Free Up Funds for New Initiatives
To be competitive and improve staff productivity, organizations expect IT to provide and support the new technologies that they see as necessary. These initiatives require new funding and will increase support costs after they are deployed. However,
- Most IT organizations spend 70% of their budget on support for existing services and have less than 25% of their budgets available for new initiatives;
- Every dollar spent on new initiatives typically increases annual “non-discretionary” costs by 20 cents, further reducing the amount available for discretionary spending; and
- Organizations are reluctant to provide more funding to IT; unless IT takes action, the amount available for new initiatives will reduce further year-by-year.
This research describes why and how IT must continue to aggressively reduce the funds allocated to ongoing support if it hopes to make progress on leveraging the opportunities provided by new technology.
The three approaches recommended in this note are:
- Buying good-enough equipment.
- Making smarter but higher risk maintenance expenditure decisions.
- Imposing tougher discipline around change requests.
The demand by management for new technologies, within a somewhat fixed IT budget, continues to create pressure for cost-efficiencies. Rather than being driven by a need to reduce organizational costs, the continuing search for cost-efficiency is driven by a need to free up more money for new initiatives.
The Pressure for New Initiatives
There is no shortage of potential new initiatives for IT. Information management cries out for investment in many organizations. Increased support for collaboration and for simple analytics can enable many companies to compete more effectively. To leverage social media, organizations need software to analyze what people are saying about their products. And if the futurists are right about medium-term technology changes, we can expect an acceleration of opportunities and expectations. IT is expected to deliver new value during this time of dramatic opportunity.
The Funding Reality
In general, organizations spend at least 70% of their annual IT budget on supporting a set of standard services year after year. They support growing volumes of transactions and historical data, and provide newer equipment and updated software that often provide limited new benefits to their organization. That leaves only 30% of the budget available for new initiatives. And often up to half of that 30% is allocated to “enhancements,” which often have limited impact. And every new initiative becomes part of the portfolio of standard services, adding annual overhead costs.
The Typical IT Budget
But few organizations are able or willing to materially increase their allocation of expense and capital dollars to IT, and many are still struggling to reduce IT costs. Even if some extra funds are made available, they often are applied to ongoing services.
So in order to provide funding for new initiatives, IT managers must reduce the expenses required to deliver the normal day-to-day services that the organization gets from IT. Every dollar, pound, or euro spent unnecessarily on ongoing operations is money that is not available to provide newly available services; services that can provide competitive advantage or are needed just to survive against competitors.
Squeezing Water from a Stone?
At some point, after cost reduction is set as an IT target, IT management ceases their quest for cost-saving opportunities. Senior management stops pushing for more savings and business users and IT managers and staff push back on further cuts.
Shift the focus from cost-saving to finding funds for essential, new initiatives to reduce objections. Have the business see not less service, but rather more valuable services, and have IT take on different and more interesting work, not reduced work.
The quest for new-initiative money can rekindle opportunities for further reduction of expenses for standard services.
Opportunity 1: Buy good-enough equipment, just-in-time
While the unit cost of new equipment has come down dramatically, few organizations have taken advantage of these dropping prices consistently to slash overall hardware expenditures. Many buy equipment of a higher power, reliability, or capacity than is actually needed, or replace older equipment before needed. Most buy more and better and spend the same, instead of spending less on the same capability.
- Aggressively challenge the claimed benefits of any improvements in reliability and equipment power that add to the basic cost of any servers or storage being proposed. IT staff’s natural preference for low risk typically leads to more expensive solutions than are needed. Consider spending more to get improvements in specification only if there are real changes in organizational requirements.
- Consider reconditioned or used equipment. It’s often good enough and a lot cheaper. If past experience has been good, don’t go back to the old way of buying leading-edge.
- Avoid over-buying; move to just-in-time. Equipment pricing continues to drop. Buying now, just in case, is a wasteful practice. When there is concern about going too frequently to management for approval, get bulk approval, but buy as needed.
Opportunity 2: Implement smarter maintenance strategies
Re-think the number, nature, and pricing of maintenance contracts. Don’t buy more insurance than needed, and don’t pay more than necessary. Every unnecessary dollar spent on maintenance could be made available for truly new initiatives.
- Evaluate your maintenance contracts with software vendors, such as Microsoft, when you buy or own perpetual licenses. You can often save money by choosing an agreement that eliminates the cost of support or upgrade rights for components that don’t need it.
- Consider providing spares instead of spending on expensive on-call hardware maintenance agreements. Spares deliver faster service restoration capability for end-user devices, servers, and routers than do on-call maintenance contracts. If a piece of hardware breaks, replace it with the spare, and pay for repairs as they are required.
- Address opposition to reduced maintenance expense. Technical staff will generally push back against any reduction of maintenance insurance. Acknowledge their concerns, but don’t give in to them unless there is real evidence of the need.
Opportunity 3: Tighten discipline over changes
Re-think the level of investment you make tweaking older systems or customizing packaged software. Most organizations have traditional levels of support for legacy systems, and there’s always a reason to continue that level of expense. Accept that these enhancements have diminishing returns relative to new initiatives, and negotiate a shift of emphasis with the stakeholders.
- Keep track of change requests. Maintain comprehensive visibility of what has been requested and what has been committed and completed. Reduce low value effort or assumption of tasks by inappropriate staff.
- Reduce the size of any groups dedicated to supporting specific services or application systems. They will do work to fill the time available. Management can always augment support capacity if the organization really needs it.
- Combine distinct changes into combined releases. Reduce the labor required for development, testing, training, deployment, and repair of individual changes.
- Require senior approval for changes if you’re handling many requests from within the user organization; force user management to make decisions on importance and priority. Expect a drop in the number of requests that are made, and the work that needs to get done.
To do new and different things with technology, free up money previously spent supporting the services that the organization takes for granted. Reduce opposition by positioning this as improved expense distribution, not cost-reduction.
While there are many ways to find this money, three are essential because they consume most of the IT budget. To reduce hardware costs, buy good-enough equipment, just-in-time. Reduce non-essential insurance expenses allocated to hardware and software maintenance. And redirect staff costs to new initiatives by reducing the work regularly done to tweak existing applications.