As the ‘credit crunch’ slides into recession, economic pressures have a lasting effect on budgets across all departments of an organisation. With such a large proportion of an organisation’s expenditure going on technology either through change or service, the cost reductions will be expected ever more so within IT.

Over the last five to ten years IT departments have already concentrated on cost reduction and much of the ‘low hanging fruit’ has already been taken. So where will the next round of cost savings come from?

The economic crisis is not only an opportunity to reduce IT spend, but also to increase its performance and service to the business. So how do we reduce IT costs and increase performance?

From working with IT departments of all sizes, Xantus has found the key lies in taking a strategic approach and focusing on five core elements:

Tackle the current level of demand

Almost all IT departments still have demand from the business that outstrips supply. Many have two to three years’ worth of developmental changes in the pipeline that they do not have the capacity to deliver.

High performance portfolio management is crucial, as is the alignment of projects and programmes to the current objectives of the organisation. If a programme or project is not directly supporting one of the top three to five objectives of the organisation, then is now the right time to do it?

For example, in a project with a global airline Xantus reduced project expenditure by 50 percent in response to extraordinary global events. This required a controlled and transparent portfolio and prioritisation process and significant management of departmental conflicts. The revised project portfolio achieved the £30 million budget target.

A strategic approach must be taken wherever possible to ensure problems are not stored up for the future, creating a so-called ‘design debt’.

A lack of investment can lead to applications on unsupported platforms that not only increases support costs but also dramatically increases the risk to the organisation. Likewise, expenditure on ill-informed IT upgrades to improve performance must be avoided – in Xantus’ experience, there is often a much simpler (and less expensive) solution to performance issues, the key is to identify the root cause and deal with it.

A new lens on expenditure will allow more money, not less, to be spent on the discretionary projects which focus on supporting business growth (or defence, if required).

Look again at in-flight projects

The current economic climate has changed many things and old assumptions or projections from even a few months ago may no longer stack up. This can have a significant impact on the business cases and viability of in-flight projects. Now is the time to re-evaluate assumptions, predicted benefits and the associated outcomes, and take the brave decision to stop projects when a realistic return on investment (ROI) can no longer be guaranteed.

This money can be fed back into the organisation or redirected towards those projects that do support one of the key objectives of the business and support growth at a time when it is needed most.

Sourcing and external partners

One obvious way to reduce spend is to renegotiate existing contracts or impose cost reductions on suppliers. However, this still needs to be approached from a strategic perspective.

Care needs to be taken not to simply impose a 20 percent reduction in a new contract as this can lead to a rapid degradation in performance as service is cut too close to the bone, in the wrong places.

In Xantus’ experience, the most successful way to reduce spend on external suppliers is often to introduce competitive tension such as multi-sourcing or non-exclusive service provision.

This requires having partnerships with a number of key suppliers, providing a spread of skills and capabilities across the IT landscape that can be called upon when required. A warning though, this change in sourcing arrangements requires corresponding changes in the way an organisation manages multiple suppliers.

The current economic climate has also highlighted the need for robust vendor due diligence to avoid the risks and issues associated with the vendor consolidation and the continuity risks that are currently arising.

IT operating model and organisation

To take full advantage of a multi-sourced environment the retained IT organisation needs to have the right combination of resources and processes, with the appropriate levels of skills, capabilities and governance.

Many of the organisations that aggressively outsourced around the millennium are now seeing an increase in performance and reduction in cost by strengthening their in-house management capability and ‘bringing back in-house’ specific areas of the IT organisation.

Companies need to take a step back and clearly define which services are to be provided externally and which are to be provided internally. The IT department can then design the right retained organisation and the correct level of resources.

At the same time as implementing the new strengthened organisation, improved processes and governance are required to cement the new ways of working; increase the levels of service and control over costs. It is only this strategic approach that allows the changes to embed and become a way of life.

Service and support

Over and above the renegotiation of contracts there are a number of actions that can be taken to reduce support costs. Xantus recently worked with a major retail chain to reduce 400 applications down to 84 systems, which resulted in £7m in annual savings. Datacentre savings can also be significant, especially with the rise of virtualisation tools. Critically, however, these need to be backed up with appropriate processes and governance or the associated savings will be short-lived.

Another way to significantly decrease operational costs is to tackle IT spend hidden within the business units, 'shadow’ IT expenditure. Much of this expenditure is often inefficient, not managed well or controlled in a cost-effective way. In most cases, it is possible to bring these services under the control of IT, rationalise through the introduction of standardised processes and governance and provide the same level of service back to the business at a significantly reduced cost.

Of course, care should be taken not to reduce service expenditure to a level where it impacts IT’s ability to support the business, particularly in customer facing units.

The way we see it the rule: ‘it is not possible to reduce costs whilst increasing performance’ is no longer the case. IT cost reduction needs to be seen as a strategic initiative with all transformational activities being self-funding.

Companies can significantly reduce their costs by looking at demand and the projects portfolio, applying strategic sourcing, negotiating with suppliers and redesigning their IT organisation’s operating models. This can be achieved while increasing performance in specific areas and across the whole IT landscape through economies of scale, industrialisation of processes, fit for purpose governance and increasing capability in the right areas.

Rules are there to be broken.

Ben Barry is a managing consultant at consultancy firm Xantus . For more information on ‘Value for Money’ IT in an Economic Downturn and on how to reduce IT expenditure contact Ben Barry at: [email protected] +44 (0)7885 555 995