Tag: IT Efficiency

Overcoming the Inefficient Technology Marketplace

    Jim D

The typical IT shop spends 60% or more of its budget on external vendors – buying hardware, software, and services. Globally, the $2 trillion dollar IT marketplace (2013 estimate by Forrester) is quite inefficient where prices and discounts vary widely between purchasers and often not for reasons of volume or relationship. As a result, many IT organizations fail to effectively optimize their spend, often overpaying by 10%, 20%, or even much more.

Considering that IT budgets continue to be very tight, overspending your external vendor budget by 20% (or a total budget overrun of 12%) means that you must reduce the remaining 40% budget spend (which is primarily for staff) by almost 1/3 ! What better way to get more productivity and results from your IT team than to spend only what is needed for external vendors and plow these savings back into IT staff and investments or to the corporate bottom line?

IT expenditures are easily one of the most inefficient areas of corporate spending due to opaque product prices and uneven vendor discounts. The inefficiency occurs across the entire spectrum of technology purchases – not just highly complex software purchases or service procurements. I learned from my experience in several large IT shops  that there is rarely a clear rationale for the pricing achieved by different firms other than they received what they competitively arranged and negotiated. To overcome this inefficient marketplace, the key prerequisite is to set up strong competitive playing fields for your purchases. With competitive tension, your negotiations will be much stronger, and your vendors will work to provide the best value. In several instances, when comparing prices and discounts between firms where I have worked that subsequently merged, it became clear that many IT vendors had no consistent pricing structures, and in too many cases, the firm that had greater volume had a worse discount rate than the smaller volume firm. The primary difference? The firm that robustly, competitively arranged and negotiated always had the better discount. The firms that based their purchases on relationships or that had embedded technologies limiting their choices typically ended up with technology pricing that was well over optimum market rates.

As an IT leader, to recapture the 6 to 12% of your total budget due to vendor overspend, you need to address inadequate technology acquisition knowledge and processes in your firm — particularly with your senior managers and engineers who are participating or making the purchase decisions. To achieve best practice in this area, the basics of a strong technology acquisition approach are covered here, and I will post on the reference pages the relevant templates that IT leaders can use to seed their own best practice acquisition processes. The acquisition processes will only work if you are committed to creating and maintaining competitive playing fields and not making decisions based on relationships. As a leader, you will need to set the tone with a value culture and focus on your company’s return on value and objectives – not the vendors’.

Of course, the technology acquisition process outlined here is a subset of the procurement lifecycle applied to technology. The technology acquisition process provides additional details on how to apply the lifecycle to technology purchases, leveraging the teams, and accommodating the complexities of the technology world. As outlined in the lifecycle, technology acquisition should then be complemented by a vendor management approach that repairs or sustains vendor performance and quality levels – this I will cover in a later post.

Before we dive into the steps of the technology acquisition process, what are the fundamentals that must be in place for it to work well? First, a robust ‘value’ culture must be in place. A ‘value’ culture is where IT management (at all levels) is committed to optimizing its company’s spending in order to make sure that the company gets the most for its money. It should be part of the core values of the group (and even better — a derivative of corporate values). The IT management and senior engineers should understand that delivering strong value requires constructing competitive playing fields for their primary areas of spending. If IT leadership instead allows relationships to drive acquisitions, then this quickly robs the organization of negotiating leverage, and cost increases will quickly seep into acquisitions.  IT vendors will rapidly adapt to how the IT team select purchases — if it is relationship oriented, they will have lots of marketing events, and they will try to monopolize the decision makers’ time. If they must be competitive and deliver outstanding results, they will instead focus on getting things done, and they will try to demonstrate value. For your company, one barometer on how you are conduct your purchases is the type of treatment you receive from your vendors. Commit to break out of the mold of most IT shops by changing the cycle of relationship purchases and locked-in technologies with a ‘value’ culture and competitive playing fields.

Second, your procurement team should have thoughtful category strategies for each key area of IT spending (e.g. storage, networking equipment, telecommunications services). Generally, your best acquisition strategy for a category should be to establish 2 or 3 strong competitors in a supply sector such as storage hardware. Because you will have leveled most of the technical hurdles that prevent substitution, then your next significant acquisition could easily go to any of vendors . In such a situation, you can drive all vendors to compete strongly to lower their pricing to win. Of course, such a strong negotiating position is not always possible due to your legacy systems, new investments, or limited actual competitors. For these situations, the procurement team should seek to understand what the best pricing is on the market, what are the critical factors the vendor seeks (e.g., market share, long term commitment, marketing publicity, end of quarter revenue?) and then the team should use these to trade for more value for their company (e.g., price reductions, better service, long term lower cost, etc). This work should be done upfront and well before a transaction initiates so that the conditions favoring the customer in negotiations are in place.

Third, your technology decision makers and your procurement team should be on the same page with a technology acquisition process (TAP). Your technology leads who are making purchase decisions should be work arm in arm with the procurement team in each step of the TAP.  Below is a diagram outlining the steps of the technology acquisition process (TAP). A team can do very well simply by executing each of the steps as outlined. Even better results are achieved by understanding the nuances of negotiations, maintaining competitive tension, and driving value.

 

Here are further details on each TAP step:

A. Identify Need – Your source for new purchasing can come from the business or from IT. Generally, you would start at this step only if it is a new product or significant upgrade or if you are looking to introduce a new vendor (or vendors) to a demand area. The need should be well documented in business terms and you should avoid specifying the need in terms of a product — otherwise, you have just directed the purchase to a specific product and vendor and you will very likely overpay.

B. Define Requirements – Specify your needs and ensure they mesh within the overall technology roadmap that the architects have defined. Look to bundle or gather up needs so that you can attain greater volumes in one acquisition to possibly gain better better pricing. Avoid specifying requirements in terms of products to prevent ‘directing’ the purchase to a particular vendor. Try to gather requirements in a rapid process (some ideas here) and avoid stretching this task out. If necessary, subsequent steps (including an RFI) can be used to refine requirements.

C. Analyze Options – Utilize industry research and high level alternatives analysis to down-select to the appropriate vendor/product pool. Ensure you maintain a strong competitive field. At the same time, do not waste time or resources for options that are unlikely.

D, E, F, G. Execute these four steps in concurrence. First, ensure the options will all meet critical governance requirements (risk, legal, security, architectural) and then drive the procurement selection process as appropriate based on the category strategy. As you narrow or extend options, conduct appropriate financial analysis. If you do wish to leverage proofs of concept or other trials, ensure you have pricing well-established before the trial. Otherwise, you will have far less leverage in vendor negotiations after it has been successful.

H. Create the contract – Leverage robust terms and conditions via well-thought out contract templates to minimize the work and ensure higher quality contracts. At the same time, don’t forgo the business objectives of price and quality and capability and trade these away for some unlikely liability term. The contract should be robust and fair with highly competitive pricing.

I. Acquire the Product – This is the final step of the procurement transaction and it should be as accurate and automated as possible. Ensure proper receivables and sign off as well as prompt payment. Often a further 1% discount can be achieved with prompt payment.

J & K. The steps move into lifecycle work to maintain good vendor performance and manage the assets. Vendor management will be covered in a subsequent post and it is an important activity that corrects or sustains vendor performance to high levels.

By following this process and ensuring your key decision makers set a competitive landscape and hold your vendors to high standards, you should be able to achieve better quality, better services, and significant cost savings. You can then plow these savings back into either strategic investment including more staff or reduce IT cost for your company. And at these levels, that can make a big difference.

What are some of your experiences with technology acquisition and suppliers? How have you tackled or optimized the IT marketplace to get the best deals?

I look forward to hearing your views. Best, Jim Ditmore

Delivering Efficiency and Cost Reduction: Long Terms Tactics Wrapup

    Jim D

In the last several posts we have covered how you should deliver IT cost reductions with long term tactics that also enable you to build capability and capacity.  If executed well, you will also yield some longer term benefits such as a better workforce balance or elimination of redundant or low value systems. These tactics require relentless leadership and focus by you. You must keep them in the forefront and ensure you are progressing on them everyday. Your patience and influence are required as well. You must obtain business support for efforts that often have a longer cycle than the business team is used to supporting.  If you are both consistent and persistent in your approach, and employ these tactics, you will make a material difference, in some cases a massive difference, that will make your business far more competitive and is simply unattainable through other approaches.

We discussed that these long term tactics are executed by first laying a groundwork for sustainable improved cost through quality. Second, you build a highly productive and well-balanced team in order to meet a world class cost profile. Throughout you leverage metrics-based, transparent framework with continuous process improvement that enables you to progress and achieve world class performance. A concurrent effort with building a high performing team is to migrate to a modern, consolidated infrastructure and well-architected core systems. We will discuss this effort today and wrap up our efficiency discussion.

Nearly every IT shop that has quality or cost problems has a proliferation of archaic systems and fragmented, legacy infrastructure. The causes of this are myriad but generally result from: poor or shifting business vision and sponsorship (e.g., when you have 3 different sales executives in 4 years, IT delivers 2 and 1/2 application systems trying to match the business variances and results in multiple systems that never do what was needed); an inability of the business to invest in a steadfast manner (e.g., IT projects run out of funding, or funding shifts, thus every year projects are half completed resulting in the old systems staying in place with the new systems going in); a stagnant IT team with poor best practices and leadership that allow multiple mediocre solutions where one good solution would suffice.

As the IT leader, you must tackle the business causes first before setting out to fix this area. Draw up a compelling vision of what the systems should provide. Research and gather the facts on the costs, time to market impacts, business productivity, feature loss and quality issues due to the current multiple mediocre systems. Map out a new process and authorization where you get the multi-year business support and sponsorship to execute the vision. Going from three mediocre overlapping business systems to one well architected systems with better quality will enable efficiency and productivity gains across the board — in your shop and in theirs. This is a vision that you should get everyone to rally around. Ensure there is a investment process that enable multiyear funding and review of major projects and conversions that also tracks to ensure the benefits are delivered. The CFO should be your partner in this. It is in his interest to see that everyone meets the costs reductions and other benefits promised. And it is in yours as well, because often you accumulate the layers of barnacles by only doing 80 or 90% of a project and not doing the final steps of decommissioning the old systems. By having a multi-year project process with benefit review or scorecarding in place, there will be far more impetus to ensure projects are completed and old systems removed.

Assuming you address the business sponsorship and project process issues, you must also address poor leadership and implementation on your side. First and foremost, IT cannot be a place for ‘hobbies’. That is, you need to ensure that all those pet technology projects and explorations that are not absolutely critical to a business capability or technology implementation that has real, near term benefits, are killed. Otherwise, they are a distraction and a multiplication of your technologies and thus costs.

Second, require every major application area and infrastructure component to map out current world and a future world where they are consolidated and at best practice. Then sit down with each team and your architectures and lay out the trajectory to get from today to best practice. Estimate the benefits from the transition. Ensure you capture the gains from your productivity and quality improvements. Then pick the top 3 to 5 areas and target them as major transformation initiatives for investment and turnaround. Garner the business support, get the approvals, make it part of your IT goals and communicate the importance to your team. And of course execute them. But also, in the other areas that mapped out their trajectories, work with them to come up with ways to make progress without major funding. Identify and execute the quick ROI projects that enable you to save within the year or almost within the year. Work with vendors to come up with creative ways to overcome the investment hurdle to move your technology to a best in class platform. And every time you can come up with efficiencies or savings elsewhere, turn around, pull the next best consolidation and replatforming project off the queue and get it going. As these projects execute and land, it will drive a virtuous cycle of additional savings and quality that will enable you to more rapidly transform as well as to shift, over time, more and more resources to the point of the spear where you are attacking the business problems and needs.

The long term tactics will take 9 to 12 months to achieve some results and 18 to 24 months to yield impacts, but once you really start executing and implementing, the compound gains can be enormous. Given IT can be a very large cost center within a corporation, IT can often one of the top contributors to cost reductions. And given IT systems availability and quality drive customer service, IT improvements can be the biggest push behind improved customer satisfaction. These are huge wins for you company. So, as you are faced with cost efficiencies demands of todays environment, leverage the near term and long term tactics described to put you and your company in a winning position.

So, we have spent nearly two months covering the very important topic of cost efficiency in IT. Every IT shop today is faced with these demands. You now have the tools to drive this far more effectively. Let me know where things have gone awry or where more detail is need to handle the complexity of your situation.

Best,

Jim

 

Delivering Efficiency and Cost Reduction: Long term tactics

    Jim D

We have spend the past several weeks covering how to deliver efficiency and cost reduction in IT, and particularly how to do it while maintaining or improving your capabilities. In my last post we discussed what are some of the recent technology industry trends that enable reduced costs at the same or improved capabilities. In this post we will cover the first two of the long term tactics that you can leverage to achieve world class cost and performance: quality and a high performance team.

The first and really most important area to tackle is quality. If a factory had a quarter of the output that it produced was defective and became scrap, it could no long compete in the lean manufacturing regime of today’s industry. Yet frequently, IT shops have defect rates of 10%, 20%, or even north of 50%. And much of the time and effort of the IT team is actually spent fixing things as opposed to new work or proper maintenance. You need to regard every defect in your shop as waste and as a cost to you and your business. You should tackle this waste wherever it occurs in your shop. It is not uncommon for more than 50% of large projects or programs to be over schedule and over budget. It is not uncommon to see shops where more than 10 or 20% of the changes result in some other problem, typically impacting production and service to the customers. These areas must be addressed with rigor.
For projects and programs, are you following a robust project methodology? Do you have proper sponsorship and governance? Are you leveraging a strong analysis and requirements management methodology and toolset? Are you taking advantage of modern methodologies that solve the tough parts of a problem first, get good prototypes out early for user review and avoid the big bang and timeliness issues of a waterfall approach? Are you giving your project managers a full toolset along with the industry training and empowerment to make the right calls? If not, then you are likely experiencing issues and delays on more than 25% and perhaps more than 50% of your projects. And that is where your money is being wasted. When a fully staffed project team is waiting for requirements signoff, or when requirements are being changed again, too late in the project cycle, you are burning project monies while the resources idle or have to do rework. By introducing a rigorous process and robust tools and metrics, you will be able to avoid most issues before they start and for those that do occur, you will know precisely why and be able to correct it for the next project.
For your production services, you should insist on at least a 98% change success rate and if you wish to be a 1st quartile shop you need to drive to a 99% or 99.5% change success rate. This means that for every 200 changes only 1 or 2 fail. These success rates can be achieved by ensuring you have an effective but not burdensome change process and you have rigorous change testing and planning (including a backout plan). Have your operations and service management experts participate in and provide guidance to those making the changes (either the application areas or the infrastructure teams). And ensure full root cause on any change that fails with the requisite actions to prevent re-occurance being completed. Publish simple and straightforward reports on change and project success and quality. By measuring quality your team will get the message and place much more emphasis on getting it right the first time. And remarkably, by focusing on quality first, you will get a strong reduction in cost (whereas if you first tried to reduce costs then to improve quality you would make little progress on either). Accompanying this thrust with simple but bedrock true messages such as ‘Do it right the first time’ and ‘Spend it like it is your own money’ go a long ways to get the spirit of what you are trying to get accomplished across. You must mean it though and you must back up doing it right, even if it costs more initially. Remember you are looking to establish a quality culture and achieve longer term returns here.

The other long term tactic we will discuss today is achieving a highly productive and well-balanced team. First, understand that while you are implementing longer term team plans you should leverage some or all of the near term tactics for staffing that I identified in the October 31st post. The long term tactics are straightforward and are based on you attaining a staffing mix that is composed of a balanced mix of top performing individuals who, for your company, are in the right geography and at critical mass sites.

Some key truths that should be recognized and understood before setting out to build such a highly productive team:

– top performing engineers, typically paid similar as their mediocre peers are not 10% better but 2x to 10x better

– having primarily only senior engineers and not a good mix of interns, graduates, junior and mid and senior level engineers will result in stagnation and overpaid senior engineers doing low level work

– having a dozen small sites with little interaction is far less synergistic and productive than having a few strategic sites with critical mass

– relying on contractors to do most of the critical or transformational work is a huge penalty to retain or grow top engineers

– line and mid-level managers must be very good people managers, not great engineers, otherwise you are likely have difficulty retaining good talent

– engineers do not want to work in an expensive in-city location like the financial district of London (that is for investment bankers)

– enabling an environment where mistakes can be made, lessons learned, and quality and innovation and initiative are prized means you will get a staff that behaves performs like that.

With these truths in mind, set about building the team by addressing your workforce strategy (sites and mix); upgrading your recruiting and performance management; and revising your goals and rewards. Then execute these relentlessly while you up the training and coaching. As this begins to bear results you will then need to prune the poor performing managers and filter out the low performing staff.

So build a workforce strategy that matches the size and scale of your company. If your company is global, you will need a global workforce. If it is domestically focused, be domestic but look at near shore engineering locations as well. Establish the proper contractor staff mix based on function (again see the near term efficiencies staff post). Ensure your locations match up to where you can draw talent. For example, minimize expensive in-city locations. Choose instead locations with good commuting, very good nearby engineering universities and vibrant nearby communities. You will be rewarded with better quality engineers and lower attrition. Do you have 12 locations each with 50 to 150 engineers? Consider consolidating to 3 or 4 sites each with 300 to 500 engineers. And one or two should be global or near shore sites. And ensure you set it up so any significant IT function is done in two locations (thus eliminating the cost for BCM and establishing opportunities for work handoff between the sites yielding faster time to market). Establish strong intern and graduate programs with the universities near your key sites. If you are overweight with senior engineers, ensure that your new hires are graduates or junior engineers (even if by mandate). As you compose the plan, engage you senior business leaders to ensure you have support for the changes and potential synergies with other business sites or locations. Ensure they understand you will always locate client-facing personnel with the client, but IT ‘back and middle office’ staff will be where it is best to recruit and retain IT talent.

Make sure your recruiting practices are up to snuff. You should be doing a thorough filtering of technical talent while also ensuring that you are getting someone who can work well with others and has the same key values of quality, initiative and responsibility that you are seeking. Leverage team interview or top-grading practices as appropriate to ensure you weed out those that do not interact well (especially management recruits or team leads). Invariably, management in a IT organization can improve how they handle performance management. Because most of the managers are engineers, their ability to interact firmly with another person in a highly constructive manner is typically under-developed. Provide classes and interactive session on how to do coaching and provide feedback to employees. Even better, insist that performance reviews must be read and signed off by the manager’s manager before being given to improve the quality of the reviews. This a key element to focus on because the line manager’s interaction with an employee is the largest factor in undesired attrition and employee engagement.

Even if you execute your workforce mix and your recruiting and performance management flawlessly and you do not align your goals and rewards (and incentives) you will not get the change you desire. Quite simply, your smartest team members, will observe what you reward, and if you do not reinforce the values you are looking to achieve (productivity, quality, initiative, etc), you will not get the changes desired. So, gather your senior team. Work together to revise and update the vision and goals of your organization. Ensure they are big enough goals (e.g., Not ‘ Save $40M in costs’ instead ‘ Become top quartile in quality and efficiency in IT for our industry and company size by 201x’). And then line up quarterly awards that are very public that reward those who exemplify the values and results you are looking to achieve. The organization will then align their efforts much more keenly to your vision and goals.

Now that you have the foundation in place for long term results, execute and improve every quarter. You will need to begin pruning. And as you add new and better capability to your organization through improved recruiting techniques, you can afford to prune those marginal managers that you couldn’t lose before. This will provide another round of lift for your team productivity as they are replaced with better internal candidates who have grasped the new values and effort or better filtered external talent.

In the next post on long term tactics, we will talk about the metrics and benchmarking you will use to ensure you stay on track an enable you to identify additional and continual improvements. But you are on your way now.

What areas would you change? What pitfalls do you see or have you encountered? Post a comment and let me know. I look forward to your feedback.

Best, Jim

 

Delivering Efficiency and Cost Reductions: Long term approach

    Jim D

In the last 4 posts we have covered how you should deliver IT cost reductions in the near term. And if executed well, you will also yield some longer term benefits such as a better workforce balance or elimination of redundant or low value systems. But how do you deliver material improvements in cost and efficiency that are sustainable and material? First, you must put in place long term tactics that you will relentlessly pursue. To make a material difference here, you must be both consistent and persistent in your approach.

First, you lay the groundwork for sustainable improved cost through quality. Second, you must achieve a highly productive and well-balanced team in order to meet a world class cost profile. Third, you must have in place modern, consolidated infrastructure and well-architected core systems. And then finally, by leveraging a metrics-based, transparent framework with continuous process improvement you will achieve and then sustain the world class cost edge.

Cost reduction and efficiency have become a prevalent drumbeat for almost any IT shop in the past 4 years. I think it is important to recognize that just taking short term actions to achieve efficiencies for this quarter or this year are inadequate for today’s business environment. Because your business, regardless of the industry, is becoming more and more reliant on IT to deliver the services, enable the business operations. If you fall behind here because of cost-cutting, you are now impacting the viability of the business. Most importantly though, the technology, almost without regard to industry, is becoming a larger and larger portion of the product. Thus, if you do not build up better IT capability than you impact the future of your business. So, cost cutting must be done such that you build capability while reducing costs, no mean feat.

I think it is important to recognize that in many industries, the technology approach is now changed forever due to several key factors. The impact of consumerization of technology, mobility and smart phones, the growing scope of pseudo-automated workflow and application tools, and the economic upheaval of the past 3 years have changed dramatically how technology can should be applied. I will review these industry inputs and their impacts further tomorrow.

And then later in the week, I will map out the specifics for each of the four elements of achieving a sustainable and material cost advantage in IT over the long run.

IT Cost Reductions – Near term tactics: A ‘clean shop’

    Jim D

Our current topic is ever present in today’s economic climate: cost reduction. This is the third post on this critical area. Despite some willingness by companies to invest in IT (while there is a reluctance to invest in staff), IT must also deliver efficiencies. This is the second post on the near term tactics that you should employ to deliver the required cost reductions and efficiencies. As I mentioned previously, first ensure you understand the business drivers behind the cost reduction so you can appropriately shape your program to meet those needs.

Assuming you have that understanding, I recommend 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. This is covered in the previous post. The second area to tackle is making sure you have a ‘clean’ shop. Invariably, unless you have world class inventory and lifecycle processes, you will be able to save 1 to 3% of your budget by cleaning up. So, what is a ‘clean shop’?

A ‘clean shop’ is one where you are in control of all of your assets from PCs to mobiles to telecomm lines to software. Let me relay an interesting example of what was found through cleanup efforts. The first one was during a full data center cleanup, and not only did we find plenty of legacy server and telecomm gear that was little used or perhaps not used in 6 or even 18 months, but we uncovered DS-3 circuits that were live but no longer in use that the company had been paying for for the past 8 years! Typically, the larger the company, the more cleanup to be had. Start with making sure your inventory processes actually work, and not just the commission process but probably more importantly, the decommissioning process. Assign a small SWAT team to work your major corporate sites. Their job should be to go into every major site and sweep it of legacy, unused equipment. You may have endusers hoarding equipment no longer used in the hopes that they might need it for a new employee. If so, make sure your billing and processes do not penalize them to turn the stuff in. Hold an amnesty day by site. Publicize how much was collected and how much the company will save on maintenance, property taxes, and so on. Make sure your SWAT decomm team takes care of completing every decommission task, including getting the inventory updated and getting the decommissioned items off your vendors’ maintenance bills.

With the decommissioning processes corrected and the sites starting to be cleaned, go broader. Tackle your data centers. You should walk a few of them. If there is old equipment and boxes piled around, you have excess inventory that is costing you. Ensure your engineering teams know they must run a ‘clean shop’. Again, assign a SWAT team to decomm with server, network and storage engineers represented. Have someone from your finance team participate, you may up with required writedowns on equipment no longer in production but still on the books. That is fine, if the company is in cost reduction mode, there are invariably writeoff mechanisms for the corporation overall. And remember, for every server or device you unplug, you will get power and cooling savings.

Next, go after the user equipment, but partner with your business unit CFOs. Develop and give the the business units some nice reports that show how many users have two PCs (or more), how many have two cell phones (or more), how many home lines (even ISDN in this day and age !) that the company is paying for, and how much their business unit can save by getting rid of the excess equipment and inappropriate services (e.g., only the CEO should have the line to their house paid for). But make sure you have run a quick report on IT and you have your house in order. And make sure that when users start turning equipment in, you can decommission or reuse it effectively and it comes of their internal bill or costs.

Last, but not least, tackle software licenses. Most often the case is that you are over-licensed — all those PCs turned in mean you can recycle their software licenses for new users. And you may find you are paying maintenance for old  software that is not used, or the maintenance assumes a much higher number of devices. Software asset management is a very complex and consuming area, but it is also an area where IT shops spend significant sums.

So, by cleaning up your IT assets, and putting in place good asset management processes, you should be able to save at least 1% to 3% of your annual budget. In the next post we will discuss the 3rd near term cost reduction tactic to employ — with staffing, but not in the manner typically implemented.

Have you tried any of the ‘clean shop’ techniques? What were the results? Any practices that really improved the results?

Best, Jim

 

IT Cost Reductions – Near term tactics: 3rd Party savings

    Jim D

As I outlined in the previous post, cost reduction is ever present in today’s economic climate. And that includes IT. But, it is worthwhile to note, that during this ‘jobless’ recovery, businesses are investing in IT and other infrastructure to boost productivity and reduce costs. Thus, IT is one of the few areas where investment is occurring (versus hiring more staff). While you may have some investment increase coming in, what are the near term tactics that you should employ to deliver the required cost reductions and efficiencies? As I mentioned in the previous blog, first ensure you understand the business drivers behind the cost reduction so you can appropriately shape your program to meet those needs.

Assuming you have that understanding, where do you start? I recommend 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. In order to address this area you must understand the details and trends behind your third party (3P) spend. This can be anywhere from 30 to 70% of an IT shop’s total budget. And, unfortunately it is often not well-leveraged. Use your finance and procurement team to get the spend facts and trends. And then engage your team to ensure they understand that you will be driving a new level of leverage from this area. The first rule with any vendor is: they must deliver to the same high standards you hold for yourself and your team. And the second rule is: partner effectively together. How do you get savings in this area? Start by calling the every significant vendor in and explain to them the pressures facing you and your company and that you need their ideas on how to cut costs. If they are any good, they have been waiting for this call. If they are really good, they have proposals at the ready. Remember they will suggest that you must give them more revenue to save you money. While there may be a great idea buried in that sales pitch, avoid the suggestion and ask them to save you significant monies on your current costs and their current revenues. Tell them every area of your budget is getting reduced and they must contribute. Assign strong members from your team to each vendor, partnered with your procurement organization and review and track every savings proposal. Assign the vendors appropriate challenges — do they provide contractors? how about a 10% per hour rate cut? Many of the big banks have already done this (and perhaps 15 or 20%). Look to reduce the maintenance fees, identify unused licenses and return them for refund or maintenance reduction, negotiate for bigger discounts for anything you buy. Eliminate distributors and middlemen where ever possible. Use a procurement benchmarking service to ensure you are getting a good discount. Make every purchase a level playing field with competition. Make sure you personally review every major 3P contract and new deal — and when you do, ensure it is up to a high standard. Ensure your team understands these new principles. You should be spending your company’s money as if it is your own.

Is your team using consulting services? or expensive senior level contractors? These may be required for specific critical efforts or tasks but they should all have a turnover period where critical work is handled by your team, not the consultants. Figure out how to eliminate or dramatically reduce these third party expenses. The same goes for expensive contractors. It will be tough to keep up your team’s morale when you are reducing staff and yet you have lots of expensive contractors in your shop. Figure out how to transition the work to your team at much lower cost and improved control.

Track all of your cost reduction initiatives, vendor by vendor, task by task. Assign your finance lead and procurement lead to track these for you and ensure results. Have one of your most senior staff be responsible for the 3P reductions broadly — this also helps uncover areas where vendor relations may be too cosy. These actions will get you started on the 3P costs and should save you 10 to 20% of your 3P costs. I will cover other near term tactics in the next post that should yield a significant near term gain, typically 2% to 5% quick hit savings.

As I mentioned, it is a tough economic climate out there, make sure that you are holding the vendors to the same standards to which you are holding your shop. And make sure you listen when they come back with ways that if you change processes in your shop, can save them time and rework which they can pass back to you in the form of lower costs.

I would very much like to hear if you have implemented such an approach with 3Ps and how it went. And you will see the next post with more near term actions very soon.

Best, Jim

How to approach cost reduction

    Jim D

Given the current economic climate, IT shops everywhere are under pressure to reduce their costs. And often this has been the case for several years running. So where do you turn for either new areas, or better approaches that do not cut critical function or value? Over the next two weeks, I will cover both short term tactics and long term initiatives to get your costs down and deliver more value to your company. And if you happen to be the rare IT shop where cost reduction is not a primary goal, count your blessings, but be sure to apply these approaches in the background anyway, as it will enable you to build a stronger and more valuable shop.

Assuming that you have been given a task for either this year or next year’s budget to achieve cost reductions, what should your high level approach be? First, ensure you understand the business drivers for the cost reduction — are you losing market share? Are your overall corporate efficiency ratios too high? especially versus the competition? Is the view in the business that IT costs too much? Does not deliver value for the cost? Or, are there quarterly projections that must be met to satisfy the Street?
It is critical to understand the drivers of the request as your response should vary. For example, a focus on overall efficiency ratios would imply you require a long term plan and you should be working closely with business operations teams to jointly drive down total cost. Or, a focus on meeting near term targets indicates you will have concrete savings goals that must be met, but that it may be possible to simply defer critical spend into later quarters where revenues are higher. And if there are questions on IT value, then you must assume you have work to do with your business partners to communicate and demonstrate the value your team is bringing to the business.
Assuming you have ascertained the underlying drivers and you have cost reduction requirements that are enduring, what is the best overall approach?
First, it is critical to engage your team and ensure they are brought into full knowledge of the challenge. I strongly recommend against arbitrary or parceled out reductions. The opportunity to achieve savings varies widely within each group and assigning across the board targets will actually hurt some teams and will not put enough pressure on others. Even worse, next year, the lesson is that everyone will now sand bag on their budget because they will assume they will get an arbitrary cut. Instead, set an overall goal for the team and begin a bottoms up list of initiatives to achieve the savings. My next series of blogs will cover how you build a comprehensive and effective list of initiatives so you can achieve that target.
Once you have a draft of how to achieve the target, I recommend you always go back to the business with options. Typically you want to provide at least three: a series of minimal cuts that are very doable and have minimal business impact; second, a set of moderate cuts that meet the target and have some level of business impact; and lastly, going beyond, but where major business decisions must be made to confirm the level of impact is acceptable. By going back to the business with options, and your recommendation of course, you will enable the business to be in control and view you and IT as a partner in jointly solving the business imperative.

Over the next week we will cover how to get a comprehensive and doable set of initiatives that have both short term impact and long term benefits.

That is all for now, let me know your thoughts on the approach and how the cost environment is out their today.

Best, Jim