This is the fourth and final near term tactics post on a topic ever present in today’s economic climate: cost reduction. Though the US economy grew by 2.5% this past quarter and despite some willingness by companies to invest in IT (while there is a reluctance to invest in staff),  the overall corporate climate is to continue to cut costs. In this climate, IT must also deliver efficiencies, and you as a corporate leader must demonstrate that IT will do its share.  As I mentioned previously, first ensure you understand the business drivers behind the cost reduction for your company so you can appropriately shape your program in IT to meet those needs.

Assuming you have that understanding, I have recommended 5 near term areas that should provide real savings and also tighten up your organization to make it a leaner and more effective shop. It is important to note that most shops can achieve 3% to 15% reductions by executing these tactics and if done well, the changes will actually improve your longer term capacity and positioning.

As covered in the previous posts, the first area to tackle is what you spend on vendors and services or third party spend. Nest is to tackle making sure you have a ‘clean’ shop as well as pursuing consolidation and utilization efficiency initiatives. The final area, and perhaps most important area to address is staffing.

Before we get into the details of what to pursue, I need to highly emphasize that leadership is absolutely critical to ensure efficiency and reduction initiatives do not cause morale or productivity issues that compromise any gains. I have seen many such efficiency efforts have reduced impact or even result in broader disruption to the IT team and the business at large. So, understand that you are doing delicate work here that requires thoughtful decisioning and messaging as well as strong execution.

To achieve staffing efficiencies, there are three near term areas to focus. The first areas is to eliminate high priced contractors or consultants. We discussed this as part of getting a handle on third party spend but you should take a second look at it as you analyze your workforce. You should have metrics in place that tell you what your spending for consulting services is for the past quarter, the past year, by vendor, by IT area. Similarly, you should have spend metrics with number of contractors, their cost per hour or day, and by vendor and IT area. You should know how much more a consultant or contractors costs you versus a similarly skilled employee. In some cases it can be 50% to as much as 300%. If you have significant numbers of contractors or consultants providing services in areas that are not discretionary or project-driven (e.g. production or IT operations or maintenance areas), then you likely have the wrong staff mix. Can you shut down or defer discretionary projects and shift your staff there to displace contractors doing routine work? By properly balancing your workforce (an 85-95%/15-5% staff to contractor ratio for production work or a 50-80%/50-20% ratio for project work) you can optimize your cost base. By replacing contractors that cost you 50% to 200% more than you staff, you can accrue large savings very quickly.

In addition to optimizing your staff mix, you also should do a performance-based reduction. First and foremost, you must get your messaging and goals and vision nailed down before you start this. If you do not, then your organization will be rife with rumors and your best people will immediately be exposed to attrition elsewhere. Poorly executed reductions in force invariably result in a greater proportion of the best staff leaving rather than poor performers if the vision, goals and messaging are not well-communicated. Note the recommendation is for a performance-based reduction, not an arbitrary reduction in force, or a last-in first-out reduction, or anything that is not primarily merit-based. At this point you may be saying, but we have a good team, we are already stretched, we do performance management HR stuff every year, how can we absorb a performance based reduction? My response would be that if the rest of the organization is doing staff reductions, then you need to step up also. And even if only some of the organization is doing this, you should bite the bullet and do the performance reductions. Why? Because your HR processes rarely work as well as you think, and you likely have built up more bad apples and poor performers than you realize or your managers care to admit. And never let a good crisis go to waste. These bad apples and poor performers, even if few in number, really cost you and your organization. The Wall Street Journal had a great recent article explaining the outsize negative impact of bad apples. So, come up with the right messaging — that is, your target organization is a high performance organization; that these actions must be taken as a prudent step given these economic times; that these are all that is expected (but of course no guarantees); that merit and performance are the primary criteria; that you will continue to invest in training and adding key staff where it is critical (and you must back this up and do it); and that you will drop contractors first where possible (again, you must then do this).

Huddle with your managers and HR. Look for at least a 2% reduction, that is the typical minimum amount of deadwood in your organization. Ensure that where you have weak managers, HR and a strong set of peer managers closely reviews each manager’s 2% candidates to ensure no favoritism or bias. Ensure customer views of staff performance are included (but only as one of many factors of performance). And then execute in a timely and decisive fashion. Once completed, refocus the team on the job ahead. Now that you have eliminated the deadwood, many of staff will walk with a lighter step because Joe, the problem guy, is no longer causing problems. He is gone with the rest of the performance problems, and productivity and quality should rise.

The final area to address is training and graduates/interns. Typically, in cost cutting the first areas to get slashed are training and intern and graduate programs. This is penny wise and pound foolish. The ability to keep and attract the best and most productive staff is dependent on their ability to learn and do more. If you kill training, your skilled staff attrition will cost you far more than the training save. Further, how do you get improved productivity without the training? Similarly, graduate and intern programs require long runways and consistent support to have proper effect. Slashing them one year and reinstating them next year will not impress any top graduates. You are cutting off typically your best and lowest cost recruiting tool.  Again, the long term costs will far outweigh the savings.

So, instead, take the following actions. For training, huddle with your key vendors and work with them to see if they can provide greater discounts or free training. Can they come on site and offer seminars or classes for a group of your engineers (getting a better environment and  lower unit cost delivery)? Unless absolutely necessary, change training from one of your team traveling to a class to having the vendor or institution bring the trainer to your site (or videoconference) and train 10 to 14 of your staff. Thus reducing your training costs but increasing its impact. Don’t send 5 team members to one conference. Send 1 or 2 and have them take great notes, do a trip report, and hold a seminar for the team when they get back. They will treat it more serious, value it more, and generate excellent team interaction as a result. For graduate and intern programs, reduce the number of school visits, perhaps slightly reduce the number of graduates or interns, but really protect this investment. You are likely spending more for a few contractors for short term results than you are for your entire intern and graduate program which gets you long term results and high performance future.

So, in a nutshell, you have three key areas for near term staff efficiencies: balancing your workforce mix, performance-based reductions, and training and graduate investment alignment. But they must be done only when you have established clear vision and goals and you execute robust messaging so you avoid the engagement pitfalls. In sum, you can get significant near term cost reductions in this area if you execute it well as a leader.

What other areas would you tackle? Have you seen well-executed or poorly executed staff efficiency initiatives?

I will cover in much greater detail how you achieve much greater staff productivity and cost improvement as a long term initiative in the next few months.

Look forward to your comments.

Best, Jim

 

 

 

This is the third near term tactics post on a topic ever present in today’s economic climate: cost reduction. Though the US economy grew by 2.5% this past quarter and despite some willingness by companies to invest in IT (while there is a reluctance to invest in staff),  the overall corporate climate is to continue to cut costs. In this climate, IT must also deliver efficiencies.  As I mentioned previously, first ensure you understand the business drivers behind the cost reduction for your company so you can appropriately shape your program in IT to meet those needs.

Assuming you have that understanding, I have recommended 5 near term areas that should provide real savings and also tighten up your organization to make it a leaner and more effective shop. The first area to tackle is what you spend on vendors and services or third party spend. The second area to tackle is making sure you have a ‘clean’ shop. These are covered in the previous posts. These should yield savings of 3 to 10% in the first year if applied effectively. But you will need to do more. The next two tactical areas to pursue are consolidation and utilization.

In almost every shop, just based on natural growth, company acquisitions, or inadequate discipline, you end up with multiple solutions for the same processes or business services. And also in almost every shop, there are the future architectural diagrams where everything becomes unified and integrated at some point in the future. This typically occurs after one or two decades and several miraculous projects. What you should do as the IT leader is make some tough decisions where you have multiple systems and significantly more expense with little added value. I recommend starting with the IT systems. This would include everything from asset management to change and problem management to systems management tools. Gather suggestions on where the most problematic or redundant systems are in IT from your staff. It is likely that the areas with most overlap are also the ones with the most friction and religious fervor. One example I encountered was three different PC software configuration management systems including one that was built and maintained in-house!

We assembled a team that included representatives from each of the competing groups, added some strong analysts (including from finance) and basically did a product bake-off. It was also easy to establish that our bank was not going to be producing and marketing PC configuration software, but instead that we would ensure the critical features the in-house solution delivered would be required of the off the shelf solution. The bake-off was completed, we selected the single solution, and then we ensured that the leadership commitment was fully communicated so everyone knew we were driving to a single solution quickly and fully. This yielded significant in-year savings. A quick survey of your shop will find areas where having two or more is of no significant added value at additional cost, and those areas where it may add value or it may have high hurdle costs (e.g., multiple development tools). My recommendation would be that you have singular toolsets for all IT production processes (change, problem, etc), financial processes, and HR and administration processes. Systems management and asset tools should be multiple only where there are compelling reasons to do so. If IT cannot agree and leverage singular solutions, how will you convince your business partners they do not need multiple loan, banking, or general ledger applications? And the IT consolidations can generally be done more quickly and smoothly than business systems consolidations. So start within the IT shop.

For business system consolidations, most of these initiatives could not be classified as near term. So I will primarily cover this area when I talk subsequently on your long term efficiency and quality approaches. For the near term, though, get in place a full inventory of your business systems and identify their costs by system. Then take that information along with the identified overlaps and sit down with your business partners, particularly those knowledgeable on how the business operations work, and discuss what should be done with the overlaps. You may be surprised but occasionally the business team will say, ‘With that cost, we think we can turn that system off as we do not really use it and it is not worth it’. Chalk it up as a win, decommission the system and count the savings.

In addition to consolidating or eliminating redundant systems, another near term tactic is to address poorly utilized resources. Every sizable IT shop should have a team of performance experts for their major resource pools. If you have a mainframe, than you should have a least one senior engineer for every 5,000 to 10,000 MIPs that on an ongoing basis, goes through all of the work running on the mainframe and identifies poor code, improper parameters, wasteful routines, etc. There are a plethora of tools that your most senior performance management experts can use to identify where the waste is. And most of the fixes are relatively simple and low cost. And you will quickly save hundreds of MIPs, gigabytes, terabytes, etc. You will not have to make that next purchase of the mainframe or servers or disk. Instead, you will recapture your current capacity. You should put in place these performance management teams that identify such waste, provide the detailed solutions to your application or infrastructure engineering teams to implement for each major resource pool: mainframe, server, disk, and network. And the requirement should be that they identify and help implement every quarter savings worth 3 to 5 times the cost of the team. Make sure you provide the sponsorship of the efficiency implementations with your application and engineering teams. But, if you provide that backing, you should find strong utilization savings within 3 to 6 months. And even better, you will find performance improvements in your systems with wall time reductions in batch, better user response times, less latency — all because you eliminated wasteful processing that was hogging resources.

We are almost complete on the near term efficiency tactics — I will be covering staffing in the final segment. I should point out that the two areas discussed today: consolidation and utilization, can only be address if you have adequate senior engineering talent and leadership. And you must give them the leeway to identify waste and issues without incurring penalties but instead garnering your support to fix them. This is a critical leadership requirement. You must encourage your engineers to fix the problems and provide them the support to fix them. Going forward you must also insist on high standards so you do not create more problems, but when you are starting to fix things, you do not help your cause if you punish the very team who is trying to fix the issues.

What savings have you been able to achieve by consolidating systems? Where you able to execute them and achieve the savings in the short term? or did it take longer?

Do you have any good performance management approaches to share? As the industry moves to cloud computing, efficient utilization and management becomes more critical (but should be easier). What are your thoughts on how to ensure you are getting the most efficient use of your resources in the cloud environment?

Next week I will post the last near term efficiency tactics topic. I look forward to your feedback.

Best, Jim