Methodology: Reducing IT Cost to Serve

1. Methodology: Reducing IT Cost to Serve

2. Table of Contents 1. Introduction 1.1 Context for Cutting Costs 1.2 The “Cost to Serve” Approach 2. Getting Ready 2.1 Sources of Cost Cutting 2.2 Types of Cuts 2.3 Right-sizing the Solution 2.4 Cost Cutting Resources 3. The Cost to Serve Methodology 3.1 Step I: Discover Budget and Cost Reduction Targets 3.2 Step II: Take Stop-Gap Measures and Develop a Strategy 3.3 Step III: Review Services and Compile the Plan 3.4 Step IV: Negotiate the Plan 3.5 Step V: Execute Changes 3.6 Step VI: Review 4. Closing Summary

3. Introduction

4. “There are fewer people doing the same things we’ve been doing for the past four or five years. If we say, ’We just can’t keep this up,’ the business expectation will be ‘Yes, you will.’” CIO, Manufacturing 1.1 Introduction: Context for Cutting Costs A history of “lean and mean” won’t help avoid new cuts • Most IT departments have experienced pressure to reduce costs on an ongoing basis for many years now. Therefore, the idea of keeping a tight rein on costs is nothing new. • However, sooner or later, worsening global economic conditions will impact every organization, be it directly or indirectly, strategically or operationally. • Do not be complacent – even though many IT leaders say they are already running “lean and mean,” IT will not be immune from the next round of business cost reductions.

5. “The best thing to do is actually take initiative. If you want to survive, you need to find the things that you can do.” IT Director, Business Services 1.1 Introduction: Context for Cutting Costs Take cost-reduction action before being asked • Don’t cut costs just because of the economy; cut costs because it makes sense. • Cuts that are made during times of financial pressure should be treated as permanent changes, i.e. the new way of doing business. They must be done as effectively as possible to ensure future manageability. • In challenging economic times, inaction on the expense management front is not a feasible response. Doing nothing will create severe competitive vulnerabilities, if not vulnerabilities that jeopardize the basic survival of the organization. • IT leaders repeatedly highlight the need to take initiative in anticipation of negative conditions. Taking initiative means exploring new ways to cut costs. One way, which will be explored here, is the Cost-to-Serve method.

6. “Cost cuts are an ongoing thing where no one can ever take pause. It’s ongoing effort to become more efficient overtime.” IT Director, Health Insurance 1.1 Introduction: Context for Cutting Costs Make expense management proactive and ongoing • The key to expense management success is to take proactive steps to set a healthy foundation for overall cost reduction. • Those organizations that have taken a proactive approach to holistic expense management are more likely to benefit from the measures taken, and even identify new opportunities for growth. • Those who aren’t proactive run the risk of making damaging mistakes unless thoughtful action on how and where to reduce costs is taken. • Expense management should be an ongoing exercise, regardless of financial conditions. Preparedness paves the way for proactive response versus panicked reaction.

7. 1.2 Introduction: The Cost-to-Serve Approach Services are the direct link between IT and the business • While there are many ways to approach a discussion about IT cost reduction, Info-Tech proposes the “Cost to Serve” method. • An IT service is defined as a set of related components (i.e. hardware, software, and documentation) that work together in support of business processes. • Although the components of a service may cross multiple technologies, the service is perceived by the client as a single, coherent entity. • Many IT organizations are moving towards service-oriented models. Examining costs from this same service perspective is consistent with emerging IT organizational and operational structures.

8. 1.2 Introduction: The Cost-to-Serve Approach Reducing cost-to-serve offers a business-oriented approach • The ultimate goal of the Cost-to-Serve approach is to directly map and forecast the impact that changes in spending on IT services will have on the ability to achieve business strategy. • Cost-to-Serve examines the relative cost to deliver specific IT services, such as servers and storage services, end-user support services, and application maintenance services. • When activities have been categorized into services, it’s much easier to decide what spending changes to make. Changes could include reductions, decisions to outsource, or eliminations in services. • Those spending changes that will negatively affect business strategy are avoided, and those that will positively impact business strategy are prioritized and pursued. • The Cost-to-Serve approach differs from traditional line-by-line assessments of capital and expense budgets. Traditional methods do not show the causal relationship between expenditure change and the impact on business strategy. IT departments should take a proactive approach to cost management by evaluating the cost to serve IT and focusing on areas that will have minimal or no negative impact to the business.

9. Getting Ready

10. 2.1 Getting Ready: Sources of Cost Cutting IT writes checks to only two groups: staff and vendors • In general terms, organizations spend money on two things: staff, and vendor products and services. As a result, direct cost reduction can be found in these two areas only. All other perceived “cuts,” such as gains made through process optimization, will ultimately tie back to one or both of these two expenditure areas.

11. 2.2 Getting Ready: Types of Cuts Reduce, replace, reprioritize: tie types of cuts to timeframes Cuts can be made by doing one or all of the following: reduce, replace, or reprioritize.

12. 2.3 Getting Ready: Right-sizing the Solution Cut opportunities vary depending on organization size Large enterprises have more flexibility in where to reduce costs, but complexity is a barrier.

13. 2.4 Getting Ready: Cost Cutting Resources IT cut decisions rely on knowing business plans See Info-Tech OptimizeIT’s collection of IT Strategy tools to help document strategic business and IT information. There are specific business documents that provide invaluable information when making cost-cutting decisions. Seek them out to make informed decisions.

14. 2.4 Getting Ready: Cost Cutting Resources Understanding IT team activities is key to creating baseline information See Info-Tech OptimizeIT’s Project Prioritization tools to help track and assess your project portfolio.

15. 2.4 Getting Ready: Cost Cutting Resources Retaining the right skills brings IT a strategic advantage See Info-Tech OptimizeIT’s Talent Management and Policy and Procedures Management capabilities for more helpful toolsets.

16. “Getting Ready” Summary • Cost reduction activities inevitably target just two areas: Lowering expenditure on staff, and lowering expenditure on vendor products and services. • Cost reduction offers three types of cut strategy: reduce, replace, and reprioritize. The size and timeframe of cut targets will drive the strategy taken. • Enablers and barriers to cost reduction vary by organization size, which often dictates flexibility, available redundancy, and impact of cuts. • There are key business documents that contain highly important information for making cost-cutting decisions. Track down these documents. If they don’t exist, then gather the right basic business information to illuminate thinking and reduce risk.

17. The Cost-to-Serve Methodology

18. 3.0 The Cost to Serve Methodology The cost-to-serve methodology is iterative – it begins with target setting and concludes with process review Cost-to-Serve Methodology

19. 3.0 The Cost to Serve Methodology Executing cost cutting requires careful consideration and review

20. 3.1 Step I: Discover Budget and Cost Reduction Targets Understanding the urgency and depth of cuts clarifies IT’s response Gathering information about the enterprise’s situation helps define the internal economic climate and establishes expectations the business has of its IT department.

21. 3.1 Step I: Discover Budget and Cost Reduction Targets Don’t assume explicit targets and deadlines will be communicated by the business • It leaders report frustration when cost targets and timelines are not clearly communicated. However, clear targets may never materialize. • The Cost-to-Serve methodology begins by establishing time and scale criteria. A targeted approach need not rely on an executive order; IT departments can develop internal cost management targets as well.

22. To achieve a 5% budget reduction within this quarter will require a different set of tactics than it would a year from now. Some tactics represent a one time reduction which is not repeatable. For example, how long can you defer raises before losing talent to competitors? Some tactics require time. For example, a vendor contract may require the enterprise continue with a service to the end of the contract term. 3.1 Step I: Discover Budget and Cost Reduction Targets Understanding when to hit targets is as important as the target’s size “We think IT might have to make another five or ten percent cut. That's still up in the air right now because it's hard to forecast revenue projections that far ahead of time. But due to anticipated revenue shortfalls, there will likely be an additional $2 million hit to the organization.” IT Director, Public Sector

23. 3.1 Step I: Discover Budget and Cost Reduction Targets Caveat: IT’s “place at the table” affects decisions made • The way cuts affect IT services is more often than not dictated by the nature of the relationships between CIOs and the other executives at the table. • While some IT departments work unpaid weekends to deliver next to impossible service levels, others use strong professional relationships to negotiate trade offs. • IT leaders who are satisfied with the IT/business relationship with regards to managing service levels cited these factors and recommendations as a factor.

24. 1 Discover Targets Cost-to-Serve Methodology 3.1 Step I: Discover Budget and Cost Reduction Targets Step I Summary • Understand the urgency and depth of cuts to clarify IT’s position and response. • Don’t assume explicit targets and deadlines will be communicated by the business. A targeted approach need not rely on an executive order; IT departments can develop internal cost management targets as well. • Understand that target size and timeframe will determine the best types of cuts to make. • Remember that IT’s “place at the table” affects decisions made and take proactive steps to improve this position.

25. 3.2 Step II: Take Stop-Gap Measures and Develop a Strategy Take stop-gap measures to meet immediate cash flow needs • Developing a strategy for cost cutting requires time; however, immediate actions will be required where mandated cuts are: • Immediate (within the quarter). • Significant (10% or higher). • Some or all of the following steps can have immediate results on cash flow if deadlines and significant cuts must be made. These should be viewed as temporary measures.

26. 3.2 Step II: Take Stop-Gap Measures and Develop a Strategy Build a strategy around targets discovered in Step I With stop-gap measures in place, a longer-term strategy will be developed around the opportunities and constraints uncovered around cut targets, IT’s role, and business strategy. These Considerations Build the Strategy Cost-to-Serve Strategy What are the major strategic thrusts of the organization for the next year or two years or five years? Let’s identify the top five of those and let’s make sure that the IT spending is aligned with that, and then make the cuts in the areas where things are not aligned.” IT Consultant, Professional Services

27. 3.2 Step II: Take Stop-Gap Measures and Develop a Strategy A cost reduction strategy is a high-level declaration that seeks to achieve targets while minimizing business impact • The main benefit of the Cost-to-Serve approach is not random – its primary goal is to control business risk. • Committing to a strategy helps drive cost management and cost cutting decisions. A strategy ensures that the steps taken will achieve the required cost cuts without cutting off arterial business functions. • Knowing where the enterprise stands and IT’s role in cost management efforts helps drive the direction of cuts. • There is no one-size-fits-all solution; each enterprise is unique with it’s own “sacred cow” projects, technology strengths and weaknesses, and cost reduction targets. • IT’s cost cutting strategy will drive the types of tactics that are used. It may not specify which tactics will be used, but it should certainly point to a general direction.

28. 3.2 Step II: Take Stop-Gap Measures and Develop a Strategy An enterprise under financial duress must select an approach with immediate pay-off . • The timeframe and size of a cut determines strategy, driving the real life tactics available. • If timeframes are short, there is little time to gather information and make in-depth plans. Organizations must focus cost reduction efforts on low-hanging fruit that achieve quick wins with minimal effort and bureaucracy.

29. 3.2 Step II: Take Stop-Gap Measures and Develop a Strategy Ongoing cost management improvement opportunities appear in the mid-term • Timeframes of six to nine months afford more opportunity to making lasting change built on research and planning.

30. 3.2 Step II: Take Stop-Gap Measures and Develop a Strategy Where cuts are not immediate, focus on investment for long-term upside • If cut targets are 12 months or longer away, invest-to-save projects that require expenditure today, with the promise of future savings or returns, are now an option.

31. 3.2 Step II: Take Stop-Gap Measures and Develop a Strategy Step II Summary • Take stop-gap measures to meet immediate cash flow needs. • Develop a strategy that will meet target cuts and align with business initiatives. 1 Discover Targets 2 Develop Strategy Cost-to-Serve Methodology

32. 3.3 Step III Review Services & Compile Plan Assemble the plan by reviewing each service for opportunities • Given a general direction in the way of a strategy, each service area can be assessed for tactical solutions that fit with the department’s strategy. • This step is repeated for each IT service to generate a set of potential recommendations. 4.Workstation Services

33. 3.3 Step III Review Services & Compile Plan Internal IT administration opens opportunities to simplify and streamline processes

34. 3.3 Step III Review Services & Compile Plan Optimizing network and telephony investments returns cold, hard cash

35. 3.3 Step III Review Services & Compile Plan Analyzing end-user support activities is the best way to gain IT process efficiencies

36. 3.3 Step III Review Services & Compile Plan Spend smarter with workstations and peripherals

37. 3.3 Step III Review Services & Compile Plan Reassess disaster recovery investment in light of real risks

38. 3.4 Step III: Review Services & Compile Plan Servers, mainframes and storage bring huge IT capital costs, so they’re prime targets for cost reduction

39. 3.3 Step III Review Services & Compile Plan Application development work can be reduced or eliminated

40. 3.3 Step III Review Services & Compile Plan Improving application maintenance processes reduces wasted effort

41. 3.3 Step III Review Services & Compile Plan The Cost to Serve plan includes time to completion and estimated savings • The chart below is designed to reflect some generalities. For example, Internal IT Administration expenses such as travel and training are easy to reduce immediately, but don’t reflect a large percentage of most IT budgets. This table represents an example of what a top level Cost-to-Serve plan might look like.

42. 3.3 Step III Review Services & Compile Plan The Cost-to-Serve plan includes time to completion and estimated savings - continued

43. 3.3 Step III Review Services & Compile Plan Step III Summary • Assemble the plan by reviewing each service for opportunities. • Rate the tactics within each service area for “fit.” • These recommendations will next be discussed and negotiated with business stakeholders to arrive at a final cost reduction list for execution. 1 Discover Targets 2 Develop Strategy Cost-to-Serve Methodology 3 Review Services & Compile the Plan

44. 3.4 Step IV: Negotiate the Plan Reducing IT services may be met with strong resistance Read the ITA Premium note, “Save the IT Department by Linking Budget Cuts to Decreased IT Services.” • Departments faced with significant budget cutting mandates are often given the impossible task of maintaining, or even increasing IT services despite a reduction in available resources. • Organizations with poor IT-Business alignment often find that the business is resistant to service level cuts due to the lack of understanding of the cost to serve IT. • Cuts to the department’s budget may necessitate cut backs on IT services, something that must be negotiated with the senior management prior to the execution phase. • Having an executive sponsor lends credibility to the IT department’s measures and will improve IT’s position at the bargaining table. “I think the biggest thing that enterprises need to really understand is to know your cost. You really need to understand what your cost is …So when business comes to you and says they need you to reduce my cost, then you’re in a better position to say okay. You can negotiate with them and say this is what it is. What is it you want to take out?” IT Director , Tech Services Industry

45. 3.4 Step IV: Negotiate the Plan Acknowledge ongoing cuts and specify planned measures • Both written documentation and meetings with key stakeholders will be required to negotiate and finalize the cost reduction plan. Follow the four steps below.

46. 3.4 Step IV: Negotiate the Plan Communicate consequences to senior management to finalize the plan

47. 1 Discover Targets 2 Develop Strategy 3 Review Services & Compile the Plan 4 Negotiate the Plan 3.4 Step IV: Negotiate the Plan Step IV Summary • Acknowledge ongoing cuts and specify planned measures. • Communicate consequences to senior management to negotiate and finalize the plan. Cost-to-Serve Methodology

48. 3.5 Step V Execute Changes Executing cost management tactics can make or break the plan – treat it like a full, formal project • Changes to staff, organizational structure and service levels must be accompanied by strong communication. • Measures built on changes to procedures and policy must be enforced to remain effective. • Without strong vendor management practices, cost reduction efforts surrounding purchasing may be ineffective – or even backfire to increase costs. • To make all of these things happen well, it is best to approach cost management tactic execution as an actual project with formal deliverables, milestones and measures.

49. 3.5 Step V Execute Changes Communication is crucial to successful implementation of cost cutting plans • Communicate the plan to business users. The IT cost reduction plan should be communicated to end users – especially if service levels or business facing projects are being impacted. Once the plan has been communicated, the department will embark on executing proposed plans. • Continue to make efforts visible. Proactive cost management should not go unrewarded. The challenge of being a good corporate citizen is that when costs are managed on an ongoing basis, there is much less fat to cut from the IT budget. Be an active IT advocate and employ departmental PR. • Share news on cost cutting efforts in monthly or weekly meetings. • Use weekly or monthly bulletin e-mails to laud IT’s cost cutting efforts. For example, communicate to end users why they’ve had their personal printers taken away and show how much money the company has saved as a result.

50. 3.5 Step V. Execute Changes When cut backs are necessary, IT must take extra steps to retain current staff See ITA Premium’s “There’s No Crying in IT: How to Make Tough Staffing Cuts” and “Redefining Job Roles Due to Downsizing” for more guidance. • Cost cuts can result in employees being forced to take on new, unfamiliar tasks, affecting morale and productivity. Practice change management to minimize potential impacts.