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The old 80-20 rule: It usually refers to an unequal division of wealth or workload. In IT, it refers to something else--a problem most tech managers don't want to talk about.
Most IT departments spend as much as 80% of their budgets on routine maintenance and day-to-day operations, while only 20% is spent on new technology or business-process enhancements, according to surveys by Gartner and other research firms. That makes it hard to argue that technology is adding value to the business--and that IT departments deserve bigger budgets--when most of the money goes to just keeping the computer lights blinking.
Still, some companies have taken on the challenge of reducing the amount of the IT budget devoted to maintenance and operations, in order to free up funds for new development and business-process improvements. Often, what they've done is employ a hodgepodge of practices and tactics, using a variety of technologies and techniques, to attack specific points of pain. Only a few can claim to have dealt with the problem on a systemwide basis. And none says its accomplishments were easy. But most business-technology managers can learn to get a better handle on expenditures and thereby better service their companies' business goals.
Making the right kind of changes can produce big returns for IT departments. "There are millions of ideas for cutting costs, but they're different for each company," says Martin Reynolds, a research fellow at Gartner. "One of the mistakes I see is just taking what you're already doing and automating it. The biggest opportunity for cost savings is figuring out where to change the process."
It can start with just knowing what technology you have. A lot of companies haven't done an inventory of their technology assets or assessed the costs of maintaining those assets, says Suzzette Jaskowiak, director of support services at Forsythe Technology, a consulting firm that helps companies cut IT infrastructure costs. One company Jaskowiak worked with had hundreds of servers, "and they couldn't tell me what each one did or what it was used for." The fully redundant system could handle up to 100,000 transactions per hour. "The IT folks were so proud that they were fully redundant," she says.
However, the company's service agreement with customers said its systems could be down for 16 hours every month. Not only didn't the company need the redundancy, it didn't need all of the horsepower: "It was only doing 5,000 to 6,000 transactions each hour," Jaskowiak says. That's why she urges IT departments, after they've done an asset inventory, to review their vendor-maintenance contracts and talk to their business units to see if they'll accept a lower, and cheaper, level of service.
For some companies, the only way to make major cuts in maintenance and operations is to make major changes to their infrastructures. Security Benefit Group, an investment- and retirement-services provider with more than $10 billion in assets under management, got its maintenance costs down to around 43% of its IT budget. The solution was to move off two legacy mainframes and standardize on Dell hardware and Windows software. It also consolidated its applications around an insurance-industry software application from NaviSys Inc. and built a data warehouse to contain all of its customer and product information.
"We also made a decision not to invest in areas that didn't give us a competitive advantage," says Brent Littleton, director of IT applications. "We changed our entire mind-set." Security Benefit spends most of its IT dollars on major systems enhancements, new projects, and new products for the company to sell, mainly through independent financial planners. "Those initiatives all add value to the company," Littleton says. The company also closely tracks the costs associated with each new project through a project-management office to make sure they add value. "The IT department has proven itself over time that the projects we undertake give us a competitive edge," Littleton says.
Using a project-management office to monitor technology development and costs is common among businesses with "world-class" IT organizations, says Beth Hayes, IT practice leader at the Hackett Group, a consulting firm that benchmarks how companies manage business technology. Hackett categorizes IT departments as world class if they rank in the top 25% in efficiency and effectiveness in categories such as infrastructure and operations, applications management, planning and strategy, and management and administration of labor and vendors.
Hackett has IT spending data on more than 400 companies that average between $2 billion and $5 billion in annual revenue. World-class performers spend 18% less per end user on technology and are much more likely to use a project-management office to track new initiatives. Those projects come in on time and on target 91% of the time. Leading companies also establish a consistent methodology for tracking projects. "It's more important to have a methodology than which one it is, as long as it's defined, understood, and consistently applied," Hayes says.
World-class IT departments also have fewer applications, databases, and full-time employees, partly because they've standardized and consolidated their IT infrastructure. And they make better use of selective outsourcing and strategic partners to lower labor costs and gain access to capabilities they'd rather not invest in themselves, Hayes says.
A virtual help desk let Sygen cut costs, CIO Michael Bailey says.
Bailey cut maintenance and operations costs to around 65% of his budget by moving from Unix systems to Linux running on two-processor Dell servers. "We're developing a centralized control point that can parcel out tasks to any available Dell server," he says. The company uses Cisco Systems gear for its worldwide network, Oracle applications for financial and order management, and the open Java programming language for application development.
Sygen, with 1,100 employees and around $225 million in annual revenue, has a 28-person IT staff in four centers around the world. The company's worldwide operations made user support a challenge. "We've been able to cut those costs by creating a virtual help desk that rolls over to whoever is awake at the time," Bailey says. He replaced a disaster-recovery system that stored the company's backed-up data and applications on tapes at a remote site with spare servers at a local hosting company. "We can have four Linux servers sitting idle at a hosting site and turn to them quickly when we need them, especially since we don't need to replicate those huge Unix boxes," he says. "We will have slower performance for a while but can easily add new servers."
Some people argue that cutting costs in IT operations can have negative consequences, especially if taken too far or done for the wrong reasons. Tim Dechant is director of technology at the W.K. Kellogg Foundation, which has more than $5 billion in assets and awards several hundred million dollars worth of grants each year. The foundation has a small IT staff of 14 full-time employees and uses part-time staffers who are the equivalent of 20 to 25 full-time IT employees. Dechant keeps close track of what each IT worker does. "We break down every single hour of every single day for every resource, and we can show where every bit of costs goes," he says.
Dechant uses a variety of tools for application-portfolio analysis, asset inventory, and project planning. He has retired applications, reduced service levels, and is looking at server virtualization to gain more efficiencies. Still, operating expenses consume in the mid-70% of the IT budget, and "it's getting harder to find ways to cut costs."
What's crucial, Dechant says, is to make sure senior management understands the costs and benefits of each application and service so they can decide the level of service and spending the organization can support. "We should all be careful not to think that all of the money spent on maintenance and operations is overhead and waste," he says. "If IT is adding value, that money is the cost of doing business."
Bruce Rogow, a principal with Vivaldi Odyssey and Advisory and a former research director at Gartner, agrees. Many IT pros take the wrong view of maintenance and operations spending, says Rogow, who interviews 100 CIOs a year. "IT is an operating asset. The applications and infrastructure are assets," he says. "Diverting money from maintenance to development is like telling an airline to stop maintaining its airplanes to buy new ones." Most companies don't do a good job of developing IT budgets that reflect the actual costs of providing services, Rogow says, and few IT departments include future maintenance and operations costs when they pitch new projects. "If you spend a dollar on a new system this year, you're obligating next year's budget with about 28 cents to 35 cents of new production, the costs to run it, and 15 cents to 22 cents to maintain it," he says. "Most companies hope to save enough next year to cover those additional costs. But many don't allocate money for that."
When it comes to efficient IT operations, one glaring contradiction involves the use of technology to lower technology's cost. Like the proverbial cobbler's children who go without shoes, IT departments have been slow to deploy and use technology to automate and simplify the work they do in managing and maintaining the business-technology systems that keep companies running. "It's shocking when you look behind the curtains," Hackett Group's Hayes says.
Software applications designed to automate IT operations include packages from major systems-management vendors such as Computer Associates, Hewlett-Packard, and IBM, and other more narrow offerings from companies such as BladeLogic, Opsware, and Optinuity (see story, "Lights Out: Software Automates Data-Center Tasks").
Adopting an enterprise architecture has helped Carlson cut IT spending by 30%, says Stephen Brown, senior VP and CIO.
Photo by Raoul Benavides
The key, he says, is to standardize technology architecture and the processes the IT department uses. "We depend on two foundational elements: An enterprise architecture allows us to understand what technology we have in place and to rationalize the products and services we're provisioning. And we use ITIL to manage our core IT processes and standardize the way we handle IT problems," Brown says. ITIL--the information technology infrastructure library--is a set of standards for IT-service management.
Adopting and enforcing an enterprise architecture alone will help Carlson cut IT spending by 30% when fully deployed, Brown says. "Enterprise architecture and ITIL let us go after top-line growth, while at the same time ensuring that the IT organization is best in class." Carlson uses Remedy systems-management software from BMC Software Inc. to automate many of its IT processes. Remedy has several of ITIL's workflows built in at a procedure level, including change management, configuration management, incident response, and problem management. "We're working with BMC to make sure that all of the ITIL processes are represented in their product," Brown says.
Carlson also keeps a strict accounting of its business processes. "The other thing we do is benchmark ourselves," Brown says. "Every business unit in the company, and the company overall, is compared service by service. I know where I stand, always, and know where the gaps are and what areas need to be addressed."
Standardizing technology and the processes used to manage it seems basic, as does knowing how your costs compare with those of other companies and the value technology brings to your company. But many companies apparently haven't gotten the message. "I sit on several advisory boards, and I'm just appalled at how many of my counterparts don't know their costs or the value they provide," says Brown, who became CIO of Carlson in 2000. "One of my first moves was to make sure the business units understood how IT affected their P&L."
Hackett Group's Hayes agrees that adopting an enterprise technology architecture is a basic step that every IT department needs to take and that an IT process framework like ITIL can help enforce discipline. Most companies have cut IT spending by 10% a year from 2002 to 2004, but the top companies "have reduced spending even more because they've embraced best practices, simplification, and applied process discipline," she says.
Developing a better understanding of technology--what you have, how it's being used, and what can be standardized, simplified, and improved--is crucial if business-technology managers are ever to get control of spending for routine maintenance and operations. It's up to business-technology managers to drive the IT cost-cutting agenda, or else frustration with IT's 80-20 rule causes problems."When a company is looking to cut costs, they go after areas they don't understand," Brown says, "and many don't understand technology."