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The challenge of cutting costs and living within the budget has dogged CIOs since the technology bubble burst five years ago. Many find themselves unable to fund innovation because most of their budget is devoted to paying for day-to-day operations. Ventana Research advises CIOs who have not already done so to establish a business-focused group within the IT department that is responsible for “housekeeping and maintenance.” We believe a majority of Global 5,000 corporations pay too little attention to the details of IT contract management and make no one responsible for following through on cost-saving initiatives. In our judgment, many CIOs can save 5 to 10 percent of their budget by identifying unnecessary spending — an amount that would fund a good deal of innovation.
IT budgets consume a large share of corporate capital spending, accounting for just over 40 percent of the total in the U.S., double its share 15 years ago. With so much money dedicated to IT, corporations are reluctant to increase its allocation. During the recent recession in the U.S., IT departments faced enormous pressure to cut their budgets, and even as the recovery has gathered steam, many companies continue to hold CIOs to limited budgets. For most of the computer age, IT departments were chartered to harness technology innovations, under the assumption that doing so would improve the company’s performance. Now, however, studies repeatedly show a high percentage of the IT budget goes to “keeping the lights on,” leaving little available for innovation. Some organizations have achieved ongoing savings in their IT budgets, but most are unable to free up money for forward-looking investments.
CIOs may have every intention of controlling unnecessary costs, but few of them have developed mechanisms that make it easy to follow through consistently. For example, most IT departments pay little attention to the details of managing software licenses and maintenance contracts after the initial purchase because where responsibility for this lies often is ambiguous. A recent article in McKinsey Quarterly on making cost reductions stick highlighted additional areas where companies’ best intentions quickly slip away. Areas identified as “likely” or “very likely” to fall to the wayside fastest (often within the first year) include eliminating custom and redundant management reports, enforcing IT purchasing standards and eliminating non-strategic technology initiatives. Further compounding the challenge, while CIOs know they have too many legacy systems and reports that are not worth continuing to generate, they may not have the mechanisms in place to determine what these are or to quantify their costs; instead, they leave it to users to make that choice themselves, and often nothing happens.
Individually, the impact of each of these matters is probably too small or too hard to trace for anyone to have noticed, like loose change in the sofa. But in aggregate, their impact can be significant. One organization that did act, a large healthcare group, was able to cut 12 percent of its IT operating costs after implementing a charge-back system. When confronted with having to pay for identifiable costs, users quickly weed out the useless and even the “nice to have” from the “need to have.” Managed properly, Ventana Research asserts, this approach can be a win for everyone, promoting management satisfaction with IT and eliminating chores IT organizations would rather not have to do.
The lesson here is plain: IT organizations must devote a portion of their budgets to managing their day-to-day operations more rigorously, so they can free up funds to devote to more strategic and innovative activities. They need to identify people to task to manage high-cost areas such as licenses and maintenance and follow through on reducing costs where appropriate. These individuals should have the ability to track time and other IT resource usage accurately, at granular levels. This function should allow companies to allocate IT costs directly rather than use formulas that managers might view as inaccurate or, worse, treat as overhead and not charge back to business units. Loose change can add up. You might find your IT department sitting on a gold mine.
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