How To Reduce the IT Budget and Still Keep the Lights On

Transcription

1 How To Reduce the IT Budget and Still Keep the Lights On By Charles Williams and John Carnegie CIOs are now more challenged than ever to demonstrate mature financial management disciplines, greater transparency, and improved performance reporting of costs. Historically, the Office of the CIO the CIO and direct reports have relied on roughestimates or SWAGs (scientific wild a guesses ) to answer questions, such as: What are the key drivers affecting cost? When and where should we cut discretionary spending? Where can we make additional cuts and still have enough staff to keep the lights on? Our prior Newsletter for IT Service Management Professionals contained two articles: 1. Part I: Are IT Budgets Driven By Demand or Demands? 2. Part II: Why Map IT Costs? Using a Capacity-Based Modeling Approach These two articles lay the foundation for validating and reducing your IT budget, describing the why and how of using a capacity-based IT Financial Cost Model. The present article illustrates how modeling of the right financial data helps CIOs and their organization to meet today s challenges, including: Greater cost transparency, Budget reduction, Better outsourced vendor value, and Improved regulatory compliance risk mitigation. Food for Thought: If you clearly define your end state where you want to be and if you have a map that clearly marks how to get there, and you have the resources and the means, then you will successfully make the trip! Capturing and modeling the right data is essential to success. This goes back to the GIGO principle garbage in, garbage out. Building a solid IT Financial Cost Model requires at least that you capture data about services and activities performed, and their cost drivers. For example, you need to collect data about the following cost drivers: Utilization Demand how often an instance of service or activity is requested or performed Duration how long to complete a service or activity successfully Unit how many measureable items are required for a service or activity Resources Assets equipment, facilities, and projects Expenses license and maintenance fees, travel, and other services P a g e 1 of 6

2 Staff Vacation and sick time Training Work Constraints Capacity planned hours to deliver services and activities Budget money allocated for delivery of services and activities Compliance regulatory and statutory risk mitigation services and activities IT Financial Cost Modeling starts with understanding and defining the current services provided. Starting with a service-orientation of the IT organization has many benefits. Sets the stage for Service Level Management improvement the service consumer has expectations even if you do not have formal service level agreements (SLAs) Improves communications within the IT organization, and between IT and the business Provides a cost-driven approach to adopting improvements, using IT Infrastructure Library (ITIL ) and other frameworks for efficiency and effectiveness Increases customer satisfaction service consumers and customers better understand the value of the IT organization Elevates the perception of the IT organization to that of a Service Provider, by orienting the IT organization to service versus technology Here are two examples of client engagements where they used an IT Financial Cost Model to reduce and validate their IT budget. 1. Program Assessment at a Customer Care Company 2. Data Center Consolidation at a Fortune 100 Company Note: These engagements are detailed in A Services Framework for Business, by JD Carnegie and DA Ackley. (Trafford Publishing, 2008). P a g e 2 of 6

3 1. Program Assessment at a Customer Care Company Goals The goals of this engagement were to: provide a view of their delivery capabilities, and determine how effective these capabilities would scale to support anticipated revenue growth of 100% over the next two years. As a result the management team was empowered with detailed information that increased the accuracy of decisions pertaining to budget, organizational structure, service delivery, and application architecture and standards. Background The client had a total staff of 8,000 people, including 181 IT staff. The client was well aware that support problems existed, and anticipated difficulty in supporting the corporate revenue projection. The client s call centers contained 4,300 seats, equipped with telephones, desktops, etc. The client initially targeted 7,100 seats to meet their projected 100% growth. From an IT perspective, this required a 43% increase in staff. Problem The problem was how to financially characterize and accurately justify the problem and the proposed solution. The Approach To create the IT Financial Cost Model the client provided the joint client and consulting team its IT organizational structure and personnel budget. The team used this information to build a set of as is IT services, and to define cost drivers for each organizational area. This as is model was the baseline, and matched the client s current budget numbers of $15.4 million and 181 IT staff. Detailed analysis of the as is model of each organizational area concluded that the IT organization had roughly 90% overlap in services provided. With an accurate baseline established, multiple to be scenarios were developed, including these proposals: A new organizational structure that improved communication, and aligned work and skills; Adoption of selected industry best practices in the areas of architecture, application development and infrastructure, and governance; and A shortened timeframe for the carry-over of services and operations under the old organization. P a g e 3 of 6

4 Figure 1 shows the summary results of the as is IT Financial Cost Model data: Figure 1: Reorganized IT Cost Roll Up and Resource Utilization The analysis of the as is model resulted in development of a to be scenario. Figure 2 shows the following achievement: IT reorganized with improved governance and standards; and 100% revenue realized with only 36% increase in IT staff. Figure 2: Organizational Growth Scenarios Conclusion The to be IT Financial Cost Model scenario proved that the 100% increase in revenue over a two-year period was achievable with only a 36% increase in IT staff. This meant $2.9 million IT budget reduction, with an overall resource utilization of 75%. P a g e 4 of 6

5 2. Data Center Consolidation at a Fortune 100 Company Goals The primary goal of this engagement was to identify and propose the tactics and budget to reduce IT Shared Services organizational expenses, with a primary focus on consolidating worldwide data centers and operations. Specifically, the company wanted to: reduce IT operational expenses by $500 million over four years, and assess the financial impact of consolidating its many data centers into fewer data centers, within a defined payback period. Background The client had enjoyed enormous internal and organic growth. Recent events cast shadows on near-term profitability. Shareholders feared that profitability may slip in the near future. The client identified nearly 200 data centers and computing facilities, most of which were closets that contained two to four servers. However, thirty locations had 500± square feet of dedicated raised floor space. Twenty-two of these locations were targeted for consolidation, with a single fail-over site. Problem The problem was how to develop realistic cost-saving strategies that would directly improve the bottom line, and mitigate shareholder lack of confidence about profitability. Approach The joint client and consultant team reviewed and selected data centers for consolidation, and started gathering data for IT Financial Cost Modeling and analysis. The team modeled the as is costs of each data center over a four-year period to provide an unconsolidated baseline. The selected data centers were surveyed to determine their specific metrics, such as: services, staffing, floor space, and servers. To develop the as is model for the twenty-two data centers, and to match the client s actual budget and environment, the joint team scaled all services to75% usage, and available personnel time to 80% utilization. The joint team then developed a separate to be model to consolidate costs for Years 2-3-4, using historical trends for server and storage growth. They modeled each year for the impact of server consolidation, tiered storage utilization, and maintenance, facilities and staff costs, using the following three premises: Conservative 12% of operational cost Available 15% of operational cost Aggressive 18% of operational cost This scaled approach represents the increasing effort needed to optimize server and storage use. P a g e 5 of 6

6 Additionally, a factor was applied to the workforce majority for each to be model, projecting their adoption of best practices in data center operations. The model was then modified to reflect other assumptions and variable expenses. The 1 st year includes the data center build-out and consolidation of three data centers. The 2 nd year is the build-out and consolidation of six data centers. The rest of the data centers are consolidated in Years 3 and 4. The details of each year are shown in Figures 3 and 4. Figure 3: Proposed Data Center Consolidation Strategies Figure 4: Consolidation Strategy Cost in $Millions Conclusion The client reviewed the three cost options, implemented a regional data center consolidation program, and is reaping the modeled savings. Authors: Charles William, is an IT Service Management Consultant and Senior Partner at KEDAR Information Technologies, Inc. Mr. Williams has spoken at numerous industry conferences and seminars, and has written several articles and special reports on the IT industry. KEDARit works with large- and medium-sized businesses, government, and public and private organizations across a broad range of industries. John Carnegie, Founder and Principal at The Enterprise Modeler LLC, has over 40 years in engineering and project management, operations, and business. Mr. Carnegie is the co-author of the book titled A Services Framework for Business (Trafford Publishing, 2008). He has held lead positions at Texas Instruments and founded a total of three companies. Mr. Carnegie has an undergraduate degree in mathematics and a graduate degree in computer science, both from Southern Methodist University. P a g e 6 of 6