Squeezing Dollars From Maintenance

Creativity and discipline can liberate capital for discretionary projects.

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 Co. in Northbrook, Ill. 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% in 2003 to between 30% and 35% 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% to 8% 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.

Motoring Past Maintenance

When Rich Hoffman joined Hyundai Motor America in Fountain Valley, Calif., as CIO in early 2003, about 90% of the company's annual IT spending was going to maintenance and operations, and just 10% was earmarked for projects that were deemed important by its business leaders.

Hoffman immediately set a goal of driving half of all IT spending into discretionary projects.

By October of that year, 49% of Hyundai's IT spending was being pumped into new projects. How was Hoffman able to turn the ship around so quickly? Two ways: by tracking its internal and contract labor resources more effectively, and by enacting more stringent quality-control requirements around Hyundai's application-development projects, he says.

"A horrendous amount of unmonitored resources were going toward minor break-fixes that were unscheduled," says Hoffman. When he first joined Hyundai, 93% of applications that were developed internally required at least one bug fix. Now, he says, that figure has been whittled to 4%.

"Most IT organizations lack the discipline to run good business proc-esses," like tracking labor resources against projects, says Hoffman, a 25-year IT veteran.

In 2003, Hyundai didn't have an application-development organization per se. Each of the 40 or so people on the IT staff was responsible for developing and maintaining applications for the business units to which they were assigned. But in March of 2005, the company's IT organization was restructured as a stand-alone company, now known as Hyundai Information Services North America LLC, with Hoffman as the president and CEO. Hoffman has challenged his managers to apply a much more rigorous approach to procuring hardware, software and services, and this has helped the new IT organization continue to lower its operating costs, he says.

Spend to Save

Joe Trentacosta walked into a different situation when he became CIO at Southern Maryland Electric Cooperative (SMECO) in 2003. At the time, the Hughesville, Md.-based electric utility "had a pretty neglected" IT infrastructure that hadn't been upgraded for about 10 years, he says. As a result, 80% to 90% of the company's IT spending over the next few years went toward updating its antiquated IT infrastructure, including the replacement of all 50 of its Windows and Unix servers and the creation of a state-of-the-art data center.

But the $600,000 that SMECO pumped into its IT infrastructure investments has had a net positive effect on discretionary project spending. The newer systems have helped push down maintenance costs and free up project funding. And by outsourcing the company's help desk operations last year, SMECO was able to increase end-user support from 50 hours a week to 168 while lowering its help desk costs by 10% annually, says Trentacosta.

Now, SMECO is allocating about 32% of its annual IT spend to discretionary projects, he says, "and we're trying to drive that up."

Licensed to Save

In 2000, IT managers at Burlington Resources Inc. were given an ultimatum by top brass: Cut its geological software licensing costs, or the company would outsource the management of those applications. "It's amazing what kind of motivation that can be," says Dan Shearer, manager of technology enhancement at the Houston-based energy company.

After hiring a consultant to help the company get its arms around its software licensing agreements, IT managers at Burlington Resources discovered that many of its licenses were underused or unused. In 2001, the company began deploying software from Open IT Inc. in Houston to monitor its use of high-end software for global oil and gas exploration.

The monitoring software has helped Burlington Resources pinpoint which geological software is being used in which offices and by whom, says Shearer, and that has highlighted opportunities for savings. For example, prior to deploying Open IT, Burlington Resources was licensing geological software only on a local basis, he says. By shifting to a mix of regional and global software licenses, the company was able to reduce its software expenses by $5 million between 2002 and 2005.

"It was quite shocking," says Shearer. "No one was prepared for this [license-monitoring tool] to work as well as it did."

Burlington Resources has been able to channel all the savings into discretionary projects, including the development of an environmental health and safety system and a learning management system that was on the verge of being abandoned. "That project never would have made it if the dollars weren't available," says Shearer. "It was at the bottom of the queue."

Copyright © 2006 IDG Communications, Inc.

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