Getting Down To Basics
"Cut costs" is the rallying cry for businesses trying to re-establish a financial balance. All sectors of an enterprise must play a part, but, over time, this is a wasteful "roller coaster ride" for IS departments and they need a strategy to minimize the effect.
To most line organizations, cost cutting means less operational output. For many administrative support organizations, budget cuts probably wouldn't be noticed at a business unit level, but they would affect the bottom line. However, the IS department facilitates the daily running of all the other line organizations, which makes cost cutting decisions particularly difficult for IS.
Every strategy needs an objective, but cost cutting directives are brutally generic. An IS strategy needs to be more specific. Gartner surveys show that 60 to 70 percent of a typical IT budget goes toward IT operations, the remaining 30 to 40 percent is used for managing business process change, that is, applications. Cost cutting discussions are very different in each domain and an IS strategy must reflect that.
From a customer perspective, IS serves the enterprise with two key deliverables:
An IS strategy has to make businesses understand not only the costs associated with these deliverables, but the level of service being supplied. Costs are easy to evaluate; service levels are less so.
Dealing With Application Change
Application changes are all project-driven and project management tools help guide the selection process and balance applied resources for best results. The costs from IS and benefits from the business should be firmly established from the beginning. This is at the core of governance and necessary for the business to fully understand its IT investment decisions, during both expansion and contraction.
Any cost containment decision by the business could mean not expanding new markets or products, and any associated projects would no longer be viable.
However, with the directive to cut costs there is most likely to be a batch of new, cost cutting projects that business units want to execute instead. The adjustment of projects, priorities and resources influences the decision to employ more staff or make redundancies. Job losses and their associated savings feed IS contributions to cost cutting, either internally or externally through external service providers. The business must decide what it needs to optimize its new objectives under a cost containment ceiling. This should also open up a dialogue for the business to decide if it needs to rebalance the amount of cost split between IT operations and business process change.
IT Operations' Service Model Drives IS to Be Price and Cost Competitive
Cost reductions through application change are achievable with the appropriate tools, but operational costs remain incomprehensible to most business people. IT operations are organized to solve technological problems, but they are also part of the service business. Most clients, whether internal or external, do not consider buying bandwidth, channels or CPU speeds. In almost all cases, they want to buy a PC or workstation that works - the rest doesn't matter much.
IT operations should be able to produce about six service delivery offerings that clients can recognize and put a value on - that is, a set price for them and at minimum cost for IS. It may be easy to define IS as a bundle of service offerings, but in practice, it is difficult to execute.
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.
The cuts now have to be translated into IS cost cuts, but they are rationally decided and focus on areas that will have least marginal value to the client. What was a random cutting exercise is one that now reflects the best economic interest of the enterprise. Again, IS has not been placed in the lonely position of deciding which costs to cut.
Bottom Line: IS organizations that are aware of the relationship between costs and service levels can draw on this knowledge to fit their particular situation. A strategic approach to cost cuts will dramatically alter what it means for IS and will provide a rational method for dealing with the inevitable ups and downs of the business cycle.
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