managing it budgets in uncertain economic times: it optimization

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Managing IT Budgets in Uncertain Economic Times: IT Optimization

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Page 1: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Managing IT Budgets in Uncertain Economic Times:IT Optimization

Page 2: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Uncertain economic times

CIOs have faced lean economic times with regularity over the past four decades

It isn’t a question of whether they will happen but when. Forrester advises CIO's to base

budget cuts on the impact to the business and to IT productivity, not on some misguided perception of equitable cuts across all areas.

Forrester Research Inc. (2008): ” Budget Adjustments For CIOs In Lean Economic Times”

Page 3: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Cut the budget in all areas of IT equally?

Easiest to simply cut the budget in all areas of IT equally, but that effectively rewards the wasteful areas and penalizes the efficient ones.

Prudent CIO will look within IT for potential options and understand their impact before taking action.

Page 4: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Key points to analyze

Cutting operating expense Can operating expenses be cut without

affecting quality, quantity, or timeliness? Small cuts over long term equal large

savings Postponing long-term projects in favor of

near-term Payback Most short term bang for the buck to get

through the downturn Deferring or reducing capital expenditures Revisiting existing service contracts Seeking productivity increases in existing

infrastructure Postponing hiring of additional IT staff Postponing the launch of new initiatives

Page 5: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Breakdown of IT spending

Investment –

new/improved

capabilities

* Maintenance, Operations, and Ongoing support of Systems and

Equipment

30%

70%

IT MOOSE*

IT Spend

Support current business at current business volumes

Budget Category Considerations Average % of IT New IT investments:

Projects that deliver new business capabilities

These projects were likely conceived and approved

before the lean times began.20%

Projects to improve IT efficiency

Waste creeps in when IT is busy completing other work on

behalf of the business.9%

IT MOOSE*:

Maintenance and smaller enhancement activity against

applications

Maintenance budgets are often based on previous year with little year to year scrutiny. 15%

Operational costs of applications and services,

including software licenses and support

Inattention to detail over time can create waste in licensing and contractual maintenance

fees.

19%

Data centre and networking costs

Data centre and networking costs Reduced business can correlate to reduced

requirements for storage and computing capacity.

19%

End user support, including desktop software

What level of support/time between desktop upgrades is appropriate during lean times? 10%

Administration, planning, architecture, and IT management

Can you shift deployments of administrative or architecture

staff to more tactical assignments, temporarily?

7%Forrester Research Inc. (2008): ” Budget Adjustments For CIOs In Lean Economic Times”

Support business growth

Reduce cost of business

Reduce cost of IT MOOSE

Page 6: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Tactical vs. Strategic Cost Reductions

Type 1 Tactical“Reduce Capacity”

Volume

ReduceFTE,

minimizeoverlap,improvecontrol

X’

x

Cost

React

ive &

In

tuit

ive

Options are easy to identify

but can damage

operational capacity

Type 2 Strategic“Transform Fixed into Variable

Costs”

Cost

x

X’

Volume

Change IT operating model

Options are not easy to identify and need good analysis and strong design

Structural Cost Reduction Strategic alignment &

prioritization Relocation of resources Central vs. decentralized IT

governance Maintenance and process

outsourcing Process optimization Shared infrastructure services Infrastructure innovation

Str

ate

gic

&

Com

ple

x

Short Term Cost Reduction

Hiring freeze New IT project budget freeze Termination of sub-contracting

agreements Voluntary departure plans Early retirement Renegotiate IT vendor contracts

CIOs need to realize short term cost reductions (12-18 month) whilst continuing to drive structural change (18-36 months)

Page 7: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Juggling Demands

Business Drivers

Benefit

Cost

Reduce Overall IT Cost

Improve

Service

Enable New Business

Capability

ImproveOperatin

gEfficiency

IT Drivers

In most cases, CIOs are trying to juggle apparently conflicting

demands.

Page 8: Managing IT Budgets in Uncertain Economic Times: IT Optimization

The CIO needs to “optimize” IT

IT Optimization is an exercise to deliver the right level of IT service at the best cost of delivery

Therefore, CIO is often looking to:

Reduce the costs of delivery without reducing the ability to support service levels

Enabling improved service levels, or meet increased demand, whilst containing cost growth

Improve service levels and reduce costs

To be effective in doing this the CIO potentially need to look broadly across all the areas that could influence the cost base and the service quality

IBM’s 7-Domain IT Optimisation Model

IT Managemen

t Process

Computing Systems &

Storage

Applications & Data

Organization

Finance & Environment

Strategic Alignment

Network

Page 9: Managing IT Budgets in Uncertain Economic Times: IT Optimization

CentralizedDistributedResiliencyArchitectureSecurity

StorageConsolidation

AvailabilitySystems Management

Portfolio Management

Technology & Innovation

Process ManagementEngineering

Quality Management

MeasurementsData Management

7-Domain Model

MaturityOperationsControlService Level ManagementProcess Framework

User Help DeskAsset Management

Best Practices, Measurement, Responsiveness

Documentation & Communication,

Implementation, Projects

IT Management Process

Computing Systems &

Storage

Applications & Data

Organization

Finance & Environme

nt

Strategic Alignment

Network

Role Definition Knowledge

IT OperationCultureSkills

TopologyManagement

Components

ControlAssetsFacilities

Technology domain

Management domain

7-domani model originated with IBM and can help CIOs understand how and where to “optimize”

IT

Page 10: Managing IT Budgets in Uncertain Economic Times: IT Optimization

The Relationship Between IT and the Business

Cost Focus

Cost Focus

Internal Efficiencie

s Focus

Commodity

Utility

Partner

Enabler

New Capability

Focus

IT Value Profile

Provider of an adequate service at a cost lower than the competition

Provider of a quality service at a cost equal to or lower than the competition

Provider works with others to develop a service and provide resources/skills necessary to support the service

Provider researches, recommends and implements technology to enable quantum leap in business capabilityService

FocusCustomer

Satisfaction Focus

CIO and the board must understand what “type” of business they are and how IT helps to foster this.

Necessary to know the relationship in order to optimize IT to fit the business

Page 11: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Each relationship type has a different set of characteristics and approaches to

investment justification and drivers

Commodity

Utility

Partner

Enabler

Investment in IT

Infrastructure

Investment strategy

Approach to justification

Reach and range

Corporate view of IT

Business Driver

LowestProject based

No attemptWithin

business boundaries

Provider of technical capability

Expense control

Low

Portfolio mgt of

applications within a process

Cost focus

Within and between BUs for data and

simple transactions

Based on organizational

efficiency

Business unit measurement

s

Average

Enhanced portfolio

Management

Balance cost and

flexibility

Within and between BUs

some complex transactions

some customer

Strategically aligned with

businessMarket share

HighestBased on

future options

Flexibility focus

Within and between BUs

Complex transactions

Any customer

Enabler of corporate

vision

Industry leadership

IT Value Profile

Page 12: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Organizational Self Assessment

Through self assessment questionnaires taken by all key personnel in the organization, the organization can begin

to formulate a road map to optimization.

Page 13: Managing IT Budgets in Uncertain Economic Times: IT Optimization

13

MOOSE = 70% of IT Spending

If MOOSE is 70% of IT spending, what are the areas to look at cutting?

Where can MOOSE be optimized? What best practices can be

implemented and what will they affect?

Page 14: Managing IT Budgets in Uncertain Economic Times: IT Optimization

14

Adoption of ITIL and Other Frameworks Brings Discipline

and Efficiency to IT Ops

The Information Technology Infrastructure Library (ITIL) standardizes IT terminologies to establish guidelines and a common language for IT operational processes like:

Change management, Problem resolution, Service delivery, and Resolution of customer inquiries.

Other frameworks include: COBIT (control objectives for information and related

technology) ISO 17799

These frameworks help companies standardize: IT operations, Management processes, and Practices

Helps lower costs by: Reducing unplanned and unscheduled work and Making it easier to adopt and implement cost-reducing

technologies

Page 15: Managing IT Budgets in Uncertain Economic Times: IT Optimization

15

IT systems performance management increases

throughput and manages costs

The operational systems — the runtime configuration of hardware, system software, and applications — are literally the engine that runs the business.

An engine that performs poorly will, at a minimum, consume more resources than it should, and may prompt unplanned and premature capacity increases.

In retail transactions: Direct adverse impact exists on the bottom line when system

outages prevent transactions and Tediously slow system performance causes customers to

abandon transactions in favor of vendors with better transaction performance.

Managing the performance of the existing operational systems is a critically important function

Firms can’t manage what they don’t measure.

Page 16: Managing IT Budgets in Uncertain Economic Times: IT Optimization

16

Server consolidation cuts hardware, software, staff, and

other costs

Distributed computing environments mostly sit idle, with Windows servers typically running at 8% to 12% capacity, and UNIX servers at 25% to 30% of capacity.

Collapsing multiple OS images and multiple mixed application workloads onto fewer, more scalable servers lets firms use the total computing capacity more efficiently.

Server consolidation also helps cut software costs, by reducing the number of per-server licenses for software not in use, and reduces the number of IT staff needed to administer and support the new servers.

Consolidation allows: Uniform and consistent systems administration and Enables reductions in floor space usage, power, and

cooling requirements. Consolidation helps IT organizations:

Simplify planning, Enables a more consistent backup and recovery strategy, Improves staff productivity, and Reduces audit and security costs.

Page 17: Managing IT Budgets in Uncertain Economic Times: IT Optimization

17

Data Center Automation Reduces Data Center Operating Costs

Data center automation (DCA) products have evolved from basic provisioning and software distribution tools into powerful platforms that govern many aspects of data center operations.

While many products share a common foundation in configuration management, DCA products have broadened their reach into:

Asset management, Compliance auditing, and Policy-based automation.

By controlling almost all aspects of a server’s configuration, including content and data files, the need for — and cost of — administrators to directly manage servers is greatly reduced.

Page 18: Managing IT Budgets in Uncertain Economic Times: IT Optimization

18

Server virtualization lowers hardware costs and reduces

administrative burden

The proliferation of smaller Wintel and Linux servers has started to escalate the costs of scale-out/scale-up efforts,

Drives greater staff costs to administer and provision the burgeoning number of individual servers.

With virtualization, the decentralize/recentralize pendulum swings back toward centralization as small mainframes and even larger Unix servers, become the new platform on which to consolidate hundreds of virtual servers

Lowering software licensing costs Lowering server administration staff costs.

Page 19: Managing IT Budgets in Uncertain Economic Times: IT Optimization

19

Application rationalization helps IT shed duplicate applications

and infrastructure..

Firms must determine how to streamline application portfolio and ensure that their current application maintenance dollars are well spent.

Application rationalization process depends on metrics gathered about applications to drive decisions about their fate

Whether to keep, modernize, retire, or replace applications. The rationalization process provides a foundation of application

information to improve decision-making capabilities and re-apportion maintenance spending in light of the business importance of the application

Starve commodity business functions to feed core-competency applications that provide competitive advantage.

Ideally, the metrics are developed by application portfolio management (APM) tools and fed continuously into a repository for management analysis.

These tools enable better decisions about which applications warrant more investment, which should be curtailed, and which should be retired.

Page 20: Managing IT Budgets in Uncertain Economic Times: IT Optimization

20

Improved data on application resource usage makes better

use of maintenance staff

Even when apps are rationalized and a knowledge base is established, firms still worry whether they are spending too much on app maintenance.

Differences in the definition of an application, a valid application size metric, base technology, complexity, frequency of change, staff skills, etc., all conspire to prevent companies from effectively benchmarking.

Legacy modernization activities are often about how to better understand, quantify, and reduce the cost of existing applications.

Some of the best answers will come from tracking the effort expended to maintain application artifacts across time to show improvement trends.

Large, complex artifacts that change frequently should have higher costs, and small, simple artifacts that seldom change should not, but trends for both types should improve over time.

Page 21: Managing IT Budgets in Uncertain Economic Times: IT Optimization

21

APM develops metrics to drive maintenance effort and cost

reductions

Mature IT organizations have applications that range in age from a few years old to a few decades old.

These span monolithic, client-server, and Internet technology genres;

the tribal knowledge about how they function has been lost — greatly increasing the effort to maintain them.

The lack of knowledge extends to management metrics. Which applications run the core business? Which are candidates for outsourcing? What is the impact of an outage? Does the application align to business needs, to future

technology directions? APM tools help build a knowledge base of metrics that

provide analysts, developers and other constituencies a single source of truth about applications that offsets the loss of tribal knowledge.

Companies using APM typically report overall MOOSE savings in the area of 10% to 20% of the MOOSE budget.

Page 22: Managing IT Budgets in Uncertain Economic Times: IT Optimization

22

Software change and configuration management tools and processes reduce

outages IT has a fiduciary duty to protect the artifacts that comprise

both the applications and the production environment, preventing unauthorized or malicious changes.

IT organizations waste staff time when software controls are poorly managed, s

Efficient IT organization must: Secure source code against erroneous change, Prevent multiple concurrent development efforts from

accidental overlay, and Have ability to recreate any application on demand in

the event of the loss of the production environment. Even authorized changes to the production environment can

result in unintended consequences and cost. Without adequate change and configuration control:

Firms waste unnecessary resources as source code thrashes in and out of production environments for changes related to process errors.

Page 23: Managing IT Budgets in Uncertain Economic Times: IT Optimization

23

Improved data on application resource usage makes better

use of maintenance staff

Even when apps are rationalized and a knowledge base is established, firms still worry whether they are spending too much on app maintenance.

Differences in the definition of an application, a valid application size metric, base technology, complexity, frequency of change, staff skills, etc., all conspire to prevent companies from effectively benchmarking.

Forrester client inquiry about legacy modernization is often about how to better understand, quantify, and reduce the cost of existing applications.

Some of the best answers will come from tracking the effort expended to maintain application artifacts across time to show improvement trends.

Large, complex artifacts that change frequently should have higher costs, and small, simple artifacts that seldom change should not, but trends for both types should improve over time.

Page 24: Managing IT Budgets in Uncertain Economic Times: IT Optimization

24

IT asset management optimizes usage with well-

tracked software and hardware

Enterprise executives, shareholders, and regulatory organizations all require an accurate record of software and hardware licenses to enable:

Financial control, Information security, and Compliance.

Licensed assets can account for 50% of the enterprise asset base and sometimes as much as 80% of capital expenditure.

Proper IT asset management (ITAM) reduces MOOSE by: Identifying unused software and hardware licenses and Enabling effective life-cycle management of the licenses

and Helps IT by providing adequate documentation.

A complete ITAM system: Supports the full life cycle of an asset, Contains a history of asset characteristics and

configurations, and Manages all cost and contract data related to the asset.

It is tempting to use a general asset management solution for IT assets, but these general purpose software tools lack the ability of ITAM tools to identify and track IT assets connected to the network.

Page 25: Managing IT Budgets in Uncertain Economic Times: IT Optimization

25

Current generation service-desk tools keep IT support

costs down

Calls to the Help Desk for support are inevitable, but proper management of them can have direct cost-reduction implications for IT MOOSE.

Many organizations overspend on maintenance of old, highly customized help desk/service desk management tools

Result: Help Desk stumbles over implementing process improvements.

Rather than nursing an application along or simply upgrading to a current version, firms should consider re-implementing a service-desk management suite on one of the current generation platforms. T

Service-desk management suites: Can cut maintenance costs on an older, more costly

product; Add formal process frameworks; and Better prioritize incidents based upon business impact Enable more responsive IT and lowering MOOSE

Page 26: Managing IT Budgets in Uncertain Economic Times: IT Optimization

26

Enterprise architecture groups drive

standardization of the software portfolio

The enterprise architecture function: Designs the future state of the computing environment, Maps the current state of the computing environment, and Maps out a path between them to ensure that the

company is moving forward with architectural improvements that will support the future growth of the organization.

Good planning works in conjunction with APM and application rationalization efforts to ensure that:

Obsolete technology is retired when it has reached the end of its useful life, and

New applications prevented from using it wherever possible.

While the EA function serves many other purposes, this selective pruning of technology will have the most impact on MOOSE

Page 27: Managing IT Budgets in Uncertain Economic Times: IT Optimization

27

Vendor and contract management teams

squeeze more value from vendors

Implementing a centralized vendor management (VM) function is a key means of ensuring that vendors live up to contractual commitments.

Primary path to reducing IT costs — Primarily through consolidation of vendors, the application of greater buying leverage, and The use of more sophisticated techniques for managing

vendors and their contracts. Vendor management leverages the total relationship, enabling

firms to secure initial discounts when buying more technology from a vendor or to revise or replace existing contracts when conditions change.

Especially important as: M&A in the marketplace consolidates vendors or When the IT organizations consolidate after their own firms

merge

Page 28: Managing IT Budgets in Uncertain Economic Times: IT Optimization

28

Contract life-cycle management helps

optimize the savings from supplier contracts

IT departments and key suppliers execute contracts that: Dictate prices that organizations expect to pay, Products that they plan to buy, Level of service they should expect from the supplier, and Key terms and conditions.

When contracts are paper documents in filing cabinets, it is difficult to verify whether suppliers are complying with these terms.

Contract life-cycle management (CLM) applications: automate the monitoring of supplier compliance with

contracts, streamline the process of creating and negotiating

contracts with vendors, and provide analysis and reports of contract obligations and

rights. CLM applications should be applied to all contracts in a firm,

not just IT contracts. CIO should look at CLM solutions to:

First reduce MOOSE for the IT department, Secondly as the starting point of adoption for the whole

enterprise.

Page 29: Managing IT Budgets in Uncertain Economic Times: IT Optimization

29

Formal IT Sourcing Practices Cut Ongoing Depreciation

and Maintenance Fees

To keep down the costs of depreciation on capital equipment and to reduce the overall maintenance fees paid on software and for outsourced contracts, IT organizations must aggressively source the products and services at the time of purchase.

Effective sourcing cannot be conducted as an ad hoc activity

Can not it be delegated to the corporate purchasing department.

Sourcing is a skill and a discipline that is acquired through focus, training, and practice.

Yet the purchasing department, which has this expertise, may lack information about IT’s requirements and perspectives on what makes a good IT vendor.

Create cross-functional sourcing teams that combine sourcing process expertise from the purchasing department with IT spend category expertise from IT.

If there is no purchasing department with this expertise, then the CIO needs to create a small group of sourcing experts who know best practices in sourcing and who will work with IT unit heads to ensure that they are followed.

Page 30: Managing IT Budgets in Uncertain Economic Times: IT Optimization

30

eSourcing and Services Procurement Tools help

Secure More Competitive Vendor Bids

eSourcing tools allow cross-functional sourcing teams to work together to:

Create sourcing requirements Requests For Proposals (RFPs) Requests for Quotes (RFQs) Requests for Information (RFIs)

Conduct reverse auctions Evaluate vendor responses to select the best vendor(s) for

a category of IT goods or services Services procurement solutions can help IT staff reduce the

cost of verifying that vendor work was done to requirements by tracking and recording vendor performance through service completion

As with CLM tools, eSourcing and services procurement products should not be purchased just to solve IT purchasing requirements, but should be:

Used enterprise wide for more effective sourcing of key spend categories and

Used to manage the purchase of all categories of services

Page 31: Managing IT Budgets in Uncertain Economic Times: IT Optimization

31

Selective Outsourcing May Lower Costs and Improve

IT.

Companies that have broadly outsourced their entire IT have sometimes found savings to be illusive, with painful side effects of reduced flexibility and responsiveness — some of the very issues they sought to resolve by outsourcing in the first place.

That said, outsourcing is an option that should be reconsidered and re-evaluated on a periodic basis — especially for functions like:

Help desk support Application maintenance Web site hosting.

Even when deciding against outsourcing of a specific function, the exercise of reviewing outsourcing options can identify areas for improvement and encourage internal IT staff to improve in order to avoid being outsourced.

Leading firms regularly review whether to outsource specific IT functions every two to three years.

Too frequent a review cycle will increase the costs of the review process and demoralize IT staff

Too infrequent a review cycle leads to complacency

Page 32: Managing IT Budgets in Uncertain Economic Times: IT Optimization

32

IT Operations Scorecards Drives Improvements and

Reduces Cost

Implementing an IT operations scorecard as part of the IT Balanced Scorecard process is a powerful tool to drive breakthrough performance by linking the day-to-day operations activities to the overall IT strategy.

Research has demonstrated that a key problem for many IT organizations is the amount of unplanned work.

Much of this unplanned work is the result of sloppy, inconsistent operational processes regarding areas such as:

Release management Configuration management Change management Operational controls (or lack thereof) Problem/incident resolution

The IT operations scorecard can focus IT management attention on where improvements are needed in these areas, enabling reduction of MOOSE

Page 33: Managing IT Budgets in Uncertain Economic Times: IT Optimization

33

Give IT leaders Dual Roles as Business Relationship and

IT Activity Managers The practice of designating IT executives to serve as

relationship managers (RMs) with key business units has become an IT management best practice.

RMs have a solid line reporting relationship to the CIO and a dotted-line reporting to a business unit head.

They participate in the business unit’s executive team meetings, serving as the alignment agent between a business unit’s needs and IT’s capabilities and priorities.

Downside of creating and staffing these appointments as additional positions:

Added overhead costs for IT Seemingly duplicate function with existing IT application

management Relationship managers with no direct IT management role

tend to be advocates for business desires rather than alignment agents between IT and the business

Solution: Leave RM as managers of IT activities — but at a level

above day-to-day activity — ensures that they play their alignment role effectively, and saves money.

Requires that RMs coach subordinate staff to step up and take a much larger portion of the day-to-day management activities —

Necessary to avoid RM burnout as they try to manage these two roles.

Page 34: Managing IT Budgets in Uncertain Economic Times: IT Optimization

34

“You Have to Spend Money to Make Money.”

Many of the proposals outlined on previous slides are process changes that do not require new capital investment.

Though tools may not be necessary for a given change, don’t underestimate the cost of process and workflow changes and the training required to implement a new IT management discipline.

Other proposals may require: An investment in supporting technology

e.g., applications portfolio management, IT asset management, eSourcing tools, CLM tools, server virtualization, data automation tools, etc.

Increased spending Is the software expensed or purchased on a software-

as-a-service basis? Look to case studies of the savings realized by organizations

that have already implemented these functions to build business cases for management approval.

Google results can show case studies for most, if not all, proposals outlined.

Although spending increases upfront, near-term spending results in lower IT MOOSE over time.

Page 35: Managing IT Budgets in Uncertain Economic Times: IT Optimization

Case Study Examples of Optimization

Solution: IT Lifecycle

Mgmt & Governance

Tivoli Tools & GTS Maximo Accelerator Services

Business challenge: Difficult and costly to operate their IT Mngt infrastructure to support IT assets & services

Benefit: $7M in

cumulative benefits with an ROI of 122%

Banking

Solution: Server

Consolidation Reduced 40

servers down to 3 servers

Business challenge: Excessive support costs, poor server performance and security concerns

Benefit: Lowered long-

term support and maintenance costs by 30%

Manufacturing

Solution: IT Optimization

Planning Data Center Assessment

Completed effort in 12 weeks

Business challenge: Insufficient data center capacity across multiple geographic locations

Benefit: Detailed

blueprint saved approximately US$20 million in investment costs

Financial Services