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Runaway IT spending is out, creative cost control is in.
Bob Violino, CFO Magazine
June 1, 2008
Most analysts expect information-technology spending to increase about 2 percent this year, and in April research firm IDC found evidence that spending may actually decline slightly. Either way, IT still represents a huge corporate expense, accounting for about half of all capital spending and exceeding $500 billion annually. No wonder, then, that when times get tight executives turn to their companies' IT budgets and get out their red pencils.
Let's hope those pencils have sizable erasers, because IT spending has long defied any kind of simplistic analysis. Gauging the return on investment of specific projects is an exercise fraught with peril, and whether a company does or does not green-light an ambitious initiative, there is still plenty of infrastructure to pay for. The need to keep basic IT services up and running while also exploring the potential of new technologies is challenging under any conditions; during a downturn it becomes downright herculean.
Companies are now concluding that in order to control costs they must better understand them. Initial outlays for hardware, software, networks, and storage are far from the only costs. Maintenance, support, labor, and other expenses add to the total cost of ownership, or TCO. Increasingly, analyst firms are urging clients to get a grip on TCO as a useful benchmark by which to base purchasing decisions.
Earlier this year, for example, Gartner reported that effective management can cut the TCO for desktop PCs by 42 percent. A large company might use a volume discount to acquire a PC for a mere $1,200, but if it's kept for four years the TCO could run as high as $5,867 — per year. The disparity between initial purchase price and actual cost of ownership can be traced to a host of indirect costs, everything from maintenance, support, and training to the multiple costs of downtime (repairs, loss of productivity, potential impact on customers or other aspects of the business, and so on).
Companies tend to overlook TCO and focus instead on the much more easily measured purchase price, but even here they often don't do enough to drive down costs. Southern Co., an Atlanta-based electric utility, has consolidated all of its IT hardware procurement into a central vendor-management function that enables the company to take advantage of volume discounts and economies of scale. Previously, says Bart Wood, the company's vice president of strategic planning and compliance of IT, individual departments bought and managed the contracts for their hardware needs. Southern first targeted hardware in its centralized approach and then added software, and has since saved millions.
Hartford Financial Services Group Inc. has launched a similar effort. "In effect, we are changing our vendor model from a transactional one to a more strategic one," says Elizabeth Bock, senior vice president and CFO for Enterprise IT. It now assesses software needs across the entire company. "This allows us to create a forward-looking vendor strategy for driving cost down as opposed to just reacting to each transaction as a one-off," she says.
Just Ask for It
Even companies that forgo centralized procurement, however, can reap lower prices. One of the simplest ways is simply to ask. Steve Cooper, who has served as chief information officer at Corning, the U.S. Department of Homeland Security, and the American Red Cross, says that companies should more aggressively explore and negotiate deeper vendor discounts.
This usually involves an exchange: customers agree to buy a broader range of products and services (including maintenance fees) from the vendor, or commit to a minimum purchase amount, and in turn get a better price. Two caveats: expect the process to be time-consuming, and don't sign on for things you won't use.
Don't assume that once a deal is struck, however, that you are bound by it. There is often room to renegotiate, particularly when it comes to outsourcing arrangements. Research by Compass Management Consulting, a Naperville, Illinois, IT and business consulting firm, shows that many companies are currently paying 15 to 25 percent more than prevailing rates, and that some are spending 30 to 40 percent more for outsourced services than best-in-class companies pay to provide the same level of service in-house.
Armed with those facts, Geraldine Fox, sourcing lead at Compass, says companies should not hesitate to lobby for better deals. One Compass client, for example, used the firm's analysis to win reduced fees for the 18 months remaining on its contract.
A veritable army of specialists, in fact, can be hired to help wrest savings from IT vendors. Lafarge North America, a diversified construction-materials supplier in Herndon, Virginia, hired a firm called NPI to benchmark its telecommunications spending and vendor agreements. NPI helped gather detailed information about Lafarge's telecom usage and contract terms, and assisted the company in crafting RFPs and negotiating with providers. That led to better rates and the consolidation of multiple vendors, says Sepehr Kousha, IT controller at Lafarge, who adds that "our annual savings is anticipated to be in seven figures."
Telecom cost management is a field rife with advisory companies, some of which offer specialized software to monitor usage at a very detailed level. NPI and some other vendors will also assess enterprise-risk-management and other big-ticket software and act as pricing experts and negotiating partners, often leveraging their databases of past deals to help customers push for lower prices.
Bob Violino is a freelance writer based in Massapequa Park, New York.
Keep It Simple, and Green
You can cut IT and energy costs at the same time.
Standardize on products wherever possible. According to The Hackett Group, companies with less-complex IT infrastructures are more effective and efficient, and spend less on IT as a percent of revenue. Often, complexity breeds more complexity: a vast applications portfolio, for example, typically requires a more complex infrastructure. Companies that standardize desktop computers, pool application-development efforts, and consolidate vendors have cut their IT operating costs by as much as 50 percent over four to five years, Hackett says.
IT asset-management software can help companies get a better handle on how much hardware and software they have and whether they are overbuying software licenses or hardware upgrades. The software creates an inventory of software and hardware assets and measures which applications are actually being used. Asset-management tools can help eliminate expensive licenses and maintenance contracts.
For a time, the ever-lower cost of computer servers prompted companies to buy them in droves, but that resulted in overcapacity and attendant management problems. Now, many companies are using fewer, more-powerful servers to tackle multiple tasks, a feat made possible by virtualization software that allows one server to do the work of many. Delaware Electric Cooperative, a Greenwood, Delaware, electric utility that provides electricity in southern Delaware, launched a virtualization project last year and reduced the number of servers it needed from 20 to 6, says CFO Gary Cripps. In the process it reduced server power usage by 80 percent and disk-maintenance time by 90 percent.
Virtualization is a key part of broader efforts to make computer data centers, which consume huge amounts of electricity, more efficient. Eaton, a diversified industrial manufacturer in Cleveland, deployed energy-efficient blade servers and virtualization software and now saves more than $1.5 million annually in power and lease costs, according to CIO Bill Blausey. The company also developed programs to automate its data centers, so it can better manage capacity and shut off idle servers. The company also benefits by meeting the criteria of a "demand response program" sponsored by a local utility, saving it another $40,000 per year in one facility alone. CFO Rick Fearon credits a close partnership between finance, IT, and facilities with helping the company develop a greener data-center strategy. — B.V.