How IS Organizations Can Survive Cost Cuts

Service definitions are important to IT operations because the marketplace has become very competitive. Every week we hear of major firms throughout the world that have outsourced some or all of their IT operations. For example, "Telecom Italia..., and HP [Hewlett-Packard] have reached a Management Services & Outsourcing agreement, for a duration of five years, worth 225 million euros... Telecom Italia will achieve significant cost savings in the group's distributed IT environment management and allow the group to focus its skills and resources on its core business."(PR Newswire, 21 February 2003).

The market firmly believes that outsourcing can save costs. It is debatable whether that is the case, but the perception holds true for senior management. To take advantage of this and to be competitive in the marketplace, the IS strategy should be to adopt clients' business models. One benefit of this is that the market price is perceived to be the lowest price available.

Another, often unobserved, benefit that the business must consider is the cost of additional business complexity - that is, traditionally organized internal IS groups won't have to bear extra costs that the business refuses to acknowledge.

As an alternative, some organizations use benchmarking to make evident to the business the real levels of capability and services currently being offered. This doesn't solve a pricing problem but it does effectively elevate awareness.

The cost or price problem may have been solved, but, more importantly, the business discussion has been shifted to one that aligns cost with the service delivered. Put simply, increasing service leads to higher prices and costs; reducing service drives prices and costs down. Business decision makers know what they are buying and understand its value to their business operation. Any increase or decrease in the price or cost is read as cost cutting. They can directly relate this to the effect on service levels and decide if that is where they want to cut costs. If they do, then they have consciously agreed to a reduction in service levels. This removes the onus for IS to implicitly make decisions about service cuts and has the added benefit of directing cuts at the most marginal value area.