DATA CENTER

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

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"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

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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.

KEY POINTS TO REMEMBER | Cost Reduction Project

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

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

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    "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.

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• 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.

Cost Reduction Approaches

There are several approaches to reducing IT costs and looking for opportunities. You may choose to use one or more of the approaches as shown in Figure 1:

• Expense. This is reducing spending on discretionary items such as training, meetings, and travel. This is typically the first and fastest way that companies reduce spending. Frugal expense management must be an on-going activity. Ensure guidelines for expenses are in place, communicated fully, and monitored by management.
• Investment. This is reducing or deferring spending by re-prioritizing or reducing how you make investments. These reductions are typically capital spending related to projects. These changes typically involve business management in the governance process to re-prioritize projects.
• Asset. This is reducing operating expenses by simplifying, standardizing, consolidating, or reducing assets. This could be hardware, software, or any IT-related asset. For example, make sure that departments are not carrying assets on the books and incurring depreciation charges for assets that have been in the company for years. Although it is accounting money, there are often huge dollar savings involved in cleaning up old assets and removing them from the books. Also consider selling or donating old equipment (after a thorough security review and clean), as it is better than scrapping the items and paying to have them removed. Talk to vendors about trade-in credit, as some vendors are concerned about their equipment ending up in the used market. For example, one company sold an AS/400 disk drive back to IBM that had never been used but had been owned for four to five years. The company received about $10,000. If you are able, separate the asset management function from the groups that support and maintain the equipment as it is more difficult to hide or overlook unusual equipment.
• Services. This is eliminating, reducing, or changing the services and capabilities that IT provides. It could be changing the support provided to a line of business, a particular business process, a particular business goal, or an application area. This involves both capital and expense spending including projects and on-going expenses.
  
  

 

Figure 1: Cost reduction approaches

ANALYZE | Cost Reduction Project

Slice and Dice the Costs

Although it is important to have transparency and visibility into IT costs on a regular basis on the budgeting process, it is even more important to have that visibility when beginning budget cuts. Analyze and look at the IT costs in a number of ways, such as:

• Costs by business area. Make sure you obtain costs by application and costs by business area or business process to identify areas that are not in alignment with business value. Look at your costs by service or capability provided. See if you are able to eliminate or target for reduction within a particular service or capability offering. Look at business processes that are costly and could benefit from business process re-engineering.
• Keeping the lights on versus adding value. Many organizations spend 70 to 80 percent of their budget maintaining systems or keeping the lights on. Typically, companies spend only 20 to 30 percent on projects that add value to the business. Companies that have implemented best practices drive to spend 40 to 50 percent on projects. Review your costs to see how much money you spend on maintaining systems, and target that area for potential cuts and efficiencies.
• Fixed versus variable costs. Look at the amount of fixed costs you have versus variable costs. Particularly in turbulent business times, it is helpful to have more costs that are variable and scalable with the business. Shift costs from fixed to variable in a number of different ways, such as using some consultants rather than all employees, using software-as-a-service (SaaS) for some applications rather than having everything in-house, or using hosting services you pay for based on volume.
  Top Tip :Prioritize based on criticality
  "Start by understanding the application portfolio and prioritize based on the criticality of the application and functionality provided to the business. Based on this, ensure you are spending the time and money on the critical applications."
  —Trent Buness
  3 Wire
• Project cost. Review the estimated total costs by project. Align each project with the business priorities. Ensure that the estimated total project cost has not exceeded estimates.

Cost Drivers

Understand the detailed costs and the key cost drivers. Analyze the budget by areas of the business or business services. For example, as you look at infrastructure costs, perhaps a key driver is the number of employees. As the company hires an additional employee, your desktop software costs increase as do disk space, network bandwidth, support calls to the help desk, etc. A key driver for some of your application costs could be company revenue. As revenue increases, perhaps hosting costs or SaaS costs increase, transaction volume increases, etc. Other potential drivers might be service level, business mix, product portfolio, number of sales channels, number of sales representatives, number of acquisitions, number of products, and complexity of products. As these drivers decrease, it is important to determine if you can decrease costs. As the drivers increase, it is important to review how you might be able to reduce or leverage costs. Of course, not all costs have drivers as there is a fair amount of fixed costs. However, the more costs you can tie to drivers the more this will help reduction analysis and communication to the business.

Reduction Enablers

Examine the key enablers that help you achieve each of the cost reduction goals to obtain the desired results. Enablers are tools that you can use to reduce costs. For example, one company had implemented a document management and workflow system for one part of the organization but had not used the tool in IT.

Top Tip : Cost drivers

"It is critical to understand the principle cost drivers behind a service provision—volume, unit cost, and service level. Understand what you can control, influence and only worry about that. Focus on the first two. Institutionalize with repeatable processes to run IT as a machine. Look at the processes, metrics, and controls—leading indications not just lagging results. Implement general management principles and lean philosophies."

—Malcolm McRoberts
Deluxe Corporation

They identified cost savings by using the document management and workflow tool in IT. Another company had begun implementing Information Technology Infrastructure Library (ITIL) but just within one process of IT. They identified ITIL as a key enabler to reduce costs in additional IT processes. Another company identified the web as an enabler to help users solve IT issues through self-service methods, thus reducing help desk costs. Even simple vehicles can be enablers. For example, one company reduced password resets to one-third of the volume by changing the time frame for password changes from 30 to 90 days.

Benchmarking

Another aspect of analyzing costs is benchmarking. However, be careful when benchmarking IT costs. The key point to remember when comparing costs is that it is not how much money is spent, but how wisely the money is spent. Although benchmarking is interesting, do not use it by itself to dictate cost reduction actions as it is very difficult to make sure you are comparing apples to apples. To the extent they do not line up, benchmarks could create pressure to achieve savings that are neither possible nor desirable as discussed below in the precautions. Skip benchmarking if the cost reduction goals are short-term and require quick action.

Common IT costs to benchmark include:

• IT spending as a percent of revenue.
• Operational spending percent of IT budget.
• IT staff as a percent of total employees.
• Average IT staff growth.
• Rate of IT staff turnover.
• Employees supported per IT employee.
• IT cost per employee.
• IT spending per employee.
• Spending by maintenance versus projects.
• Total IT budget.
• IT budget increase or decrease.
• IT expenses by category, including desktop, client devices, software, network hardware, communications, etc.
• IT staff time allocation by help desk, desktop services, network, project management, business analysis, application maintenance, application development, database administration, data center operations, and so on.
• IT staffing mix.
• Help desk staff per PCs.
• Cost per help desk call.
• FTEs compared to servers or PCs.

Although benchmark statistics are very powerful to supplement a thorough qualitative analysis, be very careful when comparing benchmark metrics, as you can come to some potentially incorrect conclusions by looking at the numbers without context. Benchmark statistics tell a piece of the story, but do not tell the entire story. The following are examples of a few precautions:

• Rather than comparing to companies in general, be sure to compare to companies that are of a similar size are in a similar industry. Both of these factors make a tremendous difference to the benchmark numbers and conclusions.
• Be sure you consider the total IT costs and know what is in the benchmark numbers. For example, determine if depreciation and amortization are included in both numbers as that makes a substantial difference.
• Consider hidden IT costs. Your IT costs could be lower than the industry, but you have substantial IT costs hidden in user operational budgets. If you include all the hidden costs, it tells a completely different story.
• At initial glance, it appears that it is good to spend less than the industry, but this could also mean that you are not investing in architecture for the future and could be at a competitive disadvantage.
• Depending on where and how you spend money makes more of a difference than how much money is spent.

OBTAIN INFORMATION | Cost Reduction Project

The second step is to obtain the necessary information. Two main areas of information to gather include the budget and spending, and on the assets and inventory. The following are some basic components of information to assemble before beginning to identify cost reductions. If you do not have formal documentation, this information provides ways to develop the necessary components:

• IT budget and spending. Obtain up-to-date budget and spending information. If a complete budget does not exist, collect IT spending information for the past couple of years in a spreadsheet using the components identified in a budget. This information will provide the baseline for cutting IT costs. Forecast costs for the year based on year-to-date numbers.
• Business plan. This information will ensure that you make any cost reductions while still achieving the overall business strategy. If your company does not have a formal business plan, meet with senior management to document the key business goals, strategies, and objectives they hope to accomplish in the next few years as well as the planned business initiatives for the next year.
  Top Tip: Understand what you have
  "Before making reductions, you need to understand what you have. You need the basics in place, such as project portfolio management, asset and inventory management, time tracking, and incident tracking."
  —Randy Witt
  Restaurant Technologies
• IT strategic plan. This information will ensure that the implemented cost reductions will not sacrifice key goals and objectives. If you do not have an IT strategic plan, document the key IT objectives and show the linkage to the business goals and objectives. Document the major IT strengths and opportunities. Identify the key IT initiatives for this year and next year in the areas of business applications, technical infrastructure, IT organization, and IT processes.
• IT project list. You will use this information to re-prioritize projects in light of budget cuts and changing priorities. If you do not have a formal project portfolio, develop a spreadsheet with basic information for each project including the area of the business it supports, its status, its priority, and the costs or estimates needed to complete the effort.
• Application list. Use this information to identify services to replace, consolidate, or remove. If you do not have a formal IT service catalog or detailed current situation documentation in the IT strategic plan, develop a spreadsheet with basic information about each business and infrastructure application. Include the software name, if the software is vendor-supplied or custom, annual maintenance and support costs, full-time equivalents (FTEs) required to support each application, business criticality, and general application health.
• Hardware inventory list. You will use this information to identify components to replace, consolidate, or remove. If you do not have a complete configuration database of assets, assemble a spreadsheet with the key components of hardware assets, including servers, major network components, and desktop information. Include the age, condition, business need, and criticality.
• IT staff inventory. Use this information to understand IT salaries, as it is a major portion of the IT budget and identify whether you need to change the focus of resources. If you do not have a complete skills inventory, develop a spreadsheet to document basic information about the IT staff. Include the number of years of IT experience, years with the company, compensation, bonus, overtime costs, skill sets, tasks, responsibilities, and projects.
• IT organization chart. This will help evaluate supervisor ratios for the potential of merging or condensing the structure for more efficiency. If you do not have a documented organization chart, develop one using PowerPoint or similar software.

The Cost Reduction Project

Cost Reduction

The business may set IT's cost reduction goals, but IT should also consider proactively identifying the need for budget cuts rather than waiting to be asked by the business. Whether it is business-driven or an IT-driven cost reduction, understand and clarify the urgency, depth, and magnitude of the necessary cuts. Obtain a common understanding of the measures of success. Clearly understanding the targets will help determine the best type of cuts to make. If required cuts are not specific, but rather a more general need to improve efficiencies and reduce overall costs, your actions are often general improvements in fiscal responsibility that take time rather than specific cuts that produce results by a given deadline.

Depending on the goals, the magnitudes of reductions that will be necessary are drastically different. Do not make assumptions on the goals. Needing a 5 percent cut is drastically different from needing a 20 percent cut. Deeper cuts signify the company may be in dire financial duress and it will require a serious need for quick action.

Timing of Reduction

The timing of the cost reduction goal is also important to understand. Achieving a 5 percent cost reduction within this quarter or month requires different actions than having to achieve a 5 percent reduction by the end of the year. Some actions will require time to implement and realize benefits. Identify the short-term (0 to 3 months), medium-term (4 to 10 months), and long-term goals (11 months or longer). For example, you may need a 5 percent reduction immediately and an additional 10 percent reduction by the end of the year. For the short-term goals, you will need to look for low-hanging fruit and stopgap measures. More structural changes will be required to meet long-term goals.

Short-term needs for cost reduction signify an urgent requirement for action. You will need to identify cost reduction actions quickly with limited planning to meet short-term needs. If cost reduction needs are short-term, minimize the information gathering and planning steps identified below and pick low-hanging fruit under short-term actions. After completing immediate cuts, you are able to return for more complete planning and information gathering phases for strategic and sustainable budget cuts.

Reduction Impact

Clarify what type of budget cuts are necessary, and identify particular areas targeted for the reduction. For example, identify if the budget cuts need to be operational expenses or capital items. Understand if the budget cuts must apply for company-wide IT support or IT services for a specific division or line of business. Identify if you will reduce costs in the area of staff as this is a major component of the IT budget. If desired cuts are broad and deep, you will probably need to affect the services provided and potentially reduce personnel.

Constraints

Make sure you clarify and understand any constraints in meeting the necessary budget cuts. For example, some company cultures do not support personnel layoffs unless it is a last resort. In addition, union rules may affect the ability to execute layoffs. Identify if any projects that need to proceed (even with budget cuts) are sacred cows or off limits to reductions.

Business Goals

Review the changes in the business goals, priorities, and projects as they have an impact on the IT projects and expenses. Look across all areas of IT and align the cost reduction strategy with the business strategy and priorities. Use the governance process and work with the IT steering committee to help in the cost reduction effort. Ensure that you align actions with the business strategies. The cost reduction goals in the business may also affect some IT projects and initiatives. For example, the business may defer a previous business goal to add a new product line in order to meet general cost reduction requirements. This is a great time to work with the IT steering committee and governance process to re-prioritize all IT efforts based on the new business priorities and budget constraints.

Communicate Goals

Clearly document the cost reduction goals as shown in Figure 1. Announce and communicate the goals and intent. Be honest and direct. Enlist the help of everyone in IT, your vendors, the governance structure, and the business to help achieve the IT budget cuts. You will be amazed how quickly you are able to identify cost reduction opportunities by asking everyone involved in IT for suggestions. If you get the buy-in from the entire IT group to meet the cost reduction goals, you are able to be significantly more effective than if you try to meet the goals by yourself. If the IT organization knows the goals, and understands that the last resort is personnel cuts, it is amazing how resourceful the group can be. It is even helpful to ask vendors and suppliers for their ideas in meeting cost reduction goals. They know the realities of today's economy, and the strong partners will start developing solutions to meet your needs.

Top Tip 1: Ask for input from everyone

"Don't underestimate the power of the people in the trenches. Ask them for ideas! Stand on a mountain and communicate what you are trying to do. Tell them to let you know if they see something dumb. We were flooded with suggestions. For example, one employee identified that we spent $70K/year in 411 calls."

—Brad Smuland
Merrill Corporation

 

Figure 1: Cost reduction goals sample

Mergers and Acquisitions

In the situation of a merger or acquisition, the focus often turns to that of cost reduction in eliminating duplication or overlap and achieving synergies between companies. Although cost reduction is important in these situations, the primary focus should be on integrating systems and processes while minimizing risk, operational disruption, and adverse impact to the customer or business. Oftentimes, in the planning phases of mergers or acquisitions, management can be zealous about the cost reduction opportunities but neglect to adequately plan for the costs of integration before being able to realize the reductions. Particularly in IT with large systems and infrastructure, the costs and time to integrate can be huge. Therefore, although the cost reduction process and tactics apply in the case of mergers and acquisitions, view it within the overall context and effort of merging companies and operations. Rather than an initial focus on cost reduction, it is far more important to minimize the risk of exposure, customer defection, employee defection, and operational errors. A cost reduction effort actually may be more appropriate as a follow-up wave of integration efforts. Once stabilized, standardization and consolidation can reap huge benefits in mergers and acquisitions.

Top Tip 2: Invite all team members

"Invite all team members to help you find cost reductions and be part of the solution. They know more about what can be cut than you do, as they are in it day-to-day. Bring them into the process and build trust."

—Peter Bellavance
Tastefully Simple

KEY POINTS TO REMEMBER | Cost Reduction Strategies

Business applications:

• Look at cost reduction holistically, considering the overall impact to the business.
• Impact revenue and top-line growth; innovation is better than cutting costs.
• Make sure the technology supports your strategy and has a valid business purpose.
• Have an eye on the future and consider long-term structural and strategic changes that will result in lower overall total cost of ownership.
• Divide large programs into smaller and more manageable projects.

Technical infrastructure:

• Change the game by using new technologies to reduce costs.
• Know the impact of business changes and understand the IT impact.
• Delay costs if you can, providing you do not cause adverse strategic ramifications.
• Increase risk levels to match the company risk profile.
• Consider IT investments to improve the efficiency and effectiveness in IT itself.
• Simplify and standardize to minimize the diversity of technologies supported.
• Pay only for what you use.
• Consider green initiatives for cost reduction.

IT processes:

• Focus on what is important to the business through governance and prioritization.
• Increase the minimum ROI requirements to ensure projects are worthwhile. Audit proposed savings to verify that you have achieved the projected benefits and cost savings.
• Look at the total cost of ownership to consider up-front costs as well as on-going ones.
• Cut the appropriate costs by focusing on nondiscretionary and hidden IT costs.
• Identify what you are able to eliminate.
• Leverage IT financing, procurement, and contractual aspects to maximize assets and negotiate better deals.
• Ensure that definitions are clear and policies and procedures are supportive of the cost reduction efforts.
• Plan ahead and have a contingency plan.

IT organization:

• Manage and control IT to ensure cost effectiveness.
• Reduce hidden costs so that you can manage, leverage, and reduce total IT costs.
• Consider alternative delivery models and strategies.
• Reduce service levels to match rather than exceed business needs.
• Implement a culture of cost awareness that starts at the top.

IT ORGANIZATION | Cost Reduction Strategies

Manage and Control IT

As technology has gotten easier to use, and employees in every department have become more adept at using technology, IT solutions have seeped into all corners of the organization. Although this is often a good thing, it can also be more challenging to institute reductions if IT and technology investments and activities occur throughout the organization. In many companies, IT is compartmentalized into business units so that they are more responsive to business unit needs. During times of economic pressure, it is good to look at how IT is organized and managed. Verify that IT is organized in a cost effective manner for the business. Although centralizing IT functions often reduces costs, the key is to manage and control all areas of IT costs. This can be done by organizing centrally or organizing in a distributed fashion by business units (or a hybrid of the two), but manage the organization and costs instead of becoming complacent.

Reduce Hidden IT Costs

Many organizations have hidden IT costs, or IT functions conducted within a business area. The business generates and increases hidden IT costs over the years particularly if IT is not meeting the business needs. These costs are often for pet projects, nonstandard software, hardware, or tools for the business. Users often have an emotional attachment to the solution they have devised. The hidden IT costs are in the business units' budgets and are not visible in the IT budget. Although it is politically difficult, IT must identify, discuss, and reduce hidden IT costs without interfering with the business benefits they have generated. IT must work with the business to absorb these tools into the standard environment and the IT budget in order to manage, leverage, and reduce costs. If you are going to assume control of what the business has done for itself, make sure the result is a perceived improvement on the part of your users. Otherwise, you will only get to do this once. If it is perceived that your efforts are not successful, it will become politically impossible to do it again in the future.

Hidden IT costs can also be resources (or entire support organizations), which are located in the business units but actually perform IT-related tasks almost 100 percent of the time. Examples include business analysts that spend their time communicating with IT or individuals that write reports for the business unit. Due to their expertise, often other business units pull in these individuals. As a result, these analysts do not support their home group 100 percent. Review the situation to determine if you are able to reduce overall costs by leveraging these individuals across the organization by consolidating and absorbing the resources into the IT organization. If a valid business reason exists to have IT resources located in the business units, recognize and accurately count them as IT expenses and manage and control them cost effectively.

Consider Alternate Delivery Models

There continue to be new ways to deliver IT services, such as outsourcing, insourcing, off-shoring, cloud computing, SaaS, business process outsourcing (BPO), and platform-as-a-service (PaaS), which provides the entire computing platform. Subsequent chapters will discuss all these options in detail. The key is to have a strategy open to new ways of delivering services. As new options become available, continually review existing traditional delivery mechanisms. You need to consider other options; do not assume that the best way is always the way that you did it in the past. Many of these changes have emotional connotations that impact resource levels, but you need to review and analyze each of them objectively. Review the costs and impact to services against the business goals to decide if any of these options are right for you. For example, using CRM as a SaaS model would save the cost of servers, software, infrastructure, management labor, facilities, etc. However, review options cautiously as you may need some of these items for other applications and reducing one application may not result in any decrease at all. There also may be switching costs and other associated costs to consider with the SaaS model.

Selective outsourcing

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"We did not do wholesale outsourcing, but did selective outsourcing. We went through a thorough analysis to determine what should be outsourced, similar to how the business analyzed outsourcing. We made decisions using a four-part matrix based on whether the work provided a competitive advantage or not, and whether we were good at it or not. Outsourcing gave us flexibility and leverage to ramp up or down."

—Gail Farnsley
Purdue University
(former Cummins CIO)

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Small- and medium-sized businesses continue to look more closely at managed service providers and SaaS because the upfront costs are lower than building your own and the monthly fixed costs are easier to include in budgets. Similarly cloud computing is attractive because it is also subscription-based with relatively low upfront (development) costs. Off site backup and archiving services using the web are becoming popular uses of cloud computing as companies cut back on costly hardware upgrades, maintenance, and software updates while still addressing their backup needs. Even managed print services, or managed phone systems, are a form of outsourcing that companies use to reduce costs.

Leverage outsourcers

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"Many organizations think they are special or unique. That stops you from leveraging the capabilities an outsourcer provides. Identify what you need to be good at internally and then leverage someone else's core competencies to complete the picture. You can use outsourcing to change the cost structure—when it comes down to it, we're not all unique."

—Malcolm McRoberts
Deluxe Corporation

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Reduce Service Levels

Whether a company is outsourcing or insourcing, look at the possibility of reducing service levels to meet budget cuts. For example, if you are able to get 90 percent of the service for less cost, it is worth considering. Service providers, hosting partners, and maintenance providers typically have a variety of support designations such as titanium, gold, silver, bronze, etc. Understand exactly what services you get at each level and the business impact of changing to lower service levels. Consider grouping equipment or software into multiple levels for support. For example, customer-facing services and products need a very high level of maintenance and service, but you could support a noncritical back-office application at a significantly lower level.

Investigate the impact of reducing either agreed upon or implied service levels. Would there be cost savings, staff reductions, or reduction in underlying vendor support agreements if you would resolve help desk incidents in four hours rather than one hour? Focus on the business impact. Are you able to categorize specific noncritical problems in order to reduce responsiveness while maintaining a higher priority on critical business problems? Look at your disaster recovery times to see if you are able to reduce costs by compromising on the recovery time parameters. You often find that you have many areas of IT designed for service levels, reliability, and performance that are more than the business requires. This is because IT assumed the maximum service level that was required and did not offer alternatives or costs. Discuss service levels and present facts, costs, and usage statistics so the business can assist in making informed decisions. Providing a variety of options facilitates open dialog within the business, which is preferable to an atmosphere where the business feels they have no control over IT and no options.

You may have implemented past projects with excess capacity due to unknown usage. Analyze the implemented systems to see if you are able to make any capacity reductions leading to cost savings. Discuss and analyze alternative cost models with different service levels. For example, a company has a very expensive staffing model with support organization staff available on a 24/7 basis and with enough backup to respond immediately to provide a five-9 service level agreement (99.999 percent). The closer a company can get to 24/7 at 99.999 percent (or more) availability, the higher the investment will cost. Examples of costs for a high-availability environment include redundancy, end-of-life replacement, extensive disaster recovery and business continuity plans, network analysis tools, sophisticated security tools, backup technology, and stringent asset management. If the business requires only 11 hours, five days a week to cover the east and west coast working hours and is able to tolerate a one-hour response time, IT would be able to reduce staffing and some other costs.

Culture of cost reduction

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"Our company culture is very accustomed to cost reduction. We look at licensing and ask the hard questions to determine what we need on an ongoing basis. Where we have stability, we assess options including consolidation and outsourcing."

—Daniel Heschke
Imation

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Implement a Culture of Cost Awareness

Effective and sustainable cost management versus one-time cost-cutting efforts requires leadership from the top of the organization as well as a supportive culture. Entire books are written on how to instill a continuous-improvement and cost-conscious culture as consistency and focus are critical to achieve sustainable cost management. A continuous-improvement culture implies that room for improvement exists; you must continuously look for improvements and be mindful of complacency. Whether it is reducing costs on executives' trips or purchasing pens, you must have a continual cost focus. The executive management team must be personal role models for conservative cost management. Cost management is not just the job of the CFO or CIO; it is part of everyone's job.

If you want all members of the organization (not just the CFO or CIO) to strive for cost-cutting opportunities, you have to set and communicate goals with your team. They will find opportunities for savings in hundreds of little ways not listed here (e.g., stop ordering lunches for meetings). Once you create an enterprise-wide cost-cutting strategy, then live and breathe it. Communicate the budget and celebrate the savings.

Have clear accountability for cost reductions. When identifying a particular cost reduction, assign an individual to execute the reduction and ensure that you actually realize the savings. Make sure performance measurements support the cost reduction effort rather than conflict with it and have timely and visible feedback loops.