure and avoids having to purchase additional hardware. It helps IT to be more responsive and agile when handling changing business needs. Virtualization is not limited to servers, but also is applicable to desktops, network, application, and storage environments. Implementing virtualization is an innovative way to use newer technology to reduce costs. Even though it is newer technology, server virtualization has similarities to the old days of partitioning mainframes.

Server virtualization saves money on rack space, power and cooling requirements, maintenance and support, and disaster recovery. Virtualization consolidates an average of six servers, but it can be 15 or more. Server virtualization is now mainstream technology and most IT shops use it to streamline capacity management, use resources more efficiently, save money, and provide improved scalability. In fact, just about every company interviewed had implemented some degree of server virtualization and had realized significant cost reductions. Many companies estimated that server virtualization saved them at least 35 percent of their server costs. If you have not investigated and started using server virtualization, you need to do so. Although it will require an initial upfront investment, virtualization savings are not necessarily short term (unless you are at server capacity), but more a long-term cost of ownership savings and cost avoidance when buying additional servers in the future.

Top Tip: Virtualization

"Virtualization does not immediately reduce costs but provides a future reduction. We anticipate $1M savings starting in 2010 due to server virtualization as we won't have to refresh aging servers."

—VP IT
Energy Company

Be sure to investigate the impact of virtualization on all your software licenses as it could increase or decrease your license costs depending on how you have agreements structured. You may be able to reduce the license costs for applications that you rarely access. Microsoft has made some modifications in software licensing to accommodate the move to virtualization. In September 2008, Microsoft changed the 90-day reassignment rule except for server operating systems. Previously, you had to assign server and other software to one server for at least 90 days before you could assign it to another server. For a virtualized server farm environment with load shifting between multiple servers, you would need to assign licenses to both servers, making it cost prohibitive. The new terms allow some Microsoft products to be assigned within a server farm in up to two data centers as long as they are in time zones no more than four hours apart. For example, if you were running Microsoft Exchange Server on a Virtual Machine (VM) and wanted to migrate the VM to two other servers in the farm, you would need three exchange server licenses and three Windows server licenses, which would be very expensive. With the rule change, you only need one exchange service license, which is a 66 percent savings, and enough Windows server licenses to cover the operating system running on the physical server and the VM machine. Therefore, you are able to take advantage of the VM failover capabilities and increase the utilization rate and capacity of the machines. From a licensing perspective, you can see by these examples that moving to a VM configuration can be confusing.

Virtualization also affects the type, or edition, of Microsoft licensees that is the most cost-effective for your needs. For example, Windows Server 2008 is available in five different editions with significant cost variation: Standard, Enterprise, Datacenter, and two other niche methods. The Standard edition comes with one physical instance and one virtual instance. The Enterprise edition has one physical instance and up to four virtual instances. The Datacenter version includes an unlimited number of operating system instances. If you plan to host more than three VMs on a server, the Enterprise or Datacenter editions are the most cost-effective. The Datacenter version is most cost-effective when the maximum number of VMs is greater than four times the number of physical processors in the server. Server licenses for all editions of Windows Server are assigned to physical servers, not to VM machines. Therefore, an enterprise edition on a physical server running two Windows Server VMs runs up to two more VMs without requiring additional operating system licenses. The bottom line is you need to determine the most cost-effective edition based on the number of VMs you have. Of course, you need to check with Microsoft, or any other vendor, for current licensing configurations and rules, but the examples outlined above show the complexity in Microsoft and virtualization licensing. It definitely is not for the faint of heart and takes time to understand and design the most cost-effective solution for your environment.

In addition to reviewing software licenses, the following are additional considerations that you should review when considering virtualization as they may have an impact on costs:

Impact to the network. Once an organization implements server or storage virtualization, the impact may be significant enough that you need to redesign the network to handle the new network traffic pattern.
Impact to storage. Virtualization impacts the storage architecture, particularly for direct-attached storage systems.
Server workloads. You need to have a good understanding of the server workloads and business priority to determine what you should consolidate into the virtualization platform and what you should not.
Tools for management of the infrastructure. You may require additional tools to manage the virtualized environment.
Training of support personnel. The virtualized environment adds a layer of complexity. Make sure you train the technical staff to cover design, implementation, and support. Identify these costs in the initial financial analysis of implementing virtualization.
Book life of assets. Equipment that is nearing the end of the life cycle and end of book life is the best candidate for virtualization.
Compliance and security requirements. Virtualization may not be the best option for heavily regulated industries or applications.
Consider virtualization testing. Microsoft's free Virtual Server and Virtual PC (see Microsoft.com) allow you to test virtualization, for example.
Consider open source options. For example, FreeVPS provides some free open source virtualization options.

Voice over IP | VOICE NETWORK

2011-11-02T08:18:00.000-07:00

VoIP has become a mature product. Configurations to support VoIP are standard. Vendors are now able to distinguish the VoIP traffic from normal data traffic with MPLS and provide the high priority service it requires. It simplifies and saves costs for moves. Although VoIP can be a cost effective solution when implementing a new site, or if you need to replace an end-of-life PBX system, it may not always be the most cost-effective solution.

The answer to questions regarding the feasibility of migrating to VoIP services from traditional telephony services is, it depends. You need to understand your current costs. Capture your monthly phone charges, long distance charges, including costs for on-network and off-network, plus the costs for additions, moves, and deletions. For larger companies where it may be a difficult task assembling all the costs, pick a number of locations to represent the typical locations within your organization. This will give you a representative cost structure that you can apply with some accuracy over the remaining locations.

Review various options for implementing VoIP systems. The options range from doing everything yourself to having the voice and data network portions fully managed (as shown in Figure 1). Of course, there are numerous options between these two.

Figure 1: VoIP options

If you have capable staff that could easily pick up the technical skills needed, implementing and managing VoIP yourself may be the best option. If skilled staff is missing or workloads prevent picking up the additional responsibility, a partially or fully managed system may be the best option. Vendors will often propose one option, typically a fully managed system, as that is more profitable for them. However, they should be willing to tailor a system for a partially managed solution if you desire. Discuss various alternatives with them so you fully understand all your options and the associated costs and benefits.

To help determine your planned solution, build a VoIP business case. Ideally, the costs associated with converting to your VoIP solution, including on-going costs, are low enough to justify replacing the legacy voice system without any other factors. Many times this is not the case and you will need to consider other cost savings factors that are possible with VoIP solutions. VoIP cost savings include:

Elimination of conference call costs
Productivity improvements by combining voice mail with e-mail, plus implementing other unified communications services which eliminate the need for people to leave multiple messages when contacting staff for priority action items
Improvements in business services where some companies find they can reduce staffing requirements while improving customer service by implementing new telephony applications
Simplified technology that supports the infrastructure needed for staff to work at home, which has several cost savings such as higher productivity and reduced office space needs
Minimal cabling requirements for new implementations as you run voice and data over the same cable

For business cost analysis, be sure to include all VoIP costs. Some are not necessarily apparent at the beginning of the effort and can substantially reduce savings. Be sure that you do not end up with a VoIP solution that costs more than the current legacy system. Some VoIP costs include:

Data network upgrade costs. The data network may require upgrades to support voice traffic. These costs can include hardware replacement and software upgrades. Also, make sure to include costs to support network bandwidth increases needed to support voice traffic.
Training costs. You will need to train voice staff on how to configure voice options with a VoIP system. You will need to train network staff to configure network equipment to support voice traffic, and you will need to train support staff to debug problems encountered with the VoIP service. You may be able to reduce training costs with a fully managed VoIP service, but you should still have some trained staff to manage the vendor.
Security. You will need to address security concerns on a continuous basis with a VoIP system. Security concerns are virtually non-existent in a legacy telephony system, but you now have to consider security as many viruses can now attack IP phone systems.
Hidden fees. Providers can charge hidden fees. While vendors may not always mention these fees in the discovery phase, these charges can show up on the invoices.
Merging services. Tying the data and voice network services together can have some operational impact. Data network upgrades or outages can now affect voice services. Business units that were accustomed to using phones as a backup when data network services were not available will find themselves without phone service.

Implementing VoIP systems provide long-term cost savings at best. It can require a substantial cost investment for a do-it-yourself approach. The payback may be multiple years out so make sure the company is ready for this type of investment. Although a fully managed system may save money given the costs of change, it may not be a high priority item for meeting overall cost reduction goals.

Cellular Plans and Invoices | VOICE NETWORK

2011-10-29T06:30:00.000-07:00

Analyze the cost effectiveness of buying and supplying mobile devices, or have individuals record their business costs on a regular basis. It is typically more cost-effective to use a corporate-wide strategy for purchasing cell phones and cell phone plans than to have employees buy them. However, small- and medium-sized companies may find it is less expensive to reimburse employees for the actual minutes used for business on their personal phones. For company-owned cell phones, document and enforce cell phone usage policies. When deciding if cell phones will be company owned or individually owned, consider the following:

The competitive threat of personnel interfacing with customers. For example, salespeople have customers calling their cell phones for all requests. If a salesperson then leaves and goes to a competitor, your customer may call to order from your company but end up ordering from your competition. Alternatively, the competitor has an easy prospect list as customer contact information is often stored on the cell phone.
IT policy and support. If employees can get any phone they want from any carrier, they will expect you to support such features as company e-mail on their cell phone. In addition, if you want to enforce security, support email, roll out custom applications, or decrease support costs, this will be difficult on employee-owned phones.

Cellular phone plans are extremely expensive, dynamic, and confusing by design. Cell phones and plans are a less mature industry than land phone lines. There are thousands of plans, and costs vary significantly more than land telecom plans. Even off-the-shelf rate plans exist in the carriers billing system not normally offered to the public. For example, there are ways to reduce the roaming costs from several dollars per minute to pennies per minute. One company saved 30 percent by getting the appropriate plan from a wireless carrier. Many companies find they are on the wrong plan or significantly overpaying for cellular services. Companies that audit cell phone charges find that companies typically overpay 20 to 40 percent.

You can save a tremendous amount of money by accurately matching cellular calling plans to individual usage patterns. Although it is time-consuming, do this by reviewing phone usage and make sure you have the plan matched with the need. For example, if an employee's job requires texting, and the company is paying a tremendous amount for text messages, getting an unlimited text plan would save money. Similarly, if employees require navigational downloads, and these are not included in the plan, businesses are paying significantly more. The cost and use of international mobile calls is another area to review as costs mount with increasing global business. The cost of roaming calls and text messages vary significantly by country.

Make sure you are using the features that you are paying for. You may be paying for international calling for an employee that does not travel or call internationally. You may be paying for roadside assistance but the employee does not have a company car.

Top Tip: Cellular billing errors

"Every bill from one major cellular carrier has an error that will cause companies to overpay by 15% for the past year as they did a billing system upgrade that removed some capabilities."

—Brett Thompson
Cellular Optimization

Top Tip: Cell phone calls back to company

"We evaluated our telecommunications expenses. For example, we looked at the top three phone numbers called and found that 30-35% of our wireless calls are back to Tennant. We are working on ways to reduce that cost."

—Greg Hayhurst
Tennant Company

Cell phone contracts should be no longer than 12 months in duration, but you are able to renegotiate cellular contracts at any time, regardless of the length of the contract. The following are ways that companies have reduced costs for cellular services:

Service level agreements are much more difficult to get for cellular service and can cost more than they are worth.
After completing an audit and meeting with the carrier for corrections, review the subsequent invoices to ensure changes were completed accurately, rates were adjusted, and expected refunds were processed. Most cellular carriers have language in their contract allowing you to go back three months for retroactive credits. However, many companies have examples of cellular carriers having to go back 12 to 39 months for credits on mistakes.
For international travel, consider purchasing SIM cards with local carriers and use rental phones. Using a SIM card and buying prepaid minutes reduces the cost of an international call while roaming from $4/minute to $.25/minute.
To reduce costs of international calling, use one global phone that can be shared by international travelers.
Consider using rental phones with prepaid minutes to save roaming charges.
Consider offering the company's cell phone program to employees' families. When one company did this, it drove up participation and reduced rates.
Note any early termination fees. Although it is difficult to eliminate or obtain deals in this area, try to get caps or protections. For example, cap line terminations at one year, have fees decline as the end of the commitment is reached, prorate charges, grandfather minimum service periods, have a waiver pool, and provide the ability to change plans or equipment without renewing the term.
Understand your traffic patterns so that you can negotiate accordingly. Consider pooling minutes, flat-rate plans and plans with free off-peak and mobile-to-mobile minutes. Negotiate reduced overage charges. Consider enterprise plans with domestic roaming and long distance included.
Enforce policies on international usage, off-peak, data usage, Internet usage, texting, and personal usage. Communicate with employees so there is a heightened awareness of waste, fraud, and abuse. Manage company wireless devices and, if they are lost or stolen, remotely activate them to wipe them clean. Ensure that only company-approved applications are loaded on devices.
Review acquisition and renewal credits.
Consider having multiple mobile service providers for increased leverage and maximum coverage. However, too many carriers will result in loss of in-network calling benefits.
Review rates for BlackBerry, Windows Mobile, and data cards because rates are decreasing. Negotiate the rate for tethering BlackBerries to laptops for Internet access.
Consider integrating mobile devices with the office network so that wireless calls placed in the office go over the office network.

Many companies are overcharged on their cellular telecommunication invoices, yet few have a regular and effective audit of their bills. Even more than land telecom invoices, mobile telecom bills are typically very long and confusing. As in land telecom, there are specialized consulting companies that can conduct an audit of your cellular expenses, and they are well worth the expense to employ. One company saved 30 percent of their annual telecom costs by an audit, implementation of managed services, and review of invoicing.

Top Tip: Consolidating cell phone charges

"We significantly reduced cell phone charges by consolidating—using pooled minutes, getting everyone on the same carrier so inter-network calls do not use plan minutes, encouraging family members to join for increased discount levels, and making additional numbers part of the calling group."

—Haseen Alam
Johnson Brothers Liquor Company

The following are some common areas of cellular overpayment:

Paying for cell numbers no longer in use
Paying for features not used
Paying for Internet access
Abnormal calling patterns for noncompany use
Improper text messaging charges
Incorrect billing

Land Line Plans and Invoices

2011-10-25T08:12:00.000-07:00

The industry for land phone lines is more mature than cell phone plans and is highly regulated. Never sign land line agreements longer than 36 months as telecommunication costs continue to go down. As contracts come up for renewal, you have a lot of leverage for renegotiation. When renewing contracts, it is common to reduce costs by 10 percent by negotiating lower rates that depend on the mix of services, spending commitment, and length of contract. Consider negotiating miscellaneous costs such as damage costs, trade-in costs, etc. Also, consider provisions for annual or semiannual price reviews to ensure discount levels are competitive. Include a price stability clause into the contract as telecom carriers are able to increase rates without informing customers.

The following specific tactics are used by companies to reduce costs relative to land telecommunication plans:

Consider multiple levels of service offerings, such as gold, silver, or bronze.
Have clearly defined SLAs, with defined financial penalties in the event the vendor does not meet defined service requirements. Penalties should be large enough to have an impact on the vendor but not so large as to jeopardize their ability to provide services.
Specify contract termination conditions, such as the inability to meet defined SLAs, a merger or acquisition of the vendor or your company, or a major change in requirements or infrastructure. In general, the easier it is to break the contract, the more the contract will cost. For example, a clause to terminate without cause would be expensive.
Top Tip: Shorter telecom agreements
"We saved a significant amount of money by having shorter telecom agreements. We try to keep the agreements less than 36 months as costs typically come down in that timeframe."
—Joel Wiens
Regis Corporation
Ensure that you cover all services under the SLA. Often, only outages to the primary service are covered. Also, make sure you cover other services such as service delivery or cessations with specific time frames.
Consider using callback services to reduce international long distance charges.
Consider cutting back leased line capacities.
Consider getting rid of landlines and replacing them with gateway products that run traffic over the WAN, such as Voice over IP (VoIP). Once voice goes over the network, be aware that latency matters more than bandwidth, which means the details of network engineering may change.
Consider funneling international call traffic through services like Google Voice, which can reduce the cost of international calls originating in the United States significantly.

It is complex to match the invoice to contracts and plans. Errors and overcharges are common. Bundled services and taxes are confusing. Invoicing becomes inaccurate as telecommunication vendors merge and consolidate or your company goes through acquisitions and divestures. Many companies find that at least 25 percent of telecommunication invoices contain errors in billing, usage application, overages, tax application, etc., which causes a 25 to 35 percent overpayment for services. As an example, for over two years, one company paid for 56 phone lines set up for a modem bank that they never implemented. The following are typical errors found in land telecommunication bills:

Top Tip: Telecommunication plan matched to needs

"One of the best places to look for cost savings is in the area of telecommunications. We found savings in mobile, voice, and data plans. We made sure the plan matched individual needs."

—Mykolas Rambus
Forbes Media

Paying for lines, circuits, modem lines, pagers, phones, or voice mail services that are unused or disconnected
Changes to plans or lines that are not implemented
Incorrect pricing or plan codes on the account
Missing discounts or credits
Duplicate charges
Inaccurate service charges or charges that do not match the service record
Services were upgraded but older services not cancelled
Paying two carriers for the same line
Paying maintenance contracts no longer in use
Paying sales tax when the company is tax exempt
Paying for optional or invalid taxes, such as the federal excise tax, which was repealed three years ago and is still found on many bills

Telecommunication Costs | VOICE NETWORK

2011-10-22T01:13:00.000-07:00

Telecommunication is one of the largest controllable IT expenses for many companies, and it is a great place to begin your cost reduction efforts. Telecommunication services and contracts include land phone lines, fixed data lines, mobile and cellular communications, services, private branch exchanges (PBXs), call centers, and data network. Telecommunication costs are a low-hanging fruit for cost savings in many organizations as it is often an unmanaged expense. Many times, companies include telecommunication as one of IT's responsibilities often because of smart phones, and IT is not staffed or prepared to manage it. One advantage of telecommunication savings is that many of the cost savings actions have no negative impact on the business.

There are significant differences in pricing of telecommunication plans across carriers. Telecom is a competitive commodity, and vendors are typically willing to negotiate. Switching costs are also minimal, which encourages them to work with you (unlike the Enterprise Resource Planning software market). It is well worth your time to find the best combination of required services and support at the best overall price. There are thousands of telecommunication plans available, and it is an extremely confusing area. Companies save a considerable amount of money by reviewing how their telecom plans are structured overall. Consider switching or consolidating carriers after thoroughly reviewing costs. Do modeling to see if it is better to buy out an old plan or ride it out.

Telecom invoices are very confusing. Many specialized consulting companies are able to conduct an audit on your telecommunication expenses and guarantee significant cost reductions, which makes them well worth the expense to employ. These audit companies will charge a flat rate or charge a percentage of the total money they are able to recover. The auditing company also typically works directly with the telecom provider to get adjustments and corrections. As these companies specialize in telecom invoicing and audits, they are familiar with common mistakes. They know what to look for and know what reductions to expect from carriers. They also stay abreast of new offerings from telecom providers and can bring these offerings to your attention when they can lower your costs.

The following are tactics that companies have used to save costs on both land and cellular telecom:

Make sure you have complete information on your current inventory and contracts. Make sure you are using all the lines for which you are paying.
Centralize telecommunication services and billing through one area of the company to ensure you negotiate the best rates and appropriately monitor charges.
Determine and document your requirements, develop a request for proposal (RFP), and obtain multiple bids before selecting one or multiple vendors. Do not base decisions solely on cost, but consider a vendor's track record, experience, additional services, reputation, ease of support and customer service, contract specifics, and flexibility. Consider reverse auctioning for telecommunication services.
Negotiating telecommunication agreements is complex and time-consuming. Consider obtaining professional assistance from specialized experts. This service is well worth the cost and saves a considerable amount of money. Do not necessarily rely on the telecom rep to get you the best rate as they are motivated by account growth. In fact, if you significantly reduce your rates, your rep may actually try to be reassigned. The companies providing this service have the advantage of knowing the current rates other companies have been able to obtain. They can also structure their service in many ways. They can come in and cover all aspects of negotiating a contract for you or just provide consulting services at key points during the process. There are countless positions in between these two options that can be customized to offer the specific service you need.
Obviously, negotiate costs defined in the contract. Costs are typically dependent on a number of factors and terms that are adjustable. Consider trimming services or features to reduce costs. For example, a key determinant in the cost of the contract is the level of service defined, so do not define service levels beyond the business needs. Other factors that impact cost are size of contract, length of contract, termination clauses, and financing arrangements. In your terms, specify the ability to short pay disputed bills.
Times of economic pressure offer a great opportunity to renegotiate contracts as it is a buyer's market.
Vendors will offer additional discounts to get all your business. Of course, be aware that if you have a single provider your risk increases and leverage decreases. Include clauses of prenegotiated discounts if you should move all your business to a single provider.
Be aware of switching penalties, steep fees, and cancelation clauses before you begin the process. However, do not let cancelation charges discourage you from switching providers or evaluating alternatives. The savings may be more than the switching costs or the new vendor may absorb some or all of the penalties or switching costs.
Make sure you specify contract terms and costs for equipment, design, installation plans, transition services, testing, monitoring, warranties, maintenance, training, payment terms, and conditions.
Automate telecom billing and payment or consider a service provider. Online payments can lower the internal costs of processing, and may result in discounts.
As you add or terminate employees, or close offices, ensure processes are in place that allow you to make appropriate changes to telecom and network charges and invoices.
Consider outsourcing the management of telecom expenses, particularly if you are not doing a good job at it. At a minimum, do frequent audits.
Start negotiations early, for example, six months before your current contract expires. If you are trying to negotiate weeks before your contract expiration, you do not have favorable leverage. If your commitments have been met early, you have considerable leverage.
Always take advantage of rate review opportunities. Do not just renew existing deals because prices continue to drop. Contract extensions are typically more than 10 percent higher than rates you could realize with a competitive RFP process.
Identify noncompetitive pricing opportunities before beginning negotiations. Consider getting third party benchmarks to establish negotiating goals.
Make sure negotiated rates are included and fixed in the contract. Stabilized discounts are not the same as stabilized rates because discount rates in the contract that apply to a service table on the vendor's website can lead to unexpected rate changes during the contract term.
Make sure effective dates of new rates or discounts are clear and specific. Consider asking for a credit to cover the time from when the contract is signed to when new rates and discounts are effective. In exchange for price reductions, many carriers demand two and three year extensions that can destroy your leverage. Make it clear that you will not sign more than the term you had originally intended.
Carefully review and understand commitments. Avoid monthly commitment rates and consider either annual or term commitments. Try to negotiate a term commitment at a low percentage of the contract spend. For example, a $1M term commitment for a three-year contract with an expected expenditure of $2M that will be satisfied after 18 months. This provides additional leverage to negotiate better rates after the 18 month point, or provides a transition period if you decide to move the service to another vendor. If you cannot negotiate a term commitment, settle for an annual commitment, but keep the commitment amount low. Pay attention to minimum service periods for lines, circuits, and ports; they can be worse than a revenue commitment. Understand what counts for the commitment and what is exclude, commitment adjustment clauses, if commitments are gross or net, and commitment carry-forward or carry-back clauses.
Review termination charges because they should not be more than you would have paid and they should not result in a loss of discounts.
Pay attention to taxes and surcharges. Costs can add up and increase over time. Examples of taxes and regulatory charges include the Universal Service Fund, Federal Access Recovery Fee and, Federal Annual Regulatory Fee/Carrier Cost Recovery Charge. These fees and surcharges can be more than 20 percent. Be sure to include these costs when comparing vendors and considering changes, and to include taxes and surcharges when calculating credits.
Make sure the contract includes terms for any major changes such as potential downturns in business, office closings, mergers, acquisitions, or divestitures; these can have considerable contract ramifications. Negotiate an "acquired entities" clause prior to needing it. For example, try to get the right to consolidate acquired agreements and to retain the right to have multiple carriers to maintain leverage. Make sure terms include a reduction in the commitment for divestitures or office closures.
Be aware of additional charges for managing the account, such as network management reports, managing toll free numbers, paper-based bills, updating the asset management database, account management, site surveys, and management of the service level agreement. Negotiate these charges up-front and try to get them at no additional cost. Make sure you specify any services you need in the scope of the agreement or have language for the total charges to be incurred.
Consider the payment due date. Ensure you can pay in the specified time because you may not receive the invoice until 7 to 10 days after the date of the invoice and you could incur late charges. Consider asking for an early payment discount or credit. Specify that you will not be charged with late payment penalties on disputed charges.
If you find an error, go back and get credit for past billings. For disputed amounts, a customer can go back two years and ask for corrections. However, a carrier can make billing adjustments back six to twelve months. If the contract defines time limits regarding how far the vendor and customer can go back on billing errors, consider your experience with the vendor. Most error corrections tend to favor the customer because vendors tend to forget to apply discounts or apply them incorrectly. Therefore, push for a longer timeframe, such as a year. If you have a particular vendor that tends to error by forgetting charges and then hitting you with back billing charges, push for a shorter term, perhaps three to six months.
Closely manage to your contract. After implementing a new contract, carefully review invoices to insure the new discounts are applied correctly. Meet with account teams on a regular basis and have them do the work to demonstrate accuracy. Review service level agreements, track spend compared to commitment, new orders, disconnects, and additional project volumes. Make sure you give notice for extensions and renewals as required in your contract. If you have excess spend over commitments, consider moving services (e.g. conferencing, outbound long distance, ISP ports, remote access) to get additional savings. Obtain reports on lines with zero usage to identify unused lines.
If allowed in the contract, consider doing an audit to recover some money. This will also send the message to your carrier about managing to the contract. Evaluate the various pricing methods for an audit because audit fees can be on a time and materials basis, contingency, contingency with a cap, or a fixed fee.
Educate employees on ways to reduce telecommunication costs. This could include guidance on when to use conference calls versus external conferencing services. Many internal systems are less expensive and can conference up to six parties. Train employees not to use directory assistance from desk phones because it can be costly. Use laptop air-card for Internet connections on trips rather than using expensive hotel or airport connections.

Network Design

2011-10-18T03:43:00.000-07:00

There are many ways to design a network However, some network designs are more cost-effective than other designs. The following are ways that companies can improve the cost effectiveness of their network design based upon their needs:

Dedicated solutions are typically more expensive than shared solutions. A dedicated circuit between two locations will cost more than installing the two locations on MPLS. Assuming one of these locations is your data center, you are now able to use this MPLS connection to support other multiple locations. Once you add a site to the MPLS network, it will have access to all other locations. This solution provides the ability to use more cost-effective bandwidth at the data center (higher bandwidth drives a lower cost per KB), which reduces the amount of equipment required.
Top Tip: Validate assumptions
"We saved money by understanding how the field offices and sales people do their work. Their needs have changed overtime, and we re-validated our original assumptions. This included requirements related to up-time, mobile capacity, response, and redundancy."
—Mykolas Rambus
Forbes Media
The use of MPLS will substantially save costs with the implementation of a disaster recovery site. You are able to connect the disaster recovery site to the MPLS network and immediately have access to all sites.
Use Internet services where applicable. Internet service does not come with a service level agreement (SLA), nor does it require the same time to restore as other services. However, overall Internet services such as DSL and dedicated T1 access have become more reliable. If the particular location does not need the SLA provided by other services, installing an Internet connection saves costs.
Supporting Microsoft services over a WAN requires expensive high levels of bandwidth. Investigate WAN optimization products that provide Local Area Network (LAN)-like response times over a WAN without the need to increase bandwidth.
Validate assumptions about how the business functions as the business needs might have changed over time and you may need to make network design changes. For example, one company looked at how sales people in the field completed work and was able to reduce costs by making changes to the network design. These changes more closely match how work was being done—including at home, at Starbucks, and at the office. Up-times and redundancy needs in field offices were also different from when they originally designed the network.
In times of desperation, approach the business with the costs of backup services to primary WAN connections. Include statistics of outage frequencies and durations. The business areas may be willing to run the risk of an outage given the costs to provide the backup during tough times.
Top Tip: Design the network for growth
"We redesigned the network and changed the way we think to reduce overall costs. Rather than reactively adding bandwith on a project-by-project basis when we hit a constraint, we built the global network for growth. This is much more cost effective and reduces costs by the way we acquire and procure bandwith."
—Roger Champagne
Laitram
Stay abreast of new technologies and consider using them to lower telecom wireless and data services costs. For example, MPLS can carry data and voice traffic at lower costs, or use session initiation protocol (SIP) to consolidate local voice, long distance, and data services.
Review chatty applications, the possibility of content or data distribution, and application re-design improvements to reduce network bandwidth requirements.
Investigate wide area Ethernet access as an alternative to DS3s and T1s.

Internet Service Providers & Bandwith

2011-10-15T08:40:00.000-07:00

Internet Service Providers

There have been many advances in internet service provider (ISP) services over the last several years in terms of bandwidth, availability, and reliability. It is true that they do not offer a full service level agreement if you are crossing multiple Internet providers between a remote site and your data center, but it has become reliable enough to use in many situations.

From the chart you developed to define the prioritization of infrastructure components, identify sites that do not perform critical business functions and investigate moving these locations to an ISP connection. The costs will decrease and usually bandwidth will increase to provide quicker response times to the business at this location. For locations with two wide area network (WAN) connections installed in order to provide a more reliable service, consider moving one of these locations to an ISP connection. This will lower the overall cost for supporting each location. Also, set up routing so the business traffic will route over the existing WAN circuit and utility traffic will route over the ISP connection. Then you can route the business traffic over the ISP connection in the event of a failure of the WAN connection. However, since utility traffic is nonessential, you do not need to route it over the WAN connection in the event of a failure with the ISP connection. You will save the expense of upgrading the WAN connection to support all the utility traffic in the event of an ISP connection failure. Examples of utility traffic are software distribution, antivirus updates, and FTPs. You are also able to route Internet bound web traffic over the ISP connection. Routing this traffic over the ISP connection relieves congestion on the primary WAN link and provides better service for business traffic. Since the ISP connection provides higher bandwidth for lower costs, using this connection to support video applications is a more cost-effective solution than using the WAN service.

Bandwith

Users never have enough bandwidth. Complaints of slow response time will come in on a regular basis unless you have oversupplied locations with bandwidth, which is not advisable if you are trying to control costs. Ensure that locations are actually using the bandwidth provided for business traffic before making an upgrade. Bring in tools to provide the ability to analyze traffic at a location. Determine if users at this location are performing nonbusiness bandwidth-consuming functions, such as downloading MP3 songs or listening to streaming audio. If this is the case, have this traffic stopped by talking to management at the location and identifying the staff performing these functions. Taking the time to do this will help foster an environment where employees use computer resources only for business functions.

You can implement many products and services to stop employees from using the Internet for certain nonbusiness traffic. This is a preferable solution as it stops the downloading of MP3 songs, listening to streaming audio, etc. It saves personnel time in tracking down violators and prevents slower response times at a business site. However, this is not a cheap option. If funds are limited, spend the money on analysis tools because you need to know traffic patterns either way.

As a rule, you want to provide enough bandwidth capacity to support business requirements at a location. There may be sites or vendor price points that make oversubscription of bandwidth a good selection. If there are business-critical sites for your organization, then managing bandwidth too closely may cause a significant impact to the business that is not worth the savings. Spending more at these locations to provide extra capacity is worth the cost. The other decision in bandwidth management is looking at vendors' price points. Some WAN vendors have started providing full T1 Multiprotocol Label Switching (MPLS) connections at a lower price point than higher-speed fractional T1 connections.

PREPARING FOR INFRASTRUCTURE REDUCTIONS

2011-10-12T05:56:00.000-07:00

Obtain Inventory Information

A very important and often overlooked step (Step 2) was to obtain the information and inventory.

This step is critical when beginning to look for cost reductions in the technical infrastructure area. Without an accurate inventory, you will make cost savings decisions on hunches or perceptions of what is in place and how it contributes to costs. It is important to know what your services cost. You also must understand what infrastructure components are required to support typical applications and what components you share across services. As you will see later in this chapter, it will also be critical to have an accurate inventory to ensure vendors are billing correctly for services.

Some companies may have a fully populated Information Technology Infrastructure Library (ITIL)-based Configuration Management Data Base (CMDB) or other type of database in place with all relationships among the IT items established. If not, do not attempt to create such a CMDB as an initial step like this is a large and complex effort. Initially concentrate on establishing enough information in a database or spreadsheet to manage resources and audit vendors' invoices. Then, implement processes to ensure the information stays up to date as you make changes to the infrastructure. Later, you can develop a CMDB or similar type database.

Develop Prioritization Scheme

Step 3 of the cost reduction to analyze the costs. Develop a prioritization scheme for the IT infrastructure. A prioritization scheme helps identify where you should look for infrastructure savings and where you want to avoid cutting back. Tier the infrastructure components to indicate the priority to the corporation. Figure 1 provides an example of an infrastructure prioritization framework. The exact prioritization scheme would vary in the number of categories and tiers for each company. Tier 1 applications would be areas in which the business stops if they become unavailable. Examples of infrastructure areas that would merit a tier one rating are components that support applications critical to the business, such as the search engine would be for Google or infrastructure components for airport passenger check-in programs would be for an airline. The bottom tier would be equipment that supports systems that you consider noncritical to business operations. Examples of noncritical systems would be an accounts payable system, help desk software, or a sales projection system. What may be noncritical for one company may be critical for another. While these are important systems for the organization, the business will continue to function while these systems are down. The importance of each tier and column vary by company, as company systems and locations will vary.

	Entire company	Major site	Minor site
Tier 1 applications	Data center, key applications	….	Customer facing location
Tier 2 applications	….	….	….
Tier 3 applications	….	….	….
Tier 4 applications	Supply ordering	….	Small remote site

Figure 1: Infrastructure prioritization framework

Making infrastructure changes to reduce costs is risky. One approach that lowers risk, if you have the time, is to start cost-cutting activities on lower priority infrastructure areas. You will then gain experience in these areas with minimum or no impact to critical business areas first. As you gain experience, and staff skills are developed, you and upper management will have the confidence to attack cost savings in more critical infrastructure components.

CUSTOM APPLICATION DEVELOPMENT

2011-10-08T00:33:00.000-07:00

Prototyping and Development Tools

Continually evaluate your set of development tools to ensure you have a complete up-to-date tool kit for application development that meets your needs. Having the right stack of tools significantly decreases the cost and time of development and support. This includes not only the development language but also other areas such as proper prototyping, source code management, debugging, testing, stress testing, and documentation tools. One company looked at their development tool stack in the areas of presentation layer, application server, web server, and rules engine. Evaluate and select your development tool set just as you would other software by identifying the requirements, establishing the selection criteria, and reviewing the options.

Agile Development

As compared to traditional waterfall systems development, agile software development methodologies gets you faster results with less cost and effort. There are many variations of agile development methodologies, such as Extreme Programming (XP), Scrum, Crystal Clear, Feature-Driven Development, and Lean Software Development. Concepts used in agile development vary, but usually include teamwork, regular communication, implementation in small increments, short time frames, and iterations. This type of development will reduce risks and costs as you are able to find errors earlier in the process and complete changes quicker.

Top Tip: Agile development methodology

"We changed from a traditional waterfall development methodology to an agile methodology using SCRUM. In doing so, we were able to take out a layer of management and significantly reduce costs, while also increasing value through better execution. This realizes the benefits of a small IT department in a large shop."

—Mike Degeneffe
Ceridian

Open Source

Open source software has had a significant impact on the software industry. Open source is not free like many think. Open source vendors charge for maintenance and support, but it is significantly less expensive than standard software. Many development projects mix open source with internal code to shorten development time and reduce costs. Open source software is typically modular so components are easily integrated, built for reuse in multiple applications, usually standards-based with efficient use of code, and transparent with its own source code. Open source avoids wasting time reinventing the wheel by using hundreds of thousands of components available for reuse on the Internet. However, open source introduces challenges to managing, such as license obligations, finding the best software for your needs, security vulnerabilities, scalability, maintenance, and version proliferation. Keep in mind that you do not realize cost savings with open source until you are able to replace or forgo other more expensive options as many companies are using open source in addition to other software. Also, do not forget to consider if you must increase resources to support open source software.

Service Oriented Architecture

Service Oriented Architecture (SOA) is an architectural paradigm that allows you to build applications with reusable components, which is similar to building blocks.

It is highly interoperable, loosely coupled, and encapsulated units of work that link or combine resources on demand. It provides a flexible application architecture that is easier, faster, and less expensive to change. Like any new approach, it is a major change, a challenge to get started, and is not a fix-all. However, evaluate using this architecture style if you have significant areas of custom development because the total cost of ownership can be less.

Mixed Development

Many companies are finding significant cost reduction by mixing development as necessary and using pieces of open source, third-party code, SOA components, outsource provided, and custom code. For example, when developing applications for online ordering, companies will frequently use a service for all the handling of credit card information. Payment Card Industry compliance requirements are very expensive if a company chooses to process and store credit card information internally rather than using an outsource provider. Another example is a company that liked salesforce.com but found it was too expensive for its budget and needs. They chose to buy the force.com development tool at a fraction of the cost of sales-force.com to develop the pieces of the system they needed.

Revenue Generation

Look at getting royalties from your custom software developments. If you have written custom add-ons to software packages, consider selling the software back to the vendor or other companies. Consider the possibility that IT can generate revenue. The one caution is that you do not want your IT department to become a software vendor that distracts from providing the business with a unique competitive advantage. This also diminishes your competitive advantage if your competitors are able to purchase the same functionality. One example is a company that wrote an extensive product configurator to handle a complex product structure. The vendor was interested in the enhancement as part of its standard product as other customers had requested the capability. The company was able to sell it back to the vendor in exchange for additional software licenses and modules. The enhancement became part of the vendor's standard offering that also helped the company maintain and enhance the modification without the high internal cost of custom software.

Focus on Business Process Improvements | SOFTWARE IMPLEMENTATION

2011-10-04T08:32:00.000-07:00

We have all heard the horror stories where a company has spent $50 million on implementing new software and only realized $10 million in benefits. As stated previously, most of the implementation costs are typically in the deployment, not the technology. Similarly, you realize 75 percent of the benefits in the deployment, not the technology as shown in Figure 1. In implementing new software, many companies focus on the software and hardware when focus should be on the business process improvement and redesign, as that is where you realize the true benefits. Companies that have focused on the process and people benefits have realized exponential payback from software implementations. For example, when implementing new software, one company initiated a vendor certification program whereby vendors who achieve exceptional levels of reliability, timeliness, completeness, and quality begin managing the product's inventory levels at the distribution center and the stores. Eventually the inventory is all vendor consigned and paid without a vendor invoice based on the store sell-through reports, which results in tremendous cost savings for the business.

Figure 1: Sample implementation benefits

The following are examples of ways that companies have redesigned business processes to realize true cost savings:

Faster cycle times
Fewer handoffs
Fewer steps in the process
Fewer decisions
Less duplication
Minimize delays
Minimize discrepancies
Allow fewer exceptions
Automate manual forms and activities
Automate workflows by using conditional rules to drive different processes
Capture data at the source
Take advantage of real-time processing and information
Centralize control, effort, responsibilities for speed, and efficiency

When you are finished implementing new software, you are never really done, as the business process improvement must continue. Always raise the bar for cost improvements.

Minimize Customizations | SOFTWARE IMPLEMENTATION

2011-09-15T03:13:00.000-07:00

As any CIO knows all too well, companies should minimize customizations to any vendor package software not supported by the vendor, but the real question is how to do that. The total cost of ownership of custom modifications is significant over the life of the software package as you need to remake and test modifications on all future software releases. A software vendor package riddled with customization is a challenge to support and keep operational. Every customization translates to real on-going costs to the organization.

Unfortunately for many companies, software customizations are like eating just one potato chip; it is difficult to stop once you start. The following are tips on how other organizations have gotten out of the expensive customized culture and reduced the appetite for customizations:

Use the software configuration options rather than customizing software vendors have designed software for tailoring the product as a wide range of industries typically use the software. Learn the various ways you are able to configure and change the software behavior with tables, workflow, and user-defined fields, etc. These changes oftentimes migrate from release to release so they are not as expensive to maintain over the life of the software. This option requires the least confrontation with business partners and eliminates most of the need for true customization.
Use trained and qualified consultants that are knowledgeable in the software and in industry best practice business processes. Having an extremely experienced individual guide your use and implementation of the software is well worth the expense over the life of the software as you will be able to take advantage of more efficient business processes. Ensure you have a software guru who knows the application extremely well and knows how to make it jump through hoops by using existing functionality, features, and configuration techniques.
Use bolt-ons rather than customizing software if configuration tools will not do the job. A bolt-on is a separate chunk of code that typically moves forward to new releases relatively easy for upgrades, rather than doing pure code changes that can be difficult to reapply to new releases.
Implement a strong steering committee with the top-level executives to screen any submitted customization. Make the business user requesting the change prove they cannot do business with the standard business process assumed in the software. One manufacturing company had a culture of customizing every aspect of the software because they felt they had a unique business process. After escalating IT maintenance and support costs, they decided to implement new software as delivered without customization. They were able to transform from a culture of modifications by using a strong steering committee that included the president of the organization to approve any potential customization. They were able to implement the new software package without any customizations, which was an incredible surprise to the vendor. Of course, the vendor wanted to publicize the implementation as it was a tremendous success and transformation testament.
Communicate the true cost of ownership of maintaining customizations over the life of the software. Over customizing is typically a business issue, not an IT issue. IT needs support from the top of the business to get out of the customization habit. This is where an IT expense chargeback approach is valuable because it is one thing to make a department aware of the cost and quite another to make them pay for it.
Track and report the cost of your custom applications or heavily customized packages contrasted to the cost of vanilla vendor packages. Be sure to include all support resources, upgrade costs, and maintenance costs.
Document, track, and measure the number of software modifications. Customizations just happen and often seep into the software without visibility or management. Report the number of modifications as a key metric on the IT balanced scorecard. Reduce the amount over time with planned actions. Obtain commitment from the business that it is a key metric to manage and drive down.
Train the business users in the software; train them well; and train them often. Once business users understand fully the software and industry best practices, the need for customization often diminishes. Employees that have been with the company for many years often have difficulty seeing how to do business differently. Get them exposure to industry associations, industry best practices, and other companies.
Delay customizations. Wait to customize packaged software until after you go live. Customizations often delay implementation resulting in a delay of benefits and missed opportunity costs. Typically, after a company implemented and became experienced with a software package, they would customize the software differently or not at all. Delaying customization eliminates costly rework and can entirely eliminate the need for the customization. Start with simple things. Reduce the number of exceptions or process deviations. You are always able to add complexity into the process, but it is far more difficult to take it out.

SOFTWARE IMPLEMENTATION

2011-09-12T01:11:00.000-07:00

Readiness to Implement

Before launching into any software implementation, make sure the business is ready to implement the change. Just because IT is ready (and a change is necessary) does not mean the organization is ready and it is the right thing to do. For example, one company had a culture of customizing all software as it was far easier than forcing business changes. In fact, IT did pretty much anything and everything that the business requested. The business was not accustomed to making process changes and they did not have improvement teams, did not understand the concept of business process improvement, nor did they understand the costs of customization. The company also did not have exposure to industry best practices. If the company proceeded with a new implementation, it would have recreated the customized spaghetti applications in new and more expensive software. Until the organization matured with business process improvement, it was not wise to implement new software. An independent and unbiased assessment of your organization helps to determine if you are truly ready for a change. Just make sure the assessor does not have a stake in your implementation (e.g., a consulting organization specializing in implementing the software).

Accelerators

Evaluate using vendor specific tools to accelerate the implementation (may be called fast-path implementation, implementation accelerators, industry versions, or rapid implementation methodology). Accelerators can take different forms, such as previously configured software packages or process flow and software configuration templates for a particular industry. You typically obtain the accelerators through the software vendor, an implementation partner, or a Value Added Reseller (VAR). Sometimes these accelerators are free while others are available for purchase. Make sure the accelerators are built on the current release, or the software release you want to implement. Often, they are a release behind the vendor for obvious reasons. If the accelerator is a good fit, it is a great deal and significantly reduces your implementation time and costs. However, if you need to change the templates, it is challenging and usually not worth the additional cost.

Time is Money

There is such a thing as an ideal implementation pace. Too fast and you may make mistakes that require two to three times the effort and costs to clean-up later. If the implementation is too slow, you waste time rethinking previous decisions or waiting for others to complete interdependent tasks. You may also have missed business opportunity costs of a delayed implementation. You need to pace the implementation aggressively, but realistically.

APPLICATION MAINTENANCE AND SUPPORT AGREEMENTS

2011-09-08T08:08:00.000-07:00

Maintenance is comprised of regular upgrades and fixes to the software while support is the ability to get help for questions or problems. On-going maintenance and support contracts for applications cost an organization a considerable amount of money year after year. Depending on your needs and the vendor, you buy maintenance and support separately or bundled together. Typically, software maintenance costs range 11 to 15 percent of the purchase price, and support cost is approximately 7 percent of the purchase price on an annual basis for a total of 18 to 22 percent per year with potential annual increases. Therefore, you are essentially paying the entire cost of the software every four to five years. For obvious reasons, this on-going revenue stream is very important to software vendors. This section outlines specific tactics for reducing the costs of vendor maintenance and support.

Annual Cost

It is well worth your time and effort to try to negotiate the annual maintenance and support costs as much as you are able. In theory, these costs are even more important than the software license fees, and they often go by without even a discussion or negotiation. Maintenance fees are based on your negotiated purchase price, not the list price of the software. Often, you will be able to reduce a 22 or 25 percent total maintenance and support fee down to 18 percent per year. Some vendors are more likely to negotiate than others but the major ERP vendors (Oracle, SAP, and Microsoft) often do not budge at all on maintenance costs.

Top Tip: Consider extending term of contract

"To get good pricing in vendor negotiations, consider extending the term of the deal from a 1-year to 3-year contract for possible pricing reductions."

—Randy Witt
Restaurant Technologies

For some vendors, maintenance revenue accounts for 50 percent of total revenue so this is a very important revenue stream from the vendor's perspective. Work with user groups to resist maintenance fee increases. Get guarantees from the vendor for the percent reinvested in product support and enhancements in future releases.

Negotiate the first year maintenance as part of the purchase agreement. Include a ramp-up option if you believe full implementation will take a significant amount of time. Only pay the percent on licenses you purchased or right-sized, not future quantities or amounts. You are also able to negotiate quarterly payments that more closely relate to how you consume the value rather than prepaid annual fees. This also provides more options and flexibility on when to stop maintenance costs and when they hit your budget. If it is possible, time the maintenance and support costs to be due at or near the go-live date, not prior to the implementation date as you typically have partners or qualified consultants involved through the implementation. However, this is only possible with a privately held vendor as public companies are subject to revenue recognition rules so it may take the form of an additional software discount for the amount waived. Other licenses purchased after the initial implementation would be subject to immediate maintenance and support fees prorated to the next quarter.

Know how you are using the software products and negotiate maintenance changes accordingly. As mentioned, know the type of users that you have and separate employees into groups so that they have only the software they are using rather than paying the same fee for all employees. Reduce the number of seats for which you pay maintenance to the precise number needed to receive value.

Beware of the statement that software maintenance can increase up to a set percent for a maximum per year. Make sure you have terms that limit the rate of maintenance fee increases each year, as well as provisions to stop paying maintenance and support fees without any penalty or fees. Do not link license transactions to maintenance transactions. You are often able to negotiate lower rates for longer-term contracts. Specify that they must publish any changes in rates 120 days prior to the contract change date.

If you consider dropping maintenance, get an agreement on the price at which you can subscribe later if you are able. At times, particularly in the first 12 months of a warranty period, you are able to negotiate so that the vendor supplies fixes at no charge even if you are off maintenance. However, after a certain period, the vendor integrates fixes in new releases rather than old software so this will not be beneficial over the long term. Verify that your software license is perpetual and does not terminate if maintenance is not renewed.

Consider renegotiating maintenance fees. Particularly in difficult economic times, application vendors rely on the steady stream of maintenance revenue. When faced with the prospect of losing a maintenance and support customer, a vendor might consider renegotiating the agreement altogether. Even the larger, more inflexible application vendors sometimes circumvent their own policies by having a customer terminate and then again license the software at a much lower price to reduce the on-going annual maintenance fees.

Support Options

One option for the support contract is to look at how much you have used support in the past and the value it has provided the organization. It is frightening to drop support as the vendor is your lifeline in the event of application problems. However, if the application has been fairly stable in the past, your business needs are relatively stable, and you have had the software for a number of years, consider dropping the support agreement and switching to a pay per hour or pay per incident model. This could result in significant immediate savings. However, it might be useful to negotiate and have in the contract an established price should you decide to go back on support in the future, although many vendors are reluctant to do this. You should also investigate the possibility of receiving support from a third party provider.

Top Tip: Negotiate support and maintenance contracts

"The first place to save is in maintenance contracts. I tell the vendors that I need 20% or they will lose the business. Negotiate flat increases if you re-up. If you don't ask, you don't get it. There are alternatives, and in some cases you may be OK dropping maintenance and going with time and materials support. We saved 60% by going with a third-party alternative for mainframe support and have a higher service level."

—Dave Brady
Starkey Laboratories

Support Service Level

Be sure to negotiate financial performance penalties if the vendor does not meet agreed upon and reasonable service levels. Specify standards for response and resolution of different categories of issues in a service level agreement. The tactics for support contracts apply not only to the initial support agreement purchase, but if you track support activity, you are able to leverage the information as a way to obtain relief on costs if the quality of support provided has been an issue.

In the strategy on reducing service levels, match the service level to the business needs and do not overbuy. Vendors typically have different levels of service offering different responses, escalation, access to resources, hours of support, etc. Work with the business to identify the level that meets the business needs given the various costs. Consider downgrading the support level. Many vendors offer multiple levels of support from which to choose. Re-evaluate whether you need premium (i.e., 24/7/365) support based on how stable the application runs and the consequences of unplanned downtime. Dropping to a less expensive support plan can save a company up to 20 percent of the annual expense.

Cost-Justify Upgrades

Do not blindly upgrade just because the software vendor is your strategic partner. Any application software upgrade is a major expense and business disruption. Implementing a new release takes 10 to 50 percent of the original implementation effort, depending upon the degree of change as well as the number of interfaces and customizations that you need to redo and test. Evaluate and justify any upgrade based on the individual costs and benefits just like any other project.

Continue to stay abreast of vendor changes in direction, and re-evaluate your upgrade options every three to five years. When considering upgrades, plan the timing after considering your budget and project bandwidth, the vendor's product strategy plans, the vendors installed base, and your specific need for the business functionality provided in new release. Try to steer away from orphaned (through acquisition or vendor strategy direction) or old products, or releases that are likely to receive smaller investments in the future for new features and releases.

Although you should cost-justify upgrades and occasionally validate the direction to stay with a vendor, it does not mean that you should not implement upgrades. Rather, make sure you understand and communicate the business value of each upgrade. If you go beyond skipping every other upgrade, you are likely to fall victim to the pay-it-now or pay-it-and-a-lot-more-later syndrome because the bigger the gap between the production version and the upgrade version, the more difficult the upgrade project. In addition, staying on an old version puts a company at risk due to a lack of support and technical expertise from the vendor.

PURCHASING APPLICATION SOFTWARE LICENSES

2011-09-04T06:46:00.000-07:00

Initial software license costs are a huge expense for a company. Many companies have paid more than they should for software license costs due to poor negotiating, lack of awareness, incorrect sizing, or poor contract management. When purchasing software, companies are in the driver's seat, yet they often sign a vendor's standard contract that leaves them with no leverage or control. This section outlines specific tactics that could save you a considerable amount of money on initial and future software costs.

Negotiation Strategy

There is much at stake with the negotiation of application licenses. Be sure you begin the negotiation process by developing a clear negotiation strategy. Identify your targets. For example, one company starts vendor discussions by saying they want three-thirds off. Although vendors laugh at this as a joke, it does set the tone for the negotiations. Prioritize your needs. Never concede on a term or condition without trading for something else. Also, document the negotiation process and the results of discussions as it is easy to forget who agreed to what

Start Negotiations Early

Do not wait until you have selected a finalist to start negotiating the price and terms. After eliminating competitors, the only valid option left is to do nothing. Keeping competing products in the evaluation strengthens your negotiation position.

Discounts

Do not be afraid to negotiate aggressively on software prices. As any seasoned CIO realizes, initially quoted prices are not the bottom price. Actual prices paid for software licenses for any given product vary greatly. In competitive software evaluations, vendors have lowered prices 40 to 75 percent, and companies have even received discounts up to 90 percent off list. Of course, each type of software has a different discount structure depending on its marketplace and competitive situation at the time. If you lower your license fee, your lifetime percentage maintenance fees are lower.

Top Tip: Hire experienced help for negotiating

"The best advice for renegotiating with vendors is to not do it yourself. Hire a company that does contract negotiation as a core competency. We engaged a company that gets a portion of the savings so there is no up-front investment."

—VP IT
Energy Company

Top Tip: Manage the contracts

"We manage the contracts rather than the contracts managing us. We try not to sign vendor's contracts and terms, but use our own. We try to have contracts that scale for good times and bad."

—Mark Brewer
Seagate

Use negotiating advantages such as the timing of the vendor's quarter or year-end, the desire for competitive positioning, publicity, and the desire for references in an industry or geography. For example, Oracle's fiscal year ends May 31 so buyers have the highest advantage and best prices as they approach the fourth quarter of Oracle's fiscal year. Some vendor's revenue cycle peaks in the fourth quarter due to increased year-end aggressiveness and the push to meet sales quotas.

Be sure to ask for the published list of prices rather than taking a vendor's word on the applied discounts. The vendor's desire for your business makes a huge difference. For example, you have minimal leverage with Microsoft when it comes to MS Office pricing and terms, but you have more leverage when it comes to your choice of all the other software categories in which it has to compete heavily.

In addition to negotiating price reductions, consider discounts for business continuity licenses, incentives for new licenses, free or discounted training, free or discounted consulting, and vendor-led financing. Consider negotiating add-on services when discussing the initial software contract as you have more leverage. For example, if you need the vendor to make critical custom software modifications or you want a support agreement, you will have much more bargaining power if you negotiate when the software licenses are negotiated.

It is also well worth the money to employ a consultant specializing in contract negotiations as they are aware of current vendor negotiating practices and prices that the vendor has agreed to with other customers. It can save the cost of services plus a tremendous amount of money through the life of the software.

License Timing

Purchase software that aligns with your actual needs relative to timing. Do not pay for software years before you will use the software in production. Consider your implementation phases and timing. Until you are using the software for production transactions, the software is not of value to your company.

Although it is not always possible, have the agreed-upon price written in the contract for the scheduled implementation time frame. For example, one company purchased complete ERP licenses and began the implementation project; however, it took two years to implement the software. They paid for two years for users who did not use the software when they could have saved a tremendous amount of money by purchasing only the necessary licenses when they needed them and the remainder of licenses coordinated at the time of implementation.

Top Tip: Tiered pricing for additional users

"When negotiating with a vendor, you will typically get better rates at the time of initial purchase. Look at tiered pricing for additional users, or enterprise licenses, so you can negotiate up-front rather than later."

—Haseen Alam
Johnson Brothers Liquor Company

Be aware that software is nonrefundable and vendors rarely give refunds for a change in your plans unless you add this provision to the contract. If you delay or cancel the project for any reason, you do not want the vendors holding your cash. As is common with any transaction, when a vendor has the cash, you lose some of your control to get attention and to get problems fixed. Time it to pay for initial software licenses about a month or so before the go-live date with acceptance language that gives you control over whether the software meets the specifications. If you are not able to proceed with the go-live, you do not want the vendor holding license fee money for software that you cannot implement. Be aware that many vendors require a good faith advance payment of 5 to 10 percent, which is normal, and reasonable.

Software Footprint

Only buy the software footprint, modules, business processes, and business functionality that you need at the time. The more precise and accurate you define the software footprint to your needs, the less your costs will be. If you will likely add other modules in the future, build that into the negotiated price and agreement, but do not pay for it until you need it. For example, if you plan to implement Customer Relationship Management (CRM) after you implement ERP, you should negotiate the price of CRM in the agreement to save a significant amount of money rather than negotiating it in the future. However, make sure in the terms that you cover an exchange clause. If down the road you decide you need a different module than CRM, such as Demand Planning, you will be able to exchange it. Not every vendor will consider an exchange clause, but it has saved many companies a significant amount of money. Be aware that vendors often make significant profit by fragmenting or starting small and up selling later, so be sure to have the negotiated future price in the contract.

Top Tip: Right-size cost of annual maintenance

"Validate and right-size the cost of annual maintenance against the needs of the company. We found we were paying for modules never implemented. Consider response time to make sure you are not paying for a greater SLA than you need."

—Trent Buness
3 Wire

Know the precise modules of functionality the vendor includes in its core software. If you do not need some functionality, try to negotiate some modules out, or if you need to pay for it anyway, consider using the functionality in the future. Be aware of middleware or structural components that you need to identify or purchase as well.

Enterprise applications morph over time. New functionality that you need is often bundled or repackaged with modules you already own, but access is limited unless you upgrade to the next version. The result is that you end up repurchasing functionality, unless you take the time to understand how the vendor is repackaging or rebranding its software. Consider breaking apart an offering or negotiating concessions for functionality that you already own. For example, a leading vendor offers over 160 modules to its enterprise software application that are bundled into suites of functionality. One company bought a Work In Process (WIP) module over ten years ago and later needed to increase its capability to manage capacity. Now the vendor packages the capacity module together with other applications in a new suite called Supply Chain. The vendor was happy to offer the new suite and bragged about its capability. However, after drilling down into the functionality within the new Supply Chain module, the company discovered that this new suite actually included WIP. After lengthy discussions with the vendor, the company was able to negotiate out the expenses for this duplicate offering. Understanding the vendors repackaging and rebranding of software functionality was important to saving considerable costs.

User Count

Ensure you have an accurate user count for software licenses. Right size your software purchase for your exact needs. Only purchase software licenses for the number of users you have today. Although most vendors have implemented a named user model in which you provide the number of distinct users, some software vendors or old agreements use the concurrent user license model in which you have a set number of people that are able to access the software at any time. Whether using the named or concurrent model, if you need additional licenses in the future due to projected growth or additional implementations, negotiate that in the contract as it could save a considerable amount of money rather than negotiating in the future. You may be able to negotiate a fixed per-user cost on licenses for some established period like two to three years from the initial implementation go-live date. At a minimum, lock licensing fees for the duration of the implementation project in case additions are necessary. As you would expect, the costs-per-user goes down as the number of users goes up.

The vendor often claims that you have to buy licenses in blocks of five users, but it is preferable to have more control, and the ability to purchase in units of one if necessary. After the fixed cost time frame, the vendor charges what they see fit and switching implemented software is difficult. The vendor has you as a captive audience.

One company purchased 300 licenses of ERP as the company was on an aggressive growth curve. The company did not grow as anticipated, and they paid for excess software license capacity for years rather than right sizing the contract for the right number of users. Be sure you have a trade-in clause and price in the event you buy too many licenses. Although the vendor is often reluctant to give money for trade-in purposes, perhaps they would be receptive to a trade-in for users in other software modules. You have significantly more leverage for adding creative options before the contract is signed.

Be aware that the software vendor is often not supportive of the concept to buy only the amount of licenses you need and when you need it. This is because incentives for the vendor are often based on large up-front payments at the signing of a purchase contract, or vendors may require a certain volume to give you the discounts they have stated. The vendor is often pressured by competitive positioning at critical quarter or year-ends, and they are not able to recognize the revenue on future negotiated licenses. Although the vendors initially resist this approach, it is possible to get agreement, and it saves you a significant amount of money.

Software Compliance

Although you want to minimize costs, always make sure you are compliant relative to any software licenses and user count. Particularly in an economic downturn, some vendors actually increase license audits. Although you might want to save a little in license costs, penalties for insufficient licensing are huge and quickly wipe out any savings you thought you were getting by cutting it short. Fines for software piracy and insufficient licensing can cost up to $250,000 and/or up to five years in jail in addition to bad publicity for the company. Track and manage usage closely to avoid these fines.

Many software distribution tools can provide software usage information. When considering various contract options, always include the cost of administrative overhead and software to comply with the terms of the contract. If there is a unit cost, consider what it is going to cost in labor to track the unit utilization.

User Type and Mix

Ensure the specific type and mix of users on licenses. Many software vendors calculate license fees based upon the type of estimated users. The way that you define users for your organization makes a tremendous difference in your total software license cost. For example, some vendors have different prices for:

A full user. A full user is someone who accesses main functions within the software footprint and has defined access tied to job duties.
Informational user. An informational user is a user participating in workflow tasks and obtains metrics, information, and reports from the systems.
Shop floor transactional user. This type of user does transactions often through bar coding of basic data entry information.
Conditional user. These are special users for a particular project.
Development user. This is someone in IT that configures the software and manages the database or programs.
Nonemployee user. This could be a partner, supplier, customer, or web user access. Do not forget to consider web users as that drives up costs and vendors classify them differently.
Interfacing user. An interfacing user accesses the software by using a system that you may interface to the software.

Vendors have the ability to monitor the usage pattern to determine when a user grows from an informational user to a full user. Monitoring and reporting the type of users also helps you recognize the value of the application as it grows over time. If your software agreement only specifies full user licenses, negotiate partial licenses as it substantially reduces costs. Again, if your needs or mix changes in the future relative to type of users, build that into the contract with an agreed-upon price.

Enterprise Licenses

Enterprise agreements are more common for databases and middleware, but they also relate to applications. One example is a large manufacturer that saved a significant amount of software license costs by purchasing a large software footprint. They were concerned that they would need additional modules in the future so they negotiated an enterprise license suite that entitled them to all the software vendors' modules for one price. Vendors typically estimate usage for about three to four years to determine the appropriate price. At the end of the term, many vendors do not recalculate a support number. Typically, customers choose to end the agreement, receive perpetual licenses, and true up.

Enterprise licenses are a good tactic to review as long as you do not overbuy significantly. Be aware of any metrics that the vendor may link to enterprise licenses costs, such as annual revenue. Consider enterprise licenses if you:

Do not want to track usage
Do not want to buy modules piecemeal
Do not want to constantly negotiate contracts with the vendor
Anticipate greater usage in the future
Want to lock in discounts for expected growth
Will likely want to expand the footprint to additional modules in the future
Are committed to the vendor for a large portion of your portfolio and are not afraid of locking in with a particular vendor
Have a high spend amount (e.g., $3 million)

Application and Process Design

Keep in mind that many vendors define a user as anyone using or accessing the software. Some vendors even require a user license for any interfaced application, in which case you need to document any known interfaces in the contract. However, if your vendor does not count interfacing users or interfacing systems but only direct users of the system, consider using portals or front-end applications to reduce direct users and your license costs. You need to know and understand your software license and terms and operate accordingly. For example, if you base your license on number and type of users, and you are able to decrease the number or type of full users by having infrequent queries going to a data warehouse or front-end system, you can reduce your vendor license costs. If the vendor charges you for interfacing users or applications, carefully consider business process design, roles, and responsibilities to minimize the number of individuals needing the information or application.

If you need to interface the information to subsidiaries or a parent company, ensure they have the right to use the software. Many times, vendors consider access by other organizations a totally new and expensive contract.

Processors, Cores, or Virtual Machines

Be sure to look at your hardware configuration relative to software licenses and consider changes to lower license costs. The price for some software is based on the number of CPU processors or number of core processors. If so, look at reconfiguring your hardware to have a lower processor count. In these cases, often you need to pay for licenses for a warm disaster recovery site as well as cold sites. Make sure you also understand the impact of virtualization on your application licenses. For example, one major vendor requires that if you use a software product in one VMware virtual machine, you must pay license fees as if you had deployed it to all of the cores in that server. The vendor will base your license fee on the number of CPUs in the box and not on the number of virtual machines that you have deployed.

Number of Instances

Be aware of how many copies or instances of the software you need as it costs you a considerable amount of money if you need to buy it in the future. Again, only buy the number you need currently, with clauses for future purchase, if needed. For example, typically you require an instance for testing, development, training, reporting, disaster recovery, and perhaps additional instances for other countries or divisions. Keep in mind that some vendors have flexibility in licenses for testing environments as the environment does not support any operational processes.

Beta Software

If the software product or release is new to market and has a small number of users, negotiate additional discounts to offset your risks. Implementing unproven software is very painful and costs you a tremendous amount of money working with the vendor to solve new software bugs and issues. If you are a beta site, be aware of it, be able to absorb the risk, and possibly be financially remunerated for it in some way. Be sure to include warranty and delivery specifications in the contract terms and conditions. Identify all of your projected costs to determine them for the entire effort.

Top Tip: New product

"At one company, we had a shortage of cash. We worked with a vendor and became a test case for one of their new products. We went to forums and told their story. We were able to secure a new solution at a very low cost. Both of us benefited."

—Randy Witt
Restaurant Technologies

Acquisitions and Divestitures

If you acquire a company or sell a part of your company, be aware that the vendor could charge you with significant software license costs. Typically, licensees cannot resell, reuse, or share the license. Several companies have had to purchase back the software which was an unplanned expense of the acquisition. Know your contract and be aware of the terms. At a minimum, negotiate terms for the transferability of the license to another entity at no cost.

Terms and Conditions

It is well worth your time and money to engage an experienced professional in the negotiation of software license terms and conditions, particularly as this is a significant expense in the event that you overlook critical items. As many CIOs have personally experienced, an oversight in simple terms and conditions can cost a company millions of dollars down the road. Examples of protections or simple terms and conditions that translate to saved money in the future include the following:

The software meets specific defined performance and acceptance criteria.
If the product is sunset (e.g., no longer supported by the vendor) while you are still using it, outline financial relief, such as five years of maintenance at no charge after the new product is implemented.
Include protection for vendor acquisition, merger, or bankruptcy. If this is a mission-critical application, subscribe to source code in escrow to mitigate the risk if the vendor goes out of business. This saves you replacing the software in the future.
Include protection for misrepresentation, lack of performance of functionality, or future capability not proven in the sales or demonstration process. Companies often include request for proposal (RFP) responses as part of the contract to warrant the promised functionality. This provides tremendous assurance and warranty and is a strong argument for detailed requirements in an RFP. Some companies also obtain conditions that new releases will not diminish functionality or they will get a refund of the initial buying decision. At a minimum, get proper notice if the vendor no longer supports software, underlying databases, or operating systems.
Include protection for damage limitations and warranties.

Top Tip: Two-year extension

"We were able to negotiate with our ERP vendor by adding a two-year extension at the back end. In exchange, we received cash back upfront and reduced rates. Even if it appears your influence is limited, sometimes just asking with the right offer results in significant savings."

—Scott Simerlein
North American
Membership Group, Inc.

Enterprise View | APPLICATION PORTFOLIO

2011-08-31T01:11:00.000-07:00

Particularly as companies grow, they implement point solutions to satisfy the needs of individual departments. This often includes one-off tools and systems from different vendors, which are cobbled together point solutions. There are often interfaces between the systems that shuttle information back and forth. As any CIO knows, what often results is a fragile spiderweb of systems where a change in one part of the system results in a breakage in another. One company referred to this as a hairball, which is an accurate description. With data duplicated and stored in multiple systems, there is no single version of the truth as reports from departments and systems have slightly different data.

When looking at the overall costs of maintaining duplicate or overlapping systems, as well as the overhead of maintaining duplicate data, the total cost of ownership of a hairball application portfolio is high. Although it is a high entry cost scenario to design systems for the whole enterprise, over the long run it saves money for an organization because you are able to reuse data and logic.

It is important for a company to practice integration management to engineer the applications as a whole. When designing applications, reduce the number of interfaces between applications. Typically, interfaces take the most resources and costs to support over the long run.

Changing the applications portfolio to take an enterprise view is not just an IT issue but also a business issue. The individual business departments are typically accustomed to getting a solution when they want it and they do not have to coordinate or involve other departments. Changing to an enterprise view requires support from the top of the organization as you need to override the needs of one department for the benefit of the entire organization. One way to make the transition from a point-solution approach to an enterprise view is to be part of an overall assessment and strategic planning process that looks at the business needs and applications in total.

Structured Selection Process | APPLICATION PORTFOLIO

2011-08-28T08:48:00.000-07:00

When evaluating software packages, you can save a considerable amount of money by doing it correctly and selecting the right tools. It saves you from re-implementing a different tool a few years down the road, which can be a tremendous expense. It is often helpful to engage the assistance of a consultant who uses a structured selection methodology and is experienced in selections and in the particular application area. They are able to save you significantly more than their cost by helping you select the right tool, engaging support throughout the organization, and facilitating negotiation strategies throughout the selection process. However, be cautious about hiring service providers who have implementation resources in one of the reviewed packages as they may bias your selection. Remember, implementing and supporting new software is an expensive proposition, so it is well worth the time and money to make sure it is the right direction before beginning implementation.

The following are tips to include in your selection methodology to reduce overall costs:

Make sure you cast the net broad enough. Do not just evaluate the packages that you have heard about or read about in magazines. Seek the help of experts and open your evaluation to additional options such as software-as-a-service (SaaS) and other options covered at the end of this chapter. It is much easier and cheaper to cast the initial net broadly through a long list, and then narrow your search in order to consider all possible candidates and a reason for eliminating each one. The mistake many organizations make is that they start with a relatively short list and end up adding candidates late in the process because vendors pop up with no compelling reason for elimination. Be a thorough and educated buyer.
Your first contact with a vendor is not too early to start planting the seeds for the negotiation process. Have a plan and strategy for negotiating the best price. That said, licensing software is nothing like buying a used car. View your vendor as a partner, not a car dealer.
Carefully identify your requirements and prioritize the needs from the wants. Educate the users about the possibilities before participating in demos so that users do not discount the software because it does not do it the way they do it today.
Clearly identify the business goals and objectives you hope to achieve with the new software in order to align expectations.

Buy before Build Strategy | APPLICATION PORTFOLIO

2011-08-25T06:36:00.000-07:00

Custom-made, internally built applications cost more than vendor-supplied packages in the long run. For example, most people would not build their own automobile because it takes far less effort and cost to go to the dealer and buy it. Standardized industry software allows a vendor to spread development costs over a large base of customers and integrate industry best practices and new technologies more easily. This allows the company to use resources to build and support areas of applications that are truly unique and provide a competitive advantage rather than expending resources on reinventing the wheel. That is the piece that everyone knows and understands.

The real question is how to change an organization with a strong appetite for custom software to utilize standard software packages. Most organizations claim that they are so different, their business is unique, it has to be a certain way. In fact, just about every company makes that claim. Yet, there cannot be that many different ways to process general ledger, accounts payable, accounts receivable, payroll, purchasing, etc. In fact, at least 80 percent of all business functions or requirements are common to other companies in the industry. The key is to figure out what and where is that 20 percent that provides a true competitive advantage.

Some business units are accustomed to getting software crafted the exact way they want it so they do not have to go through the painful process of changing their business processes to match the software. The following are some suggestions to help make this transition from a custom culture to a vendor-package environment:

Give them the facts. Communicate the costs of having custom software to the organization. Cite industry benchmark statistics and the fact that most companies are using vendor-supplied software. Cite competitors in the same industry that use vendor packages. Explain what the cost structure and environment would look like with vendor packages.
Top Tip : Buy vs. build strategy
"A buy versus build strategy can backfire. You may think that buying is cheaper, but it can be more expensive when you do not have a clear understanding of what you are buying. You need to ask the right questions as the devil is in the details."
—Deb Bauman
Sun Country Airlines
Obtain executive commitment to changing to a buy-before-build strategy. Ask for their commitment, as there will be times you will need it. Changing to a buy-before-build culture is not only an IT issue, it is a business issue, and like most culture changes it needs to start at the top of the organization.
Build only when it provides a critical, unique, and strategic advantage or if there is no product available to meet the need.
Have formal reviews with all IT groups to ensure no other in-house product could provide the service.
Educate the business users. Invite vendors to provide informational demos of software and provide examples of how other companies in similar industries use the software. Have consultants and vendors explain how an industry best-practice process would work in their environment. Then look at the new functionality these applications bring and determine the knowledge, time, and costs associated with customizing your own duplicate solution. Ask yourself if there are other things more important that your resources should be doing.
Be consistent and relentless. Enforce the new strategy through the governance process. Have any requests resulting in custom solutions and package modifications go through additional approval steps. Challenge any project request to make sure they first looked at your current application capabilities and alternative vendor software. One company had adopted a buy strategy and then defined their project management process. When someone asked, "Did you look at purchasing a project management methodology?" the company had not even contemplated that as an area for a potential buy rather than build option.
Engage vendor-neutral experts in the selection process. The project leader of any application selection should be someone who knows industry standard processes and is able to distinguish a requirement that calls for modification to fit within standard processes. The process of identifying the detail requirements and revealing what areas vendors cannot address will help project leaders to understand where and how much the business or the software needs to change rather than claiming they cannot use standard software.
Top Tip: Do not customize
"Buy versus build reduces costs. Think inside the box, in other words, don't customize it. The worst thing you can do is buy software and then customize it as you are dependent on both a third party and yourself to upgrade."
—Mike Degeneffe
Ceridian

APPLICATION PORTFOLIO

2011-08-22T06:32:00.000-07:00

Use this same portfolio picture for an analysis of your business applications environment to look for cost savings. The process of identifying application cost savings cannot proceed without a solid understanding of what applications are already in use within the organization, who is using it, where it's being used, for what business purpose, and how much it is currently costing the organization. For significant cost reductions, consider the tactics in this section for changes to the business applications portfolio as shown in Figure 1.

✓ Eliminate unused software

✓ Consolidate redundant applications

✓ Replace applications with high support costs

✓ Consider second-best applications

✓ Standardize application vendors

✓ Consolidate application instances

✓ Standardize development tools

✓ Identify gaps in functionality

✓ Use more functionality

✓ Discontinue source code in escrow

✓ Do an assessment and strategic plan

✓ Consider legacy system renewal

✓ Consider life extension strategy

✓ Consider buy before build strategy

✓ Use a structured selection process

✓ Take an enterprise view

Figure 1: Tactics to get the most from your business applications portfolio

Eliminate Unused Software

It is challenging to reduce costs in the applications area because changes typically take a long time to implement. However, eliminating unused software modules is one of the quick hits that immediately take costs off the budget. Do this by reducing shelf ware. Make sure you are not paying for any unused or unimplemented software. Third-party software inventory and spending audits to validate software licenses frequently find overspending on licenses compared to the frequency of under-licensed software. Retiring unused application software usually results in a reduction in use of supporting infrastructure items, which you then can also eliminate. For example, one company found an application that had never been deployed. This application had 30 communication lines installed but these lines also were never used. Likewise, consider retiring unused modules or excess users of any in-use application to reduce the maintenance costs relative to those modules.

Consolidate Redundant Applications

Review modules that you have purchased as part of an enterprise system that duplicate functionality provided by silo applications. Consider replacing or removing redundant applications that have overlapping functionality in order to reduce costs. For example, recording and reporting employee time is often part of your payroll system. It might also be contained in your human resource system as well as your shop floor control system and project portfolio system. You might also have departmental silo systems to track and report time. In this example, restructuring your applications so you do all time reporting in a single enterprise application will reduce the cost of providing this functionality. Eliminate all use of duplicate functionality in other systems unless there is a compelling argument to do otherwise.

In the case of an organization with multiple geographic sites, look closely at applications that are deployed in different locations as you might find redundant applications that are ideal opportunities for consolidation.

Replace Applications with High Support Costs

Review your maintenance and support costs as well as your full time equivalent (FTE) personnel needed to support each application. Rank the applications by total cost of ownership. Make sure that the business value received from each application is in proper alignment relative to the costs. Review the support costs by application with each business executive to ensure they feel they are getting comparable value. Relative to the other applications, if an application seems costly compared to the business value, work with the business to consider replacing expensive applications with a more cost-effective solution. In some cases, this more cost-effective solution may be a lean or even manual method.

Assess the business applications to ensure they are providing the desired business value. One company did this by working with the IT steering committee to place each application on a grid indicating value and cost as shown in Figure 2 according to the following actions:

Applications identified in Grid 1 are high-value applications, funding is a priority, and they are generally maintained as status quo unless expenses must increase for some reason.
Applications identified in Grid 2 are also high-value strategic applications, but review them to see if you are able to decrease maintenance costs without negatively affecting value to the business.
Applications identified in Grid 3 are lower-value applications considered for consolidation into higher-value applications with a lower priority as they have a relatively low on-going cost.
Applications in Grid 4 are immediate candidates to review for consolidation, as the costs are significant relative to the value to the business.

Figure 2: Application value matrix

Consider Second-Best Applications

When evaluating software options, many organizations implement the best software, best-of-breed, or high-end software. It is like the old saying, "no one ever got fired for going with IBM." In some cases, the second-best software may give you enough functionality to meet the business needs. You may not always need the most high-end software particularly when comparing the price differences. At times, you are able to get 90 percent of the functionality at 60 percent of the cost and that may be sufficient for your needs.

Standardize Application Vendors

If you consolidate the major portion of your application portfolio with one main vendor (e.g., IBM, Microsoft, Oracle, SAP, etc.,) as much as possible, you are able to gain additional discounts due to higher volume purchases, and it will cost less in interfaces and in achieving seamless streamlined processes. Training costs and personnel support costs are also less with a consistent technology stack. On the other hand, be aware that some of your post-purchase leverage is gone with a single vendor approach and a larger footprint has a much higher barrier, or costs, to exit. Therefore, in some instances a series of interfaced niche applications give a company more flexibility and interchangeability, particularly with the use of enterprise architecture and portal technologies.

Consolidate Application Instances

Many large global organizations spend millions of dollars implementing a common Enterprise Resource Planning (ERP) system, but some implement many different application instances to meet the needs of different divisions, locations, or business units. Each separate instance costs additional money for licenses as well as maintenance and support. Whenever possible, try to consolidate application instances into the fewest number for a lower total cost of ownership.

Standardize Development Tools

For both custom development and vendor-supplied packages, standardize on the fewest possible development tools, and classify the ones you retain as primary and special use.Each additional development tool costs the organization money as you need to have trained resources and backup resources that know each language and development tool. Of course, weigh this against the business functionality provided as you do not want to exclude applications that would provide value for the business because they are using a different language.

Identify Gaps in Functionality

As you look at your applications portfolio, contrast it against the business organization and functions. Identify any key missing areas to review for potential benefits from implementing technology. For example, one company did this analysis and found that the company's marketing area did not have automation. The company realized it was because the marketing executive did not have an appreciation of technology and did not drive the need for tools. When looking at the processes in marketing, they found a severe need for improved processes and technology, which, when implemented, resulted in tremendous business benefit.

Give people the tools to foster accountability, efficiency, innovation, and collaboration throughout the organization. Enterprise tools used across the company achieve a significant savings in business costs as opposed to siloed business unit solutions that meet the needs of only one department. One example is implementing a powerful data warehouse and Business Intelligence (BI) system that gets the right information to the right individual faster and cheaper, enabling improved business decisions. Businesses leverage and mine customer data to come up with solutions that allow a business to interact with customers in new ways that drive additional revenue.

Consider using new technology to provide functionality that was not possible in the past. This may help reduce business costs and eliminate other costly IT applications. For example, newer functionality provided with Web 2.0 collaboration products (e.g., blogging, Sharepoint, wikis, and mashups) can be extremely useful.

Use More Functionality

Most companies fail to take full advantage of their enterprise software packages, ignoring important features that drive significant business efficiencies. For example, one retailer created purchase orders to use in planning purchases and shipment timings with its vendors. This resulted in expensive downstream purchase order changes and reconciliations due to subsequent review and feedback from the merchants. When IT instructed the retailer's merchants in the use of purchase requisitions, which was previously an unused function, it significantly reduced time-consuming activities.

Considering both the full range of functionality and potential modules, industry estimates say that companies use 25 percent of the functionality that is available in packages. Work with the business managers and staff at all levels to review additional functionality that you currently own to see if they would benefit from using additional features. Of course, as a company uses additional functionality in existing software, the cost-per-functionality decreases. Payback from software implementations multiplies as the software penetrates more broadly and deeply into the organization.

Also, look at using more of what you own relative to hardware. For example, one company outsourced payroll as they initially did not have the capability to operate it independently. After implementing a secure data center for other needs, they looked at bringing payroll back in-house by using existing capacity, which saved considerable money.

Discontinuing Source Code in Escrow

Some companies regularly subscribe to source code in escrow whenever they license application software. Granted, this is a relatively nominal cost compared to the expense of having to replace an unsupported application. However, all of these nominal costs add up to a sizeable annual expense when a company subscribes to dozens of escrow agreements. Recognize that many source code escrow agreements are structured such that the only release event is where the vendor goes out of business, which is extremely uncommon. Rarely do vendors release source code without a very expensive and heated legal fight. When push comes to shove, most companies choose to continue operating their relatively stable unsupported applications rather than go to the expense of getting the source code and maintaining it internally. Subscribe to source code escrow only when the application is mission-critical and worth spending the additional tens of thousands of dollars required to get the source code released.

KEY POINTS TO REMEMBER | Cost Reduction Project

2011-08-11T06:47:00.000-07:00

Step 1: Establish goals

Determine the cost reduction magnitude, timing of reductions necessary, areas the reduction must affect, and constraints relative to actions.
Re-align IT priorities as the business goals and priorities may have changed.
Communicate the cost reduction goals to the organization.
Short-term goals may require that you immediately take short-term actions and come back later for the information and analysis steps for more sustaining cost reduction measures.

Step 2: Obtain information

Obtain information on the budget and spending and information on assets and inventory.
Obtain or assemble IT information on the budget, business plan, strategic plan, project list, application inventory, hardware inventory, staff inventory, and the organization chart.

Step 3: Analyze

Consider taking an expense approach, investment approach, asset approach, or services approach.
Understand the cost drivers and reduction enablers.
Be careful when using benchmarking.

Step 4: Identify and prioritize actions

Review all areas of IT for cost reduction opportunities, including business applications, technical infrastructure, processes, and the organization.
Prioritize actions by identifying short-term, medium-term, and long-term cuts.
Identify the cost reductions anticipated from each action.
Communicate the plan.

Step 5: Execute

Step 6: Monitor and improve

Determine the success of the cost reduction efforts and any negative impacts.
Review leading indicators.
Continue to monitor and improve.

Identify Cost Reduction Possibilities

2011-08-08T05:15:00.000-07:00

Review each area of IT for cost reduction opportunities. Include the following areas, each of which are covered within various chapters of this book to provide additional guidance and suggestions:

Business applications:
- Application portfolio.
- Software licenses.
- Maintenance and support agreements.
- Software implementations, custom application development, and other application options.
  Top Tip: Logical decisions based on facts
  "IT management must learn and understand the budgeting process for their organization. You must put the impact in business terms. Outline the pros and cons to any potential cuts and identify the risks. Work with the business to make logical decisions based on facts."
  —Bruce McIntosh
  Graco Inc.
Technical infrastructure:
- Database environment.
- Desktop environment.
- Server environment.
- Network environment.
- Voice and data telecommunications environment.
IT processes:
- Service delivery processes: service level agreement, availability management, capacity management, IT service continuity management, financial management, and security management.
- Service support processes: service desk function, incident management, problem management, change management, configuration management, and release management.
- Systems development processes: feasibility, requirements, design, develop/install/integrate, test, validation acceptance, and post-implementation review.
- Manage resource processes: IT strategic planning, portfolio management and governance, project management, human resources management, data center operations management, facilities management, procurement and vendor management.
- Manage business relationship processes: understand the business, market IT offerings, satisfaction management, and metrics management.
IT organization:
- Organization structure, roles and responsibilities.
- Salary planning, bonuses, benefits.
- Headcount management.
- Organizational alternatives, management of consultants.
Miscellaneous costs:
- Copiers.
- Printers.
- Training.
- Travel.