Penny Wise, Pound Foolish
GovTech 2013
George Ambler
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© 2013 Gartner, Inc. and/or its affiliates. All rights reserved.
Can You Be Smart About Cost Cutting?
From the
Executive Management Team:
Given current circumstances
known to all, the board requires
that all managers cut at least
10% off their budgets in the
next 30 days, preferably for
nonessential items.
Intelligent Cost Optimization Is Required
Jenga
Make sure you don't topple the business by removing the
wrong costs!
Key Issues
1. What is Cost Optimization and how should IT
leaders use this to make cost savings decisions?
2. How should the organization evaluate cost
optimization options?
3. What are the best practices for implementing a
cost optimization discipline?
Cutting Costs Versus Cost Optimization
Cost Cutting
Cost Optimization
Reactive
Strategic
Short-term results
Decisions tied to
business value
Across the board
Decisions often made
in haste
Cuts made selectively
Longer-term
initiatives and longerterm results
Six Pillars of Running IT as a Business
From a Financial Perspective
IT Budget
Mult Views
Investment
Planning
Chargeback/
Showback
• Choices
• Opex
versus
Capex
• TCO and
Business
Case
• Region/BU
• Funding
• Fixed vs.
Variable
• Tracking
Project Cost • Visibility
• Demand
• Benefits
Mgmt.
Realization
• Projects
• Services
• Resource
Type
• Run vs
Change
• IT vs
Business
• Allocation
Methods
• Fairness
• Post Project • Cost Transparency
Audits
• Investment • Appl TCO
Prioritization • IT Service
• Hard vs Soft Pricing
Benefits
• Accountability
Benchmark
IT Costs
Cost
Optimization
Performance
Metrics
• Defend or
Justify
• Run as a
Discipline
• Business
Value of IT
• Highlight
Areas to
Improve
• Frameworks
• Balanced
Scorecard
• Per Unit
Costs
• Procurement
• Reporting
• Cost Savings
• Operations
Within IT
• Visibility
• Joint
Business &
IT Savings
• Internal vs
External
• Process &
Innovation
• Cost vs
Price
• Detailed
Analytics
• Business
Value
• Strategy
• Trust
Running IT as a Business Requires IT Cost Transparency
• Financial
Impact
• User
Satisfaction
• Communications
• Visualization
Gartner Framework for IT Cost Reduction
Business Restructuring and Innovation
Process improvement, reorganization, new methods
Joint Business and IT Cost Savings
Implement cost-saving technologies with the business
Cost Savings Within IT
Identify opportunities to reduce IT costs
IT Procurement
Get the best pricing and terms for your IT purchases
Difficulty
Different types of cost optimization involve different parts of
the organization and varying IT department decision rights
Value
Government Cost Optimization Initiatives —
Meager Offerings Considering Big Goals
N = 70, 2Q 2009, Federal, State, Local Respondents. 20% Are
Federal Govt. N = 13 to 30 for Savings; Anecdotal
7
Biggest Opportunities for IT Budget
Reduction by IT Domain
Differences Between Average and Best Performers
Overall IT Spend
38% difference in cost
Application Development
53% difference in cost per function point
Application Support
55% difference in cost per function point
Mainframe
35% difference in cost per installed MIPS
Unix Server
62% difference in cost per server
Wintel Server
32% difference in cost per server
Storage
44% difference in cost per TB
Desktop
22% difference in cost per device
Help Desk
33% difference in cost per handled contact
Wide-area Data Network
43% difference in cost per device
Local-area Network
51% difference in cost per active port
Wide-area Voice Network
27% difference in cost per minute
Voice Premise Technologies
34% difference in cost per active extension
Barriers to Savings — There Are Many
Politics and
Silos
Poor IT Cost
Transparency
Lack of
Accountability
Money
Low Tolerance
for Risk
Lack of IT
Credibility
Legal
Constraints
Resource
Availability
Technical
Complexity
Treat IT Cost Optimization As An On-going IT
Discipline
Traits of best-in-class companies:
Create a culture of continuous
improvement
Operate from a basis of fact
Strategiz
Strategize
e
Manage
Look at the Demand side of IT as well
as Supply side
Alignment of the IT and
business strategy
Present a long-term vision, not short
term
Focus on successful execution,
including a program in place for
benefits realization to hold people
accountable through measured
performance
Use working capital from IT savings to
self-fund improvements towards
business
Our services
constantly evolve
with clients' changing
needs, but our focus
Optimize
on results never
changes
Execute
Evaluate
Create Cost Optimization Team
Assign some of your best staff
Include a financially qualified professional
Strengthen relationship management roles
Define cost-cutting goals and project timelines
Establish rapid go/no
go approval process
Meet weekly
IT Cost Optimization Program
Formulation
1
Establish Baseline
2
Identify
Opportunities
3
Develop Strategy
4
Track Benefits
• Capture all IT service delivery costs — current year and five year
forecast
• Categorize by asset class — HW, SW, personnel, services,
occupancy costs, and so on
• Allocate into services — establish unit cost baseline for market and
business tests
• Analyze spend gaps against market peers
• Identify high-value opportunities for cost reduction, service
improvement, and business enablement
• Assess benefit against risk to change (as well as time,
investment)
• Develop strategy and road map for most viable opportunities
• Analyze organizational change needs to manage people impact
• Create communications plan
• Create an IT cost optimization (ITCO) program office
• Monitor, measure, and report
• Identify opportunities to accelerate while managing out risk
1. Establish Baseline
IT Investment Metrics
IT Spending as % Revenue
IT Spending as % Opex
IT Spending per Employee
2013 Spend
3.5%
4.4%
$13,197
IT Spending Distribution
IT Capital
28.0%
IT Operational
72.0%
IT Spending, by Asset Class
Hardware
17.1%
Software
20.5%
Personnel/Occupancy
41.2%
Outsourcing/Third-party Services
21.2%
IT Spending, by Strategic Category
Run the Business
64.9%
Grow the Business
20.4%
Transform the Business
14.8%
IT Spend, by Technology Domain
Data Center
22.2%
End User Computing
10.5%
IT Service Desk
7.4%
Data Network
9.0%
Voice Network
5.8%
Application Development
18.6%
Application Support
15.9%
IT Management
6.4%
IT Finance and Administration
4.2%
Complete the Gartner IT budget tool to help
establish an initial baseline (view at left). Such
views (options below) help form insights from
which to better manage IT spend and set context
for IT cost optimization efforts.
By BU
Business
Consumption
View
By Services
Chargeback/
Showback
Productivity Measures Complement IT Budget Analysis:
• Infrastructure:
- OS Instances per FTE
- TB Storage per FTE
- Handled Contacts per Client Service Rep.
• Applications:
- Function Points per Developer
- Defects per Thousand Function Points
2. Identify Opportunities &
Assess Viability
For each opportunity generated:
• What's the upside?
?
Costs,
Time, and
Risks
• Is it worth the effort?
Benefits Benefits
Potential Benefit:
• How big is the saving if the action is implemented and
how does it affect cash flow?
Business Impact:
Small
Medium
Large
Negative
None
Positive
>18 months
6 to 18 months
<6 months
High; staff
redundancies,
and re-engineering
of processes and
structures
Moderate; limited
changes in roles,
structures, and
processes
Low; no staff
reduction, nor
changes in
organization and
processes
High; impacts OS,
DB, middleware,
and applications
Moderate; impacts
few components of
the architecture
Low; little more
than "moving
boxes"
High
Moderate
Low/None
• What impact will this have on the business?
Time Requirement:
• Can you capture the savings in this fiscal year?
Degree of Organizational Risk:
• Will your leaders ensure the changes are made?
Is your organization capable of adapting to the changes?
Degree of IT Technical Risk:
• Is there a risk that the change will undermine the ability
of your systems to deliver?
Investment Requirement:
• Does the change require a large upfront investment
before savings can be captured? Is the organization
willing to make an investment at all?
3. Develop Strategy & Ready
Change Program
Is the risk worth
the reward?
$8.0M
Application
Portfolio
Optimization
Improve
Application
Delivery
Implementation
Risk/Time
Outsource Application
Development and
Support
$5.7M
$6.0M
$1.5M
$1.5M
Improve ILM
and Data
Reform IT
Governance
and Demand
Mgmt.
$8.0M
$10.5M
Optimize
Infrastructure
Service Delivery
Optimize End
User Support
$2.0M
Re-compete Data
and Voice Networks
Opportunities likely
taken as natural part
of business
Benefits/Cost Savings
Note: All figures are in millions of dollars
4. Track Benefits & Watch for
Lower Yields
Large Program Benefits Predicted
Increase
Virtualization
Mature
S/W Asset
Mgmt.
Practices
Mature
Key ITIL
Processes
Unanticipated
Business Changes
Rationalize
Applications
Lack of Org.
Change Mgmt.
Deploy
Info. Life
Cycle
Mgmt.
Renegotiate
S/W
Poor Estimation
(Benefit Size, Investment)
Complex
Technical Solution
Often Smaller Than Predicted
Program Benefits Realized
After You Leave Here …
Immediately…
•
Assess which of the tactical cost opportunities are still worth trying.
•
Determine how best to get executive engagement in your IT governance
process to ensure the right decisions are being made.
•
Evaluate your IT optimization decisions across all of the dimensions
listed.
•
Argue for pursuing cost optimization that can be done and has
appropriate organizational support that will not do long-term damage to
the enterprise.
In the Next 90 days….
•
Determine if your IT demand governance process is working and, if not,
create a plan to fix it
•
Create an ongoing IT optimization program to ensure long-term
efficiency.
Penny Wise, Pound Foolish
GovTech 2013
George Ambler
This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other
authorized recipients. This presentation may contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied,
distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates.
© 2013 Gartner, Inc. and/or its affiliates. All rights reserved.
Related Gartner Research
"Decision Framework for Prioritizing Cost Optimization Ideas"
G00166206, Barbara Gomolski, John Kost, 13 May 2009
"Cost Cutting in IT: Findings and Recommendations, October 2008 to
March 2009"
G00166849, Ken McGee, 2 April 2009
"Method to the Madness: Applying a Methodological Approach to Cost
Optimization"
G00168120, David W. McCoy, Barbara Gomolski, 13 May 2009
"How the IT Organization Handles the Three Stages of a Downturn"
G00165396, Jorge Lopez, 17 February 2009
“IT Cost Optimization Round 2: Strategic Shifts and Doing Less With Less”
Kurt Potter (G00205937)
“CFO Advisory: Enterprise Cost Optimization; Overview”
Barbara Gomolski, Kurt Potter (G00173955)
“The Four Levels of Cost Optimization”
Barbara Gomolski, Kurt Potter, Mark Raskino (G00164219)
IT Procurement
Contract renegotiation — the first line of offense in saving money.
Large enterprises have huge buying power. Act like it. Organize to achieve it.
Procurement Opportunity
Financial
Benefit
Time
Organizational
Risk
Technical
Risk
Investment
Required
Renegotiate Network Rates
Moderate
Low
Low
Low
Low
Renegotiate Contract Labor Rates
Moderate
Low
Low
Low
Low
Consolidate Desktop Hardware Contracts
Moderate
Low
Low
Low
Low
Consolidate Desktop Software Contracts
Moderate
Low
Low
Low
Moderate
Renegotiate "Shelfware" Maintenance
Moderate
Low
Low
Low
Low
Renegotiate HW/SW Maintenance and SLAs
Moderate
Low
Low
Low
Low
Consolidate Commodity (Non-IT) Purchases
Moderate
Moderate
Low
Low
Low
Low
Low
Moderate
Low
Low
Consolidate IT Contract Services Vehicles
Moderate
Moderate
Low
Low
Low
Hire Internally @ Lower Rates Than Contract Staff
Moderate
High
Moderate
Moderate
Moderate
Enable Shared Risk/Reward Contracts
Moderate
Low
High
Low
Low
Low
Low
Low
Low
Low
Consolidate Purchasing Staff (Shared Service)
Defer Desktop Purchases
Source: Gartner Research.
Cost Savings Within IT
Time
Organizational
Risk
Technical
Risk
Investment
Required
Low
Low
Low
Low
Low
Automated Software Distribution
Moderate
Low
Moderate
Low
Moderate
Desktop Printer Rationalization
Moderate
Moderate
Low
Low
Low
Standardize Desktop Products
High
Low
Moderate
Moderate
High
Cell Phone Audits
Low
Low
Low
Low
Low
Centralize Portal Management
High
Low
Moderate
Moderate
Moderate
Telecommunications Line Audits
Moderate
Low
Low
Low
Low
Consolidation of IT Infrastructure
High
High
High
High
High
Server Virtualization
High
High
Moderate
Moderate
Moderate
Storage Migration to SAN and NAS
High
Moderate
Moderate
Moderate
Moderate
Reduce Business Continuity Capability
Moderate
Low
Low
High
Low
Info Management, Capture DB Capacity
Moderate
Low
Low
Low
Low
Application Audits
Moderate
Moderate
Low
Moderate
Low
Application Maintenance Outsourcing
Moderate
Moderate
High
Moderate
Low
Turn off Legacy System Maintenance
Moderate
Low
Low
High
Low
Outsource Repetitive Software Testing
Moderate
Low
Low
Moderate
Low
Assess internal IT Staffing Needs
Moderate
Low
High
Moderate
Low
Opportunity
Stratification of Desktop User Types
Financial
Benefit
Joint Business and IT Cost Savings
Financial
Benefit
Customer
Impact
Organizational
Risk
Technical
Risk
Investment
Required
Emergency Call Centers (Government)
High
Negligible
Moderate
Moderate
Moderate
Nonemergency Call Centers (Customer Service)
High
Positive
Moderate
Moderate
Moderate
Teleworking
Low
Negligible
Moderate
Moderate
Moderate
Videoconferencing
High
Negligible
Low
Low
Moderate
Moderate
Negligible
Moderate
Low
Low
Create Data Warehouse to Mine Opportunities
High
Negligible
Low
Moderate
High
Enterprise Self-Service Integration
High
Positive
High
Moderate
Moderate
Workflow and Handoff Analysis and Automation
Moderate
Positive
High
Moderate
Moderate
Asset Utilization Analysis
Moderate
Negligible
Moderate
Low
Moderate
HR Self-Service Expansion
Moderate
Negligible
Low
Moderate
Moderate
Deploy E-procurement Catalogs
Moderate
Negligible
High
Low
Moderate
Examine Storage Policy to Reduce Storage Size
Moderate
Negligible
Low
Low
Low
Consolidate Radio Systems
Moderate
Negligible
Moderate
Moderate
Low
Consolidate Geospatial Systems and Data
Moderate
Negligible
Moderate
Moderate
Low
Enforce Modularization of Large Scale Procurements
Moderate
Negligible
Low
Low
Low
Opportunity
Create/Expand E-learning Capability
Shared Services Opportunities
Financial
Benefit
Customer
Impact
Organizational
Risk
Technical
Risk
Investment
Required
Call Centers (Emergency and Nonemergency)
High
High
Moderate
Moderate
Moderate
Electronic Document Management System
High
High
Moderate
High
High
Back-Office Applications
High
Low
Moderate
High
High
Computing Centers (Mainframes, Servers,
Storage)
High
Low
Moderate
High
High
Networks
High
Low
Moderate
Low
Low
Non-administrative Applications
High
Low
High
High
Moderate
Middle-Office Application Support
Moderate
Moderate
Moderate
High
Moderate
IT Contract Vehicles
Moderate
Low
Low
Low
Low
Desktop Applications (Acquisition, M/A/C)
Moderate
Low
Moderate
Moderate
Moderate
IT Help Desk
Moderate
Low
Moderate
Low
Low
Low
Moderate
Moderate
Low
Moderate
Moderate
Low
High
Moderate
Low
IT capability
Self-Service Web Sites
Reassess Internal IT Staffing Needs