It's a conundrum many IT executives face: how to drive down spending on IT maintenance and operations to free up capital for discretionary IT-business projects.
The problem requires creative thinking on the part of CIOs who have already taken pains to reduce IT costs in response to financial pressures from CEOs and chief financial officers. Many IT chiefs have plucked the so-called low-hanging fruit such as hardware consolidation and standardization and have renegotiated software licensing agreements, making it increasingly difficult to find new avenues for operational savings. But senior business leaders continue to yell "Cut!"
"I look at maintenance as a bucket that's swashing around with lots of holes in it," says Anthony Abbattista, vice president of enterprise technology strategy and planning at Allstate Insurance. The idea, says Abbattista, is to determine how much money is leaking through those holes and figure out a way to plug them up.
One technique that world-class IT shops have been using to control IT operational costs is to set up centers of excellence where IT workers are grouped by areas of expertise such as data center management, Java or .Net development, says Anton Kritzinger, a consultant at Compass North America in Toronto. "Rather than having a number of groups that are good at what they do, you end up with one that is very good at what they do," says Kritzinger. "The payback is significant."
Allstate has done this successfully. "The first thing we did was look for duplicative activities where different organizations were doing similar things," says Abbattista. Beginning in February 2003, the company's IT department made structural changes to create technology groups that handled common activities across the organization, he says.
Around the same time, Allstate also began conducting "white-collar timekeeping" to help Abbattista and other IT managers track which projects IT staffers were working on at any given time. Through these efforts, which include benchmarking its IT skills costs, Allstate has shifted the percentage of annual IT spending in operations and maintenance from more than 70 percent in 2003 to between 30 percent and 35 percent today, says Abbattista. Each year since 2003, Allstate has reinvested "a few hundred thousand dollars" in savings generated by the centers of excellence toward discretionary IT spending, he adds.
Some of Allstate's projects that have benefited from the cost savings include a "huge investment" to modernize analytic systems throughout the company. The project, which was launched in January 2003 and will conclude later this year, has yielded "great payback and hasn't required any incremental funding," Abbattista says.
Banking on benchmarking
To help reduce its IT maintenance costs, Royal Bank of Canada (RBC) makes extensive use of benchmarking services from vendors such as Compass North America and Gartner Inc. They help the bank measure its IT operating costs against those of other world-class companies and identify processes it can improve to run those activities more cost-effectively.
"My budget may go up because we're driving incremental revenues through the mainframes, so that may be a good thing," says Dick Swadley, executive vice president of IT infrastructure at the Toronto-based bank. But "that may not tell the story that the business needs to know" when it comes to demonstrating the steps his group is taking to hold down the bank's IT infrastructure costs, he says. Benchmarking helps Swadley clarify both costs and savings.
For instance, RBC's IT infrastructure group has benchmarked the costs of buying, operating and maintaining its PC LANs three times in the past seven years. By benchmarking these and other IT unit costs, RBC has been able to identify improvements it could make to streamline those operations and have them run more efficiently. Swadley estimates that the bank has been able to drive down its IT infrastructure expenses by 5 percent to 8 percent annually by applying these lessons.
Benchmarking allows RBC to document the areas where its efficiency and costs are improving and to show the effect of activities that were started since the last benchmark, Swadley says. Still, he doesn't recommend benchmarking any particular area more often than once every two or three years, since IT departments need to allow enough time for any operational changes they might implement to bear fruit.