IT Spending Smarts: Strategies for Reducing the Cost and Risk of Technology Investment

Today's business realities put tremendous pressure upon CIOs and CFOs to make optimal technology investment decisions. Although hardware prices continue to fall, some industry estimates suggest that, on average, organizations today spend more than 50% of their capital outlay on technology investments. Of the total IT budget, as much as 80% is spent on managing the current IT environment, leaving only 20% for new applications and systems.

This demanding and complex environment requires IT decision-makers to make strategic IT portfolio management and investment choices to reduce the cost and risk of technology spending. Following are detailed strategies that will allow CIOs, CFOs and others to make smarter technology investment decisions.

Strategy 1: Assemble a Detailed, Holistic View

IT portfolio assets should be viewed as a whole, individual technology investment decision to optimize cost- and risk-management strategies. In order to assemble this holistic view of the overall IT asset portfolio and the total cost of ownership over the technology's life cycle, it is necessary to first establish a baseline of the current environment for all systems, software and maintenance. The baseline developed for your IT portfolio is no different than one you would establish for any other business initiative to track and measure progress.

Creating a baseline involves a combination of nonintrusive, automated inventory audit and software mapping tools and a physical walkthrough of the company's office(s) and data center(s) to verify current asset information. Purchase or lease records are reviewed to determine the age and life expectancy of each asset, and maintenance contracts are reviewed to ensure that existing assets are appropriately covered and that maintenance is not being paid on obsolete assets.

Another aspect of "decluttering" your IT is to inventory and map current applications to the business processes they support and to the systems supporting them, all the way down to detailed configuration and their dependencies. This provides the information necessary to determine how mission-critical various elements of the infrastructure are and thus the business impact of planned or potential consolidations and upgrades to the environment. Confirming which business processes and IT systems are most critical also is important information for validating or revising business continuity and disaster recovery plans.

All hardware, software and maintenance information should be gathered in a repository to enable a holistic view of the current inventory, technical and business interrelationships, and the supporting asset life-cycle information for the entire portfolio of IT assets. Such a repository can then be updated and used to manage the portfolio.

Of course, the idea that the whole is more predictable and manageable than the sum of its parts is not new. In the 1950s, economist Harry Markowitz began using the term portfolio management to describe the discipline of managing diverse financial assets as a whole in order to obtain the maximum return for a defined level of risk. In 1981, F. Warren McFarlan applied this idea to IT project management. Even before project resources and schedules are factored in, however, it is useful as an IT management concept. By viewing the full environment — or portfolio — of interdependent IT assets as a whole, individual technology investment decisions can be reviewed and analyzed in context, and cost and risk management strategies can be optimized.

Strategy 2: Align Maintenance Coverage

Some organizations sacrifice cost reduction for risk reduction by purchasing maintenance at higher levels than they need for certain areas within their IT environments. They may have adequate support but are overspending. Even worse, most maintenance audits uncover instances of organizations continuing to pay maintenance coverage — often in the tens or even hundreds of thousands of dollars — on assets they no longer own or use.

Alternatively, an organization may not have the coverage it thinks it has. Most business applications are highly interdependent, accessing multiple components of the infrastructure — including the network, security components, servers and storage. Business continuity is dependent upon identifying any maintenance support weaknesses.

The IT organization also must work closely with business units to understand their true needs for support, which are sometimes overestimated. Take the example of a financial organization that was contemplating a fully redundant fail-over system for one of its mission-critical business processes. Upon further discussion, it was learned that although the business unit in question had a mandatory daily deadline, it always completed processing at least six hours before the deadline. By accepting a downtime window within that six-hour margin, a maintenance option was selected that provided the critical coverage along with substantial savings.

Strategy 3: Ensure Software Compliance

These days, organizations that want to save money on software need to perform regular baseline audits on their software usage and licenses. Those unaware of what they have are learning the hard way when their software vendor sends them a bill. The noncompliance bill is usually quite large, and it's frequently incorrect — and accompanied by enormous fines.

A major insurance company recently received such a bill for $6 million. The amount was calculated based on the difference between the total number of user licenses the company held and the number of employees it had listed in its most recent annual report.

By performing an internal baseline audit, the company was able to prove that not all of its employees were using the software. It was also able to demonstrate that some users were being counted multiple times due to multiple sign-ons. It calculated that it owed $1.5 million, which it paid. By researching the licensing options in closer detail, the company was able to reduce its future costs by $600,000 per year by switching from a user-based licensing model to a server-based licensing model.

Strategy 4: Control Operating Costs Through Leasing

Typically, 75% to 80% of an organization's IT assets are modified or removed within three years of being installed, and up to 90% of the infrastructure experiences some level of change during its use. In addition, on average, IT equipment costs drop 50% over a three-year period compared to the price of new equipment delivering similar or greater performance. Conversely, support costs after three years generally increase 20% or more based on the original acquisition costs of the assets.

An important strategy for reducing an organization's risk and financial exposure is to match the financial life of its IT assets to their productive life. The most effective way to do this is generally through lease financing. Leasing enables organizations to lock in a predictable operating cost by balancing technology price declines against maintenance, software and operating cost increases.

As a rule, not all assets should be leased, just as not all assets should be purchased. Determining which assets should be leased requires evaluating the total cost of the assets to the organization, including the acquisition and depreciation costs as well as the ongoing maintenance and software costs. Reviewing historical information regarding manufacturer tendencies with regard to pricing actions, performance improvements, release time frames for new products and support-cost history for hardware assets and the software associated with them can help further refine these calculations. In addition, it is crucial to compare the internal organization's intended productive use against its actual recent history of usage time frames for various types of assets.

Leasing also reduces the burden upon IT operations by reducing the complexity of the IT environment. Some organizations find great value in the operational discipline instilled by the regular decision points (typically three years out) that leasing creates. Other benefits include freeing more capital for business investment and enabling ongoing investment in new technology to support changing business requirements.

Summary

Under intense pressure to control the cost and risk of technology investment, too many organizations focus on initial acquisition cost with regard to hardware, software and maintenance rather than on the total cost of ownership during each asset's productive life. Over time, however, true savings are the result of strategic management of the entire IT asset portfolio, including not only hardware but also software and maintenance.

Strategic IT management begins with a detailed, holistic view of the IT environment. Once such a view is obtained, individual decisions with regard to maintenance renewal, software licensing and whether to lease or purchase assets can be made proactively and with better understanding of their impact to the overall environment and organization.

This article originally appeared in the April issue of Financial Executive magazine.

John Carcone is senior vice president of financial services at Forsythe Technology Inc. in Skokie, Ill. He may be reached at jcarcone@forsythe.com.

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Copyright © 2006 IDG Communications, Inc.

  
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