Firms making tactical cuts face long-term strategic nightmares

10 Jun 2009

IT departments scrambling to cut costs are unwittingly storing up problems for the future, using short-term solutions that lack ambition.

According to Deloitte partner Harry Goddard, businesses everywhere are embarking on cost-saving measures. However, while they are making tactical decisions that appear correct, these could very well turn into long-term strategic mistakes.

“What our local and international experiences have highlighted is the fact that IT departments are scrambling to cut costs but are unwittingly storing up problems for the future,” Goddard said.

“Cost-reduction targets are being dictated by individuals with limited understanding of the costs, risks and issues associated with IT service delivery. Many IT departments are reacting to business pressure by delivering short-term tactical savings that lack ambition, rather than driving long-term benefit.”

Goddard pointed out that in many cases, companies are willing to cancel projects and rely on out-of-date infrastructure; consequently the ability of IT to support the business is in danger of being compromised. 

He said there are a number of misconceptions when it comes to IT cost reduction.

The first misconception is that an IT cost-reduction programme should deliver significant savings in six months. “Many organisations believe that they should complete cost-reduction activities in six months or less. This tactical approach is unlikely to deliver sustainable savings.

“In many instances, we are seeing organisations embark on another IT cost-reduction programme less than a year after taking this short-term approach. The best approach is to identify strategic long-term savings, combined with short-term tactical savings where appropriate.”

The second major misconception is that cutting headcount and third-party spend are the best ways of cutting costs. “While asking suppliers to ‘feel the pain’ and cutting both permanent and temporary headcount always feature prominently when cutting costs, sustainable cost reduction involves more than simply leaning on vendors and cutting staff.

“A more strategic approach includes such things as improved demand management, more rigorous business case and benefits tracking, a renewed focus on outsourcing, ensuring the right capabilities and skill sets are maintained as a part of any headcount reduction and rationalisation of the enterprise architecture.”

Goddard said a third major misconception was that by increasing outsourcing businesses will reduce costs further. “Outsourcing is a well-established approach for delivering IT infrastructure, network and application management services. Although this seems to be a mature market, we have noticed that many organisations are planning to outsource more to reduce costs more.

“This is a proven approach, but given the relatively short timescales that organisations are allowing for their cost-reduction programmes, and that major IT outsource arrangements take more than a year to complete, this approach may not always achieve the desired objective.

“Perhaps the biggest canard of our current era is the belief that ‘green IT’ is the ultimate way towards achieving significant cost savings. “Although we are living through the days of ‘green IT’ and a period of fuel price volatility, and while reducing energy usage does deliver savings, these are often not as significant as first anticipated,” Goddard explained.

“The reality is that while this is a newsworthy topic, energy costs still only form a small proportion of the overall IT budget,” he said.

Another misconception is that server virtualisation will deliver short-term costs savings. “Server virtualisation can deliver significant cost savings over the medium to long term, particular when combined with green IT in the data centre, but in the short term is rarely able to make a significant contribution.

“This is because server virtualisation cannot be applied in all cases due to a range of issues – from a lack of software support to where the existing server estate is in terms of its depreciation and refresh cycle, in addition to uncertainty as to what the growth in business demand will be in the coming years,” Goddard said.

Goddard’s top-five best practices for IT cost reduction include:

  • A strong focus on demand management – effective management of business demand, backed up by internal IT recharge mechanisms, plays a major role in controlling costs
  • Achieving business amd finance buy-in – the business must back the IT cost-reduction plans as any trade-off between cost and service must have the support of IT customers. Finance should be included right from the start in order to ensure that the correct ‘as-is’ cost base is established and that a solid business case is developed for any subsequent actions
  • Make application and infrastructure portfolio management a core discipline – long-term strategic cost reduction is best delivered by ensuring that an organisation’s applications and infrastructure are fully aligned to their business processes by reducing the platform maintenance and operating costs, and reducing the breadth of support and development skills required internally
  • Outsourcing should be used as a strategic cost-reduction tool – while it does bring some new risks and must be effectively managed, outsourcing is a sustainable approach that can deliver real long-term benefits. Organisations need to be realistic on the timeline for savings
  • ‘No sacred cows’ – there must be no sacred cows in IT cost-reduction efforts, in order to maintain credibility and maximise savings opportunities.

“Our client experience has shown that there is often potential to achieve sustainable savings of 30pc or more without resorting to short-term ‘slash and burn’ tactics. Recently, we have assisted an Irish financial services organisation in identifying savings of up to 26pc and an Irish-based global insurer in identifying savings of 18pc.

“The starting point for any cost-reduction programme is to have a clear, detailed and definitive view of IT costs, and a well-structured plan for managing and tracking cost savings. Only then you can be sure ‘how low you can go’.

“From working with our colleagues in the UK and further afield, we believe organisations in Ireland to be perhaps six to nine months behind in their IT cost-reduction plans. This is an opportunity to avoid the mistakes being made and get it right from the get go,” Goddard concluded.

By John Kennedy

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years