Cost pressures and consolidation are a key priority when it comes to companies’ business and management wants. Short-term savings can generally be achieved only through cuts or by delaying investments. It is not possible at this point to identify whether these savings are sustainable or simply delay the expense till a later date.
Significant savings can be achieved first and foremost through improving business processes. IT is affected only indirectly in this regard, since it provides support for these new processes. IT costs are generally not reduced. While these savings are ongoing, they can only be achieved over a longer period.
Looking at consolidation in the IT sector, the savings are generally medium-term and lasting and are achieved through infrastructure improvements. Examples include standardization of system platforms, cross-sectional functions, application systems and centralization of systems and system management. The period over which these savings are achieved should be 18 to 24 months.
Identifying IT cost drivers
To identify potential areas for cutting costs, it is important that existing costs are transparent. Benchmarking has shown itself to be a proven tool in this regard. In addition to a structured analysis of own costs, benchmarking also provides cost and performance data for comparable companies. This provides a firm basis for recommending possible improvements. Common benchmarking areas include:
- The IT infrastructure such as enterprise operation centers, distributed systems, data networks and voice networks
- Application development and support and standard applications such as SAP R/3
- Cross-sectional functions such as call centers, contact centers and help desks.
The complexity of the IT environment is the main cost element of the IT infrastructure. The figure draws on benchmark analyses to illustrate how the total costs associated with a user workplace depend on the complexity. The complexity index aggregates more than 30 individual parameters relating to hardware, operating software, applications, databases, upgrades and networks. The points represent the costs per workplace in different companies. The line is an empirical value. Companies with costs above the line have work procedures in place that are too expensive. Companies with costs below the line are cost-effective.
Two general measures that need to be specified on the basis of individual comparisons and detailed analyses bring about cost reductions:
- Reduction in complexity wherever possible.
- Implementation of better processes that have shown themselves to cut costs at other companies.
Reducing IT expenditure
Drawing upon the results of large numbers of benchmark analyses, quantifiable cost savings can be achieved by applying measures in five areas:
- Standardization, e.g. standardized platforms
- Centralization of systems
- Improved support structure for end users
- Automated software distribution and installation
- Improved processes, e.g. asset and license management
Benchmark analyses show that the costs per performance unit (MIPS) fall in line with the size of the data center. Considerable savings are possible if the data center MIPS level is below 5,000. The savings above 10,000 MIPS are only marginal. These results provide a valuable platform for decision-making processes regarding both centralization aspects and outsourcing strategies (for cost considerations).
Streamlining the application portfolio
In the same way that infrastructure consolidation can harness savings, management of the application portfolio also offers significant potential for cutting costs. New developments and application support each account for one quarter of total IT costs. However, applications not only generate development costs, they also result in long-term support costs amounting to 20 – 35 percent of the development costs each year. Applications therefore have to be examined regularly to determine whether they are still being used, whether functional overlaps occur and whether the cost of providing support for these applications can be justified.
A systematic analysis of the application portfolio identifies three alternatives:
- Continue the application
- Integrate the application with other systems or
- Eliminate the application
Each decision involves weighing up the cost of the support process and the needs of the business. The decision to continue the application can only be justified if it ultimately brings benefits to the business.
There are three stages in the consolidation process: Centralizing operations, physical centralization and standardizing platforms. The centralization of operations involves centralizing system management and control and introducing standardized procedures and tools. Physical centralization transfers all server systems to a data center. Standardizing platforms involves reducing the number of hardware platforms to a few systems or ideally to one system. Application systems are also standardized, for example one e-mail system instead of five. This reduces complexity and thus the degree of support required.
The cost savings and the benefits that improvements to operations will bring, must be greater than the additional costs generated by the consolidation and migration processes. The period over which ROI (Return on Investment) is monitored is also a key consideration. ROI periods of one to two years are preferable. Periods of more than three years are difficult to justify today. At the very least, some degree of success must be apparent in the short term. Existing applications that give the user the functions and performance he expects should normally not be migrated. Such migrations generally do not bring any business benefits and involve significant costs.
Cutting excessive communication costs
The communication costs are determined by two key trends. While the cost per data unit (e.g. per MB) is falling by 20 – 30 percent p.a., the bandwidth requirement is increasing by 50 – 100% p.a. due to data being more complex (e.g. graphics or moving images) and the distribution of applications being more widespread. This increases overall communication costs by 5 – 10 percent p.a.
Each company should draw up and monitor a structured cost cutting plan. The key areas that the analysis should cover include lack of use, infrastructure too large, old contracts, maintenance and support too costly, and applications with excessive bandwidth requirements.