Know the Value Before You Cut

To cut costs strategically, you need to understand your actual costs and the value of your various technologies, services and business deliverables. Otherwise, the cuts you make may degrade important business processes and reduce their value. A good way to clarify these issues is to seek expertise.

"Add a finance person to your staff to help you understand your costs and cost drivers," suggests Forrester's Cullen. And be sure to make the costs associated with specific business initiatives clear to the business process owners so that they understand how much you're spending to support them. That can help the CIO team up with other business managers to re-evaluate the service levels they demand or the value of the IT they're using and demanding. Essentially, this approach treats IT as a portfolio of services and resources. "This improves demand management, so the enterprise picks the right things to spend money on," says AMR's Gaughan. "Portfolio management is a good approach for long-term savings," he adds.

PharMerica's Toole used this approach, following the accumulated costs of each business application through the accounting ledgers, to figure out what his largest application support costs were and how they were accounted for in both business and IT budgets. (Hardware leases and purchases were his biggest expense, followed by software support and maintenance, then long-distance, local and data communications.) "We then made some attempt to calculate the value these expenses returned to the business," he says. This exercise uncovered significant waste in equipment leasing costs (mostly for old, unused or underused equipment). Not only was Toole able to reduce his leasing costs, he also got some rebates for unused equipment. But he also went further, citing the discovered inefficiencies as reasons to launch a more sweeping IT consolidation effort, getting rid of unnecessary servers, consolidating data and applications onto fewer servers where possible, and reducing special-purpose servers, applications and oper ating systems. That resulted in both equipment savings and lower labour costs, as less management overhead was needed.

Toole's cost and value analysis also led him to stop outsourcing his "helpless desk". He applied the labour savings from the infrastructure consolidation to manage the help desk internally. Although his dollar cost didn't go down, the quality of service went up dramatically. And that showed his company he could both drive fiscal restraint and improve service. Over time, that approach won Toole a separate IT innovation budget - a recognition that IT was not merely a service organization. And that in turn let Toole focus on building the right IT infrastructure (as well as applications and integrations) instead of just squeezing the one he inherited.

Other CIOs have benefited from similar cost and value analyses. For example, Crye Leike CIO Sodhi analyzes every IT infrastructure project through three lenses: project cost, the impact on productivity and competitiveness. Like Toole, he found many inefficiencies in the organization he inherited, including 28 percent in excessive costs for telecom circuits and PBXs, 25 percent wastage in server utilization, 30 percent wastage in storage and inefficient distribution of IT staff to regional offices. "My CEO still says that I'm the biggest spend in the company, but he knows it could be a lot worse if we weren't as efficient as possible," Sodhi says.

To ensure that his company's cost and value analyses are on target, John Von Stein has created an IT service catalogue to benchmark unit costs against peers and research firms' recommendations. The CIO at the financial transaction processor The Options Clearing Corporation works closely with the finance department on this effort. As a result "we have a good handle on the costs", Von Stein says. "And our business partners understand that if you put several straws in the milk shake, it's coming out of the same pool."

Separate Operations from Innovation

With the costs and values understood, CIOs can separate their operations from their new initiatives. This not only lets the business understand the balance between the services it has come to count on and the services it may want to add, but also the long-term implications of making new demands on the infrastructure. "Remember that every project you did the year before goes into maintenance," says Forrester's Cullen. Truly appreciating that cold calculation helps the business team comprehend the long-term implications of technology initiatives, and also helps ensure that the CIO is always on the lookout for efficiencies to make room for those new operational requirements, he says. The average company spends about 76 percent of its IT budget on maintenance, operations and support, Cullen notes, while efficient companies fall between 50 percent and 60 percent.

But the separation should not be just about budget lines. The separation also helps CIOs identify which staff and technologies are core to the business and which ones aren't. By definition, innovation is core to the business, but that doesn't mean everything else is not. Within the operations part of IT, the CIO needs to understand which aspects require special skills or focus, and which are routine. This analysis helps determine both where to target efficiencies and where to invest.

For example, manufacturer ThyssenKrupp Elevator discovered that it could safely outsource mainframe and AS/400 operations to reduce costs, but it could not outsource network management. That's because the mainframe and AS/400 systems management is "fully stable, fairly repetitive and low-volatility", says CIO Jim Miller. But it made more sense to invest in internal network management skills since ThyssenKrupp's 180 or so locations required intimate knowledge of the network connections and relationships among the locations, a level of ongoing focus that Miller concluded an outside vendor could not deliver.

Similarly, document-processing equipment manufacturer Bowe Bell & Howell concluded it could outsource desktop support but needed to reallocate some of the IT staff budget to work on its ERP deployment. "We were heavily invested in resources for the infrastructure, which were not lined up to our strategic areas," recalls CIO Ron Ridge. Properly providing desktop support for the company's 2000 employees, 1400 of whom are in the field, would have required a significant investment in help desk management systems, he says, yet what the company really needed was to build on its ERP deployment to help the business team improve productivity and increase revenue. Understanding the operational/innovation separation made the need to change the IT strategy clear.

By understanding which functions are strategic, ADP Employer Services CIO Bob Bongiorno has been able to increase the budget for IT staff working on new development efforts by 17 percent from 2005 to 2006, permitting growth from 575 to about 690 people, while keeping his overall budget nearly flat, rising just $US1 million this year to $US116 million. The extra money for new development efforts came from a variety of sources, including streamlining data centre operations and reducing maintenance costs.

While such separation is useful for strategic management, there needs to be communication among these two IT groups and the business to ensure that each does not go its own way and end up creating an environment where operations prevents innovation or where innovation strains the infrastructure. At the diversified manufacturer United Technologies, CIO John Doucette uses a CIO council to coordinate savings strategies among the company's divisions.