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Trimming for Dollars

Trimming for Dollars

To cut costs strategically, you need to understand your actual costs and the value of your various technologies, services and business deliverables. Otherwise, the cuts you make may degrade important business processes and reduce their value.

Five Rules for Rationalizing the Infrastructure

While there are many ways to achieve efficiencies in IT infrastructures, they tend to be variations on one basic approach: reducing complexity. "The key levers are simplifying, standardizing, consolidating and centralizing," says John Balboni, CIO of International Paper, who has cut IT costs by 25 percent over three years even though his company has been involved in a number of acquisitions during that time.

"It requires standard processes to do real consolidation," advises KPMG's Bell. So any infrastructure rationalization needs to start with understanding the underlying business and IT processes, making them efficient, then adjusting the infrastructure to support them. Part of that effort includes rethinking the service levels IT provides to the business, says McKinsey's Kaplan. "Do you need 24/7 support for all applications?" he asks. "Do you need disaster recovery for all applications?"

Service levels should reflect business criticality, since achieving high service levels adds significant labour and technology costs. "You have to show [business departments] what they can live with - service is really a level of grey," says Khris Hruska, technology director at child-care and education provider Learning Care Group. To do that, Hruska worked closely with business managers to help them understand what service levels they really needed. Then he tuned his resources accordingly.

1.Don't Keep Multiple Systems

One way Balboni has kept costs down is by not keeping acquired companies' IT infrastructures. That allows efficient usage of technology and staff while also ensuring that the business has a unified view of its customers and operations. "You don't want to serve the customer out of two systems," he says.

"You have to have the same system," agrees John Williams, CIO at retailer Party America, which has grown from 36 stores to 300 in three years through a series of mergers and acquisitions. During that time, his IT staff only doubled from six to 13, thanks to enforcing the same point-of-sale and back-end systems on all the acquired entities. "Every time you have a merger, you're at a crossroads. Do you go with theirs, or do you go with ours?" he says. At Party America, Williams went with his. It wasn't a question of which technology was better - both his Oracle-on-Linux environment and the acquired companies' AS/400 environments could do the job. It was a question of what skills his IT staff had. They knew the Oracle-on-Linux environment. Williams is also reducing the number of broadband providers to his stores to make vendor management and support easier.

It's not just companies dealing with mergers and acquisitions that can take advantage of platform reduction. For example, ADP's Bongiorno expects ADP to save $US50 million per year by consolidating 30 data centres into two by 2009. The company had been decentralized, with separate IT operations at each customer centre. Centralizing the operations not only will reduce IT staff but also will allow higher utilization of equipment. "The biggest piece has been around getting more clients on a server," says Bongiorno. Doing so reduces labour, licensing and hardware costs.

2.Routinize the Routine

The easiest way to save is to invest fewer resources in repetitive, predictable tasks, since labour is usually the largest cost in any IT organization (typically half the budget, says McKinsey's Kaplan). There are several ways to reduce that labour cost: automation, simplification and outsourcing. Often, companies employ a combination of these tactics.

Outsourcing can save money, but not always. "A lot of companies don't know the cost of a service before they outsource it," says AMR's Gaughan, so they don't know if their actual costs have gone up or down. For outsourcing to be effective, "you need to think through the control issues up front so you have the ability to hold them accountable", says Bowe Bell & Howell's Ridge. "You need a higher degree of process management when you offshore," adds Kaplan.

CIOs should approach outsourcing in a nuanced way. For example, Bowe Bell & Howell found it cheaper to outsource desktop support and ERP hosting than to maintain its own staff and IT infrastructure for these tasks. But it manages its telecommunications systems because it doesn't want to take any risks with the customer data that telecomms brings in, Ridge notes. ADP has hired cheap staff in India and Brazil to code its applications, while retaining the higher-skill project management and development staff in the US, says CIO Bongiorno. And ThyssenKrupp saved by outsourcing its mainframe and AS/400 operations, but it also saved by firing its network management outsourcer and bringing those operations back inside the company.

On the technology front, CIOs are often pitched automation systems and virtualization as ways to gain labour efficiencies. Both are new technologies and thus tend to come from start-up providers focusing on one aspect of IT, says AMR's Gaughan.

At International Paper, "we work a lot on automation", says Mark Snyder, the senior manager for connectivity solutions. But some of that effort has involved developing its own monitoring tools to ensure they map to the company's specific processes.

Virtualization technology saves labour by simplifying the provisioning of servers, making it a software operation rather than a hardware setup task. Virtualization also promises to use more of your existing server resources, reducing the need for additional hardware. It does that by treating the hardware as a pool of computation and storage. So if an application needs just half a server's capacity, the other half can be allocated to another application rather than sitting idle. But because virtualization is a new technology, it requires a more highly skilled staff to manage and can require additional overhead to maintain the load balancing, says Gaughan, adding: "That should decrease over time."

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