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You may be able to squeeze more out of your IT budget than you realize.
Thomas Hoffman, CFO Magazine
May 1, 2009
You've outsourced, you've consolidated data centers, you've decided that the usual three-year PC refresh cycle can be stretched to four years. All well and good, but what else can you do?
"Given the current economic climate, you have to be willing to think a little bit differently about things," says Joanne Kossuth, vice president for operations and chief information officer at the Franklin W. Olin College of Engineering in Needham, Massachusetts.
Although IT departments continue to apply proven cost-cutting approaches, here are seven relatively new and innovative techniques that CIOs such as Kossuth are using to shrink their tech-related spending.
Instead of hiring third-party offshoring firms to develop software or handle other IT tasks, some companies, such as BlueStar Energy Services, are continuing to do the work themselves, but far away. They are creating foreign IT subsidiaries that tap into the same highly skilled, lower-wage technicians that the offshoring giants have based their business models on.
In 2006, BlueStar began to replace the bulk of its IT infrastructure with open-source technologies and to shift development work overseas. After weighing the options in Brazil, China, Ukraine, and elsewhere, it decided on Lima, Peru, based in part on real estate costs and infrastructure reliability, not to mention the chance to tap into a highly skilled IT labor pool at roughly a third of the cost of U.S.-based employees.
While that approach may sound out of reach for all but the largest companies, BlueStar was able to go global for very little money, and now reaps substantial rewards. For less than its initially budgeted $70,000 in start-up costs, the company was able to bring on a project team of seven developers, train them in the company's software methodology, and open a facility with high-speed communications links. The facility grew to 20 people by the end of 2007 and now boasts a 51-person crew — for a monthly expense of $110,000.
"From a financial perspective, this talent is extraordinarily competitive in terms of ROI," says BlueStar Energy CFO and executive vice president Robert G. Ferlmann. "We have found that the investment made in this group has resulted in greater performance throughout the entire company."
In developing the wholly-owned subsidiary BlueStar Energy Services S.A.C., BlueStar has saved millions of dollars in real-estate and labor costs compared with opening a U.S.-based development facility, says Tom Keen, BlueStar's chief technology officer. In addition, he believes the systems that have been developed to support the company's NextStar e-commerce and billing engine have helped differentiate it from other energy providers.
Another bonus: the Lima staff is in the same time zone as Keen's Chicago IT team of 12. "There's something to be said for being able to pick up the phone and not have the person on the other end be half asleep," says Keen.
A New Approach to Shared Services
Many large companies are "trapped" by the high fixed costs of hardware, software, and network equipment investments used to run their IT operations, says Gartner senior adviser Howard Rubin. As one all-too-conspicuous example, Rubin points to big investment banks, which invested tens of millions of dollars to add servers and storage during boom times, only to see utilization rates for these machines plunge as business dried up.
But the same high-speed connections that help BlueStar work closely with its Peruvian unit can also help firms with excess capacity get more out of it by sharing or bartering with others. "People whose companies are stuck with fixed capacity are just starting to think about this," says Rubin.
Kossuth of Olin College has been doing more than just thinking about it: she has had numerous discussions with administrative officers at nearby Wellesley College and Babson College about ways to share their existing IT resources without exchanging cash. Since fall 2008, Kossuth and executives from the other two schools have discussed a range of options, including the possibility of extending the fiber-optic connection that currently links the Olin and Babson campuses to Wellesley so that the three schools could potentially share storage and other systems. "The key is that nothing is off the table if it's worth talking about," Kossuth says.
Although IT departments have been automating an ever-increasing percentage of technical administration in recent years, there are still plenty of opportunities to further reduce or eliminate manually intensive IT activities, the "What's-my-password-again?" requests that can suck up so much of an IT staffer's time.
In 2008, Constellation Energy's IT organization renewed enforcement of its policy that allows engineers and other employees to use its self-service password software tool to reset their own system passwords and unlock their user accounts as needed. Prior to the new policy enforcement, only 15% of the company's password resets and account lockouts were handled through the self-service tool; the remainder queued up at the company's IT help desk, says CTO Jeff Johnson.
But that all changed with the new password-reset policy. By March, 2,040 password-reset/account-unlock "tickets" were handled through the self-service process, representing about 84% of such requests, says Johnson.
Since it costs Constellation Energy $20 for its IT help desk to handle each ticket, the self-service software (from Courion Corp.) helped the company avoid approximately $41,000 in costs in March alone, or $490,000 on an annualized basis, says Johnson.
Because small-to-midsize companies typically have limited financial and personnel resources and can rarely afford to hire technicians who have expertise in just a single domain, many are now cross-training their IT workers in a variety of technical disciplines.
The concept is also beginning to catch on with larger enterprises. For instance, Rockford Health System, which operates a hospital and several health-care clinics in northern Illinois, is required under HIPAA regulations to randomly audit e-mail and electronically generated communication. When the IT staffer who normally handles that went on leave, CIO Dennis L'Heureux opted to train an existing late-shift computer operator to do the job while monitoring overall systems, rather than hire a replacement.
Cross-training doesn't have to cost much: many companies use job-shadowing as a key part of such efforts, and vendors are becoming increasingly willing to provide free training (see related advice, below). Employees in general and IT staffers in particular are eager to acquire new skills, and the economy may prompt employees to view cross-training as a way to stay current, and needed, versus simply being asked to do more work for the same pay.
Leveraging Software-Contract Perks
Economic pressures have led technology vendors to become substantially more flexible about contractual arrangements; if you can't get the price down as far as you'd like, consider pushing for more add-on services. For instance, when Rent-A-Center Inc. upgraded to a new version of an enterprise software product, the vendor threw in four weeks of free training, which saved the company $25,000, says KC Condit, director of information security for the chain of rent-to-own stores (see also "Have They Got a Deal for You," CFO, February).
Negotiating Lower Contract Labor Rates
As technology spending has slackened, demand for contract IT workers has also waned. Tom Pettibone, founder and managing partner of IT consulting firm Transition Partners, says rates for IT contractors have dipped 10-to-15% compared with 2008. "Cost reduction is top of mind for everyone right now," says Pettibone, the former CIO at New York Life, PhilipMorris, BMW, and other companies, "and suppliers also recognize that these are unique times." In short, this is one more area where you can drive a hard bargain.
For his part, Russ Finney has been able to do better than that: as vice president of information systems at Austin, Texas-based Tokyo Electron U.S. Holdings Inc., he has driven at least 25% savings on each of the outsourced labor contracts his team has negotiated since February. In some instances, he says he has been able to pick up contract workers at half price, or even had third-party technicians added to the company's IT help desk and systems-support groups at a very reduced charge, since vendors are sometimes reluctant to break up work teams.
Hiring Managed-Services Providers
"All politics is local," legendary congressman Thomas P. "Tip" O'Neill once said. Sadly, the same is often true of IT support, but it doesn't have to be. Rent-A-Center, for example, used to have store managers at each of its more than 3,000 U.S. outlets hire local companies to service their laser printers and replace toner cartridges. But "with the spending coming onesy-twosy, you didn't get the big discounts," says Condit.
In January, the company hired High Touch to manage its laser printers. By moving to a national managed-services agreement, the company saves nearly $100,000 a month in toner costs alone, says Condit. Plus, "it spares store owners from having to worry about printers," although they have leeway to hire local help when appropriate. Managed IT services run the gamut from network infrastructure to security to applications management.
Thomas Hoffman is a freelance writer in Warwick, New York.
To see how targeted IT investments may provide more value than traditional budget cuts, click here.