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Methodology:

Reducing IT Cost to Serve


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Table of Contents1. 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 Cuts2.3 Right-sizing the Solution2.4 Cost Cutting Resources

3. The Cost to Serve Methodology3.1 Step I: Discover Budget and Cost Reduction Targets3.2 Step II: Take Stop-Gap Measures and Develop a Strategy3.3 Step III: Review Services and Compile the Plan3.4 Step IV: Negotiate the Plan3.5 Step V: Execute Changes3.6 Step VI: Review

4. Closing Summary


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Introduction


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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.

1.1 Introduction: Context for Cutting Costs

“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


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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.


“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


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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.


“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


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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.

1.2 Introduction: The Cost-to-Serve Approach

IT Service Areas

IT Administration Workstation and Peripherals

Disaster Recovery Planning

Servers, Mainframe, and Storage

End-user Support Network and Telephony

Application Development

Application Maintenance


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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.

1.2 Introduction: The Cost-to-Serve Approach

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.


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Getting Ready


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IT writes checks to only two groups: staff and vendorsIn 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.

2.1 Getting Ready: Sources of Cost Cutting

Staff Staff expenditures can be cut by reducing headcount, reducing salary, wage and bonus payouts, reducing training expenses, and increasing staff productivity.

Vendor products and services

Vendor product and service expenditures can be cut by reducing license and service fees, negotiating deals, acquiring more cost-effective technologies, and practicing preventative maintenance to extend product lifecycles and defer equipment replacement.


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Reduce, replace, reprioritize: tie types of cuts to timeframesCuts can be made by doing one or all of the following: reduce, replace, or reprioritize.

2.2 Getting Ready: Types of Cuts

Type Impact Description

Reduce Immediate

(3 months)

This is the reduction or elimination of IT services, and can be performed quickly when faced with an urgent need to cut. This is done by reducing headcount, reducing consumption of a service, or directly eliminating spend. Cutting the training budget, layoffs, and trimming back service levels are ways to do this.

Replace Mid-term

(6-9 months)

This is done by replacing a technology (or even a person) with a less expensive alternative to achieve greater cost effectiveness. More extensive assessment is required to make replacements, so timeframe to execution is typically longer. An example of a replace strategy would include choosing commercial-off-the-shelf applications over customized ones.

Reprioritize Long term

(12 months or longer)

This is achieved by reprioritizing expenditure and choosing to invest in technologies (or people) that more clearly support the business strategy. Reprioritization usually requires expenditure and longer-term implementation timeframes before ROI and cost reductions are ultimately realized. An example would be implementing a Storage Area Network (SAN) to centralize data storage, consolidate storage hardware, and reduce storage management complexity.


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Cut opportunities vary depending on organization size

2.3 Getting Ready: Right-sizing the Solution

Size Enablers Barriers

Small Enterprise

Low complexity levels of small shops mean that fewer technologies and supporting structures are ingrained.

“Must have” elements are more obvious. The effects of removing a piece of the IT puzzle are more visible, and therefore less risky.

IT staff counts are already at a minimum. Achieving cost savings through staff reduction may not be an option without jeopardizing basic operations.

Small shops may have less pull with vendors when negotiating licensing agreements, but are more likely to benefit from open-source and freeware solutions.

Mid-Sized Enterprise

More likely than small shop to find cost management solutions by leveraging relationships with vendors.

Consolidation and centralization may allow for closure of redundant service desks.

Mid-sized enterprises show elements of both small and large organizations, and are often in transition. They may be complex like large shops, but be resource constrained like smaller operations. This can reduce option flexibility.

Large Enterprise

Large staff headcounts allow flexibility for staffing cuts and redistribution of responsibilities.

Large vendor agreements bring renegotiation clout. Out-of-cycle renegotiation may be an option.

Many end users means slight changes to service levels or number of end users supported will yield significant cost savings.

Large organizations are often complex and slow to change. Simple logistics and compounded risk factors could protract timeframes for cost reduction.

Large enterprises have more flexibility in where to reduce costs, but complexity is a barrier.


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IT cut decisions rely on knowing business plans There are specific business documents that provide invaluable

information when making cost-cutting decisions. Seek them out to make informed decisions.

2.4 Getting Ready: Cost Cutting Resources

Information How to Use It If You Don’t Have a Formal Document…

IT Budget Contains financial information that is the baseline for IT cost cutting.

If a budget does not exist, then collect available spending information for the past year in a spreadsheet. Include totals for staff, hardware, applications, and outsourced services.

Business Strategic Plan

Describes the enterprise’s core business and direction, which may change in light of a challenging economy. Ensures that work is prioritized and cuts are made within the context of the business’s overall strategy.

If the strategic plan for the coming year is not documented, then meet with the senior management team to rough out a one-page strategy statement document to use as a reference. The document should include a list of strategic goals and planned initiatives to reach them.

IT Strategic Plan

The enterprise’s IT strategy is derived from the business strategic plan. It will help determine the difference between necessary and “nice to have.”

If an IT strategic plan does not exist or does not map to the business strategic plan, then list the services and projects that IT supports and show their linkage to the business plan.

See Info-Tech OptimizeIT’s collection of IT Strategy tools to help document strategic business and IT information.


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Understanding IT team activities is key to creating baseline information



IT Project Portfolio

Projects consume resources. All projects, either planned or underway, must be accounted for and documented so that each can be reevaluated against the business strategy.

Use a simple spreadsheet to document basic information for each project, including its relationship to the business strategy, project stakeholders, and project financial cost to completion.

IT Service Catalog

The service catalog is a menu of IT services provided to the rest of the organization. It can be used to identify activity-based costs for IT services.

If one is not in use, then draft a brief list of IT services provided to the business in a spreadsheet. Include each service within the organization and its relative criticality (high, medium, low) to business goals and operations.

Internal Service Level Agreements (SLAs)

SLAs describe expected baseline IT service levels. SLAs may need to be renegotiated in order to reduce costs.

If internal SLAs do not exist, then at least consider how business may react to reductions in the level of services currently provided. For some organizations, documenting primary service levels that exist informally may be worthwhile to set a starting point for negotiation.

See Info-Tech OptimizeIT’s Project Prioritization tools to help track and assess your project portfolio.


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Retaining the right skills brings IT a strategic advantage



IT Organizational Chart

An organizational chart displays people resources and reporting relationships. This understanding allows IT leaders to revaluate staff-to-manager ratios and the potential for merging managerial responsibilities.

If there is no organizational chart, it’s straightforward to create one from basic office productivity tools. Small IT organizations do not have enough staff to warrant this effort.

IT Staff and Skills Inventories

These inventories document key employee information. Since IT salaries represent the largest portion of IT spend, they often play a major role in deep IT spending cuts.

A single or multiple spreadsheets can be used here to document basic staffing information. Include compensation and potential bonus amounts, skill sets and skill levels, and primary tasks, responsibilities, and projects.

IT Policies and Standard Operating Procedures (SOPs)

Operational efficiencies can be gained by documenting and reviewing policies and procedures. Any review of IT services will mean a review of associated IT operations and the policies and procedures that govern them.

If no policies or procedures are formally documented, IT likely will not have the time to document them if cost reduction is urgent. Earmark this work as a future project, or include relevant policy and procedure documentation as a milestone in all in-progress or planned projects going forward.

See Info-Tech OptimizeIT’s Talent Management and Policy and Procedures Management capabilities for more helpful toolsets.


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“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.


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The Cost-to-Serve Methodology


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The cost-to-serve methodology is iterative – it begins with target setting and concludes with process review

2 Develop Strategy

3Review Services & Compile the Plan

1 Discover Targets

4 Negotiate the Plan

5Execute Changes

6Review

Cost-to-Serve Methodology

3.0 The Cost to Serve Methodology


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Executing cost cutting requires careful consideration and review

3.0 The Cost to Serve Methodology

Steps in the Cost-to-Serve Methodology

Step I Discover Budget and Cost Reduction Targets

Review and understand mandated cuts, timelines and the resulting effect on the enterprise and IT budget.

Step II Take Stop-Gap Measures and Develop a Strategy

Take immediate measures where necessary and develop a go-forward strategy to address long-term targets that align with business and technology strategies.

Step III Review Services and Compile the Plan

Conduct reviews of IT service areas to establish whether they offer cost-cutting opportunities for given targets and timelines.

Step IV Negotiate the Plan Obtain staff and management buy-in and rally around the cost management plan.

Step V Execute Changes Execute the related staffing, vendor management and process changes.

Step VI Review the Plan Measure success of cost cutting and cost management solutions.


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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.

3.1 Step I: Discover Budget and Cost Reduction Targets

Information Why It Matters

Know the depth and timeframe of cuts:

Does senior management want a cut of 10% within three months and a total cut of 30% within 12 months?

Fast and deep cuts indicate that senior management perceives the situation as urgent and that the enterprise itself is at immediate risk.

Understand IT’s role:

How much say will IT leaders have in where and how to cut costs?

Limited input in cost management planning will prove frustrating and may lead to mistakes.

Acquire situational information:

How much are the different departments in the organization being asked to cut?

If cuts are broad and wide, there is also an opportunity for IT to reduce service requirements, and ultimately headcount.


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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.


Executive Mandate Expectations from IT Examples

Targeted and immediate mandated cuts

Actions with guaranteed results and by a guaranteed deadline.

Freezing of capital expenditures

Layoffs

Unclear statement about the need to reduce costs

Fiscal responsibility and improvement to the bottom line.

Reassess purchase policy Revisit application licensing

structure.


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Understanding when to hit targets is as important as the target’s size


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.

“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


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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.


Factor Affecting Business and IT Relations

Ability to Improve

Recommendation for Proactive Improvement

Strong communication of IT efforts. High Demonstrate hard numbers in formal business communications.

Transparency of IT costs Medium Publish the IT budget. Negotiate Service Level Agreements.

Associating cost to service activities Medium Outsource IT activities to tie service to cost. Implement service catalogs.

Backing of the IT department from champions at the executive level.

Low Time cost-cutting actions in accordance to enterprise-wide initiatives.

Pre-existing equal and leveraged relationships with the business.

Low Increase face time with the corporate leaders.


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Step I Summary

1 Discover Targets



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.


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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.

Capital expenses Freeze and reevaluate all capital expenses, including purchases currently in progress.

Vendor contracts Revisit unsigned contracts that are still in negotiations.

Hiring Consider freezing hiring across the board.

IT salaries Consider freezing bonuses and raises for existing employees.

Project portfolio Temporarily hold off on the entire project portfolio, including projects currently in progress.

Other discretionary Place temporary limits on travel and training expenses.

Take stop-gap measures to meet immediate cash flow needs

3.2 Step II: Take Stop-Gap Measures and Develop a Strategy


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Build a strategy around targets discovered in Step I

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

Know the Depth and Timeframe of Cuts

Understand IT’s Role

Acquire situational information

These ConsiderationsBuild the Strategy

Cost-to-Serve

Strategy


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.


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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.

A cost reduction strategy is a high-level declaration that seeks to achieve targets while minimizing business impact

Sample Strategic Statement

The IT department must meet its 5% first quarter reduction target without cutting back the quality of client facing Web applications. To do so we will employ actions that offer both immediate and repeatable cost reductions in IT operations.



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An enterprise under financial duress must select an approach with immediate pay-off

Strategic Approaches

Description Sample Tactics Drawbacks

Short-term Includes tactics aimed at immediate impact. These must have cash flow implications.

1. Cut travel costs, training costs, and perks. (Reduce)

2. Eliminate contractor positions.

3. Delay upcoming pay increases. (Reduce)

4. Reallocate funds to essential services. (Reprioritize)

5. Freeze projects. (Reprioritize)

Short-term pay off.

Potentially non-repeatable.


.

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.


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Ongoing cost management improvement opportunities appear in the mid-term



Mid-term Primes the enterprise for continued savings through adoption of changes that involve day to day activities. Replacing expiring contracts and hardware with more cost efficient solutions.

1. Revisit vendor contracts for renegotiation. (Reduce)

2. Reassess software licensing for cost savings. (Replace)

3. Increase hardware lifecycles. (Replace)

4. Open up previously approved change requests for reassessment under new budgetary constraints. (Reprioritize)

Requires planning.

Timeframes of six to nine months afford more opportunity to making lasting change built on research and planning.



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Long-term Cost management strategy involving invest-to-save tactics aimed at positioning the department for long-term cost efficiency.

1. Evaluate services for outsourcing. (Replace)

2. Standardize applications to reduce maintenance and development costs. (Replace)

3. Develop service catalogs and tie costs to IT services. (Reprioritize)

Longer implementation time.

May involve costs before savings realized.

Savings may be interpreted as “cost avoidance” versus an actual reduction.


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.


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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.


2 Develop Strategy

1 Discover Targets



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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 Cost Management Tactics

Workstation refresh rates

Workstation refresh rates can realistically be extended from the traditional 3-5 years to as long as six years. Cascading old high-end workstations to less critical tasks is another cost-saving tactic.

Desktop virtualization

Explore the advantages of virtualized desktop technologies to make a long-term and very real impact on the bottom line.

Desktop images Reduce and standardize the number of desktop images supported so that end users have the applications and configurations they need, and only what they need.

Print management Reducing access to personal printers, centralizing on few multi-function machines, and setting limits on color printing via a print policy is a quick, and often overlooked, way to reduce costs.

IT Services

1. Internal IT Administration

2. Networks and Telephony

3. End-User Support Services

Workstation Services

5. Disaster Recovery Services

6. Servers, Mainframes and Storage Services

7. Application Development

8. Application Maintenance

4.Workstation Services

3.3 Step III Review Services & Compile Plan


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Internal IT administration opens opportunities to simplify and streamline processes

1. IT Administration Services

Travel expense management This represents a major area of loose discretionary spending in most organizations. Formalize a travel expense policy if none exists, or tighten approval considerations and enforcement if one does exist.

IT staff productivity Every work minute counts, especially if doing more with less is a reality. Track staff productivity levels and then identify ways to motivate and increase efficiencies.

IT staff headcount Finding the right staff headcount and staff-to-manager ratios are fast ways to dramatically reduce IT costs. But proceed with caution to avoid deficits of key skills.

IT administrative processes Streamlining existing processes and formally documenting others will reduce wasted time and errors.

Centralizing management of IT operations

Bringing IT operations under a single management point of control reduces waste created by policy disparities and operational non-standardization.



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Optimizing network and telephony investments returns cold, hard cash

2. Network and Telephony Services

Network and telephony infrastructure integration

Explore all opportunities to consolidate data and telephony networks and support teams. This may mean standardization on IP and examining the costs and benefits of integration.

Network monitoring Monitor the performance of network components to ensure they’re operating appropriately and efficiently.

Bandwidth consumption Bandwidth may be oversubscribed. Monitor consumption for opportunities to right-size and pare back on costs.

Mobile device policy Explore which is more cost effective: the enterprise supplying mobile devices, or the individual employee who then bills the company for business costs incurred. Document and enforce.

Teleconferencing solutions Explore where teleconferencing solutions can be implemented to reduce travel costs.

Second-hand equipment Second-hand and refurbished network and telephony gear can bring a “good enough” hardware solution at bargain prices.



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Analyzing end-user support activities is the best way to gain IT process efficiencies


Analysis of problem root causes Understanding the real nature of end-user problems affords the chance to address and eliminate root causes, thereby eliminating them and reduce ticket volumes.

Logging incidents Document help desk tickets to be able find trends and uncover more effective practices.

Speed of ticket resolution Tier resolution rates based on business criticality.

Tickets per analyst Review the number of tickets per analyst to achieve more efficient demand management.



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Spend smarter with workstations and peripherals

4. Workstation Services

Workstation refresh rates Workstation refresh rates can realistically be extended from the traditional 3-5 years to as long as six years. Cascading old high-end workstations to less critical tasks is another cost-saving tactic.

Desktop virtualization Explore the advantages of virtualized desktop technologies to make a long-term and very real impact on the bottom line.

Desktop images Reduce and standardize the number of desktop images supported so that end users have the applications and configurations they need, and only what they need.

Print management Reducing access to personal printers, centralizing on few multi-function machines, and setting limits on color printing via a print policy is a quick way to reduce costs that is often overlooked.



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Reassess disaster recovery investment in light of real risks


Matching DR solution to system needs

Not every system requires the same level of disaster recovery investment. Match the DR investment to the need, which may result in scaling back and cost savings.

Business recovery objectives Review recovery objectives with business stakeholders to determine if current objectives are too stringent based on assessed risk.

DR outsourcing Outsourcing DR may be critical to risk mitigation, or too costly to justify. Perform a cost-benefit analysis to determine if DR is best delivered in-house.



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Servers, mainframes and storage bring huge IT capital costs, so they’re prime targets for cost reduction


Server consolidation and virtualization

Reducing the number of physical servers and virtualizing server instances is a proven way to reduce data center capital and operational costs.

External server collocation or hosting

Explore cost saving opportunities in collocating servers or running applications on hosted external servers.

Second-hand equipment Refurbished servers can offer “good enough” solutions for common server functions.

Storage virtualization This can include implementation of SAN technologies. Perform a cost-benefit analysis to assess long-term savings.

Limited personal storage volumes

Review and potentially reduce existing storage volume limits for end-user groups. If there is no policy on storage volumes, create and enforce one.

3.4 Step III: Review Services & Compile Plan


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Application development work can be reduced or eliminated

7. Application Development Services

Continuation of application development

Consider stopping application development entirely if it is not absolutely required.

Prioritize projects Implement a process for selecting and prioritizing only those projects that bring a strategic benefit to the organization.

Document requirements Clearly documented requirements reduce wasted effort and ensure applications built meet business needs.

Test applications Detecting and fixing errors early costs much less than fixing errors released into production.

Contracting out application development

Assess the relative costs of contracting out development work versus retaining full-time in-house staff.

Commercial-off-the-shelf (COTS) vs. custom builds

COTS applications often cost less to procure and maintain. Set COTS as the preferred option when possible.

Open source alternatives Consider open source options for non-mission-critical deployments.

Software-as-a-Service (SaaS) SaaS alternatives can be more cost effective than COTS or custom solutions. Explore the options.



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Improving application maintenance processes reduces wasted effort

8. Application Maintenance Services

Prioritizing maintenance work requests

Implement a system for strictly prioritizing work requests to ensure time is invested in the most critical changes.

Bundling work requests and change releases

Bundling work and releases maximizes efficiencies.

Redundant and isolated applications

Unused and underused applications inflate licensing costs and impede integration efforts.

Software patching Patching presents a tradeoff between costs and benefits. Ensure the tradeoff is balanced cost-effectively.

Application testing and reviewing Ensure applications continue to meet business requirements. It’s less expensive to identify and fix problems early.



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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.


IT Services Example Service Components

Percentage of IT Budget

Estimate a portion of the IT budget that this

service represents

Estimated Potential for Reduction Estimate potential savings

Estimated Time to

Completion

IT/Business

Alignment Score

Estimate alignment with top level

enterprise strategy

1. Internal IT Administration

Travel, training, supplies

Low 30-60% Immediate Low

2. Networks and Telephony

Monthly telecom expenses, network infrastructure

Med-Low 10-20% Six months Medium


Help desk salaries, support applications

Med-Low 20-30% Six months Low

4. Workstation Services

Laptops, desktops, printers

Medium 10-20% Immediate to one year

High

This table represents an example of what a top level Cost-to-Serve plan might look like.


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IT Services Example Service Components

Percentage of IT Budget

Estimate a portion of the IT budget that this service

represents

Estimated Potential for Reduction Estimate potential savings

Estimated Time to

Completion

IT/Business

Alignment Score Estimate alignment

with top level enterprise strategy


“Hot” or “cold” sites. Low 30-60% Six months. High


Backup procedures, server monitoring

High 10-20% Immediate to one year

Medium

7. Application Development

Vendor’s maintenance costs, in-house development staff salaries.

Medium-High 50%-100% One year High

8. Application Maintenance Service

Vendor’s maintenance costs, in-house development staff salaries.

Medium-High 50%-100% One year High


The Cost-to-Serve plan includes time to completion and estimated savings - continued


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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.

2 Develop Strategy

3Review Services &Compile the Plan

1 Discover Targets



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Reducing IT services may be met with strong resistance

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.

IT servicesIT budget

3.4 Step IV: Negotiate the Plan

“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

Read the ITA Premium note, “Save the IT Department by Linking Budget Cuts to Decreased IT Services.”


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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.


Negotiation Steps Description

1 Communicate Ongoing Measures Already Taken

Demonstrate IT’s ongoing cost management efforts to the business through a presentation of recent accomplishments.

Detail how recent steps taken affect the bottom line, whether positively or negatively. It is important to highlight areas where IT has made itself or the business more efficient. These proof points will help gain buy-in for future “invest to save” initiatives.

Demonstrating IT’s current efficiency helps validate anticipated service reductions, signaling that IT has already taken measures to maintain service levels.

Use tangible numbers whenever possible.

2 Detail the Planned Cost Cutting Efforts

Document the future steps that will be taken (e.g. reductions, postponed projects) and demonstrate alignment of these steps with the enterprise and departments’ cost-cutting strategy.

Use hard numbers to show expected cost savings from each individual measure.


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Communicate consequences to senior management to finalize the plan


Negotiation Steps Description

3 Explain Consequences and Impact to Stakeholders

Transparency of the IT budget changes the perception that IT is a “free” service and helps enable senior management to understand what needs to be done in order to accomplish cost cuts.

Demonstrate the potential consequences of cutting expenses. For example, “We can save $5,000 per year on maintenance, but if a breakdown occurs the department will require additional funds to make repairs.”

It is important that each individual measure to be taken is evaluated in terms of consequences and impact to stakeholders. By outlining each one, senior management can easily understand what impacts to expect.

Where cuts will impact current ongoing projects, specify how timelines will be affected.

4 Finalize the Plan IT and senior management should work together to negotiate the final plan. Where drastic cuts are required, IT will have to give up core resources and, subsequently, core services. As a result, senior management should decide where service levels can be cut back.


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Step IV Summary Acknowledge ongoing cuts and specify planned measures. Communicate consequences to senior management to negotiate and finalize the plan.



2 Develop Strategy


1 Discover Targets



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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.

3.5 Step V Execute Changes

IT Leaders on Challenges in Strategy Execution

Communications… Policy… Vendors…

If I cut staff by x%, what does that mean to the business? It means a lot of things. It’s tough to nail it down to the actual effect on service levels.

IT Director,

Technology Industry

The problem we have here is this is, by and large, a trusting organization. It’s quite difficult to actually get a policy in place that says that users can’t do stuff.

IT Director,

Manufacturing Industry

You’ll never have as good a negotiating position as when you’re buying… When we’re out there negotiating, we’re smart.

IT Director,

Manufacturing Industry


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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.


Peer Example

An IT Manager at a small professional services organization keeps its end users constantly informed of IT’s major initiatives via their “Weekly Edition.” This weekly newsletter educates end users on what IT is doing, the pros and cons of why they are doing it and how it impacts the organization.


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When cut backs are necessary, IT must take extra steps to retain current staff

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. Execution Step Description

IT Communication & Expectations

Management

Communicate changes honestly and proactively. While honest and proactive communications do not guarantee success in minimizing negative impact due to staffing changes, they can help boost employee confidence.

Set clear expectations. Employees must have a clear understanding of what is now expected of them due to the changes.

Reassigning IT Work Tasks &

Responsibilities

Ask for individual preferences. While not always possible, reassign work tasks to encourage learning and knowledge transfer.

Track skills/competencies. Document current skills and future needs.

Coaching IT for Success

Provide coaching support. When training and travel budgets are frozen, it is even more crucial for staff to receive the coaching that they need to grow. Set up new coaching relationships that will give senior employees coaching experience and junior employees guidance and support.

Reward IT Successes

Recognize accomplishments. Reward staff who take on initiatives or additional duties and perform well. While financial rewards are important, providing non-monetary bonuses, such as flex time, is also effective.

3.5 Step V. Execute Changes

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.


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Policies and procedures are necessary for process change execution

Policies. Having identified several policies as means to cost cutting (e.g. printer policies, laptop policies), it’s up to IT leaders to execute on these policies. Strong policies are:

• Capable of being enforced by management.• Aligned with organizational culture and values.• Accompanied by other barriers such as spending limits on company credit cards or

bandwidth limitations on company laptops.• Well communicated from a legitimate and central point of management.

Procedures. Well documented procedures are essential to an organization undergoing changes.

• Documenting procedures captures knowledge that may be lost in staff layoffs.• Establishing repeatable processes establishes consistency where high staff turnover

is expected.• A repeatable process eliminates time spent asking questions, and offers a learning

curve which improves exponentially with each iteration.



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When purchasing, get a better price or forego the purchase altogether

Negotiate with vendors. The same economic conditions that drive IT to manage costs provides opportunities for renegotiating costs with vendors.

Consider TCO. Don’t let the pressure of finding a “cheaper” solution drive purchases entirely. Consider total cost of ownership as well the costs associated with IT solutions that don’t achieve their intended purpose.

Making do with less. Expect some disappointment when IT users start noticing slower replacement of hardware and the IT staff’s toolset.

Visit Info-Tech’s Cost Reduction Center to read “Negotiation Tips – How to Save $ With Vendors.”



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Step V Summary Develop and enforce policy and procedure. Communicate changes to business users and make change visible. Take steps to retain remaining staff. Negotiate a better price when purchasing or forego the purchase altogether.

2 Develop Strategy


1 Discover Targets


5Execute Changes




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Measure cost reduction success to continuously improve

The value of a cost to serve approach is the ability to cut costs without damaging the core of the business and it’s technology assets.

A “numbers only” approach does not tell you what effects cuts will have on the organization down the road.

The benefits of reviewing efforts are twofold: IT can tout its successes and learn from the challenges. Both should be documented and used to continuously improve the cost reduction process.

3.6 Step VI Review

Goal Key Question Measurement

Meets mandated cost cutting targets

Did IT meet required budget cuts?

Compare actual IT spending to strategic plan, initial IT budget.

Meets mandated timeframes

Was the cost cutting plan reached in the original

timeframe?

Compare estimated time to completion to actual. If there are any variances, explain reasons

behind delays.

Minimize negative impact to business

Is IT still able to meet service level agreements?

Adherence to SLAs, client satisfaction surveys.


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3.6 Step VI Review

Goal Key Question Measurement

Minimize negative impact to IT operations

Are IT staff more productive with the new procedures

and processes?

Track staff productivity to compare before and after cost reductions.

Minimize negative impact to IT morale

Is morale down within the IT department?

Gauge IT satisfaction through coaching and one on one sessions.

Take action with non-tangible rewards if possible to recognize

successes.

Minimize negative impact to end user

morale

Is morale down within the organization?

If user facing IT employees notice a change in end user attitudes, IT

management should make senior management aware.

Achieve “invest to save”

improvements

Are current projects improving business or IT

processes?

Calculate formal ROI or payback of projects completed.

The review process of cost reduction should identify areas which can be improved going forward. Cost reduction should be viewed as a continuous improvement cycle.

Measure cost reduction success to continuously improve – continued


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Step VI Summary

2 Develop Strategy


1 Discover Targets


5Execute Changes

6Review


3.6 Step VI Review

Assess efforts and tout success. Measure cost reduction success to continuously improve.


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Closing Summary


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4 Closing Summary

Cost to Serve Methodology in Summary

Step I – Discover Targets• Understand target sizes and timeframes to determine the best cuts to make. • Take proactive steps to improve IT’s position at the decision-making table.

Step II – Develop Strategy • Take stop-gap measures to meet immediate cash flow needs.• Develop a strategy that will meet target cuts and align with business initiatives.

Step III – Review Services and Compile the Plan• Review each IT service for cost reduction opportunities and rate against strategy.• Set cost reduction recommendations to negotiate with stakeholders.

Step IV - Negotiate the Plan• Acknowledge ongoing cuts and specify planned measures.• Explain cut consequences to senior management to negotiate and finalize the plan.

Step V – Execute the Plan• Communicate changes to business users and make change visible. • Make changes to policies, procedures, and staffing contingents.• Negotiate better pricing with vendors or forego purchases altogether.

Step VI – Review the Plan• Assess efforts and tout success.• Measure cost reduction success to continuously improve.

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