A tremendous amount has been written recently about ways of reducing IT costs, aligning IT with business and unlocking the value of IT. In the manufacturing sector, "reducing IT costs" is probably the main remit to most CIOs today.
Those IT managers who are measured purely on their cost-cutting ability can feel they are powerless to contribute value to the business.
Gavin Halse, MD, ApplyIT
However, reducing costs unwisely can impact significantly on the ability to service the business and can begin introducing significant operational risks. Cost reduction can also result in a stifling of innovation, resulting in IT falling behind business strategy.
Those IT managers who are measured purely on their cost-cutting ability can feel they are powerless to contribute value to the business. Over time they become sceptical, claiming that sustained cost reduction in the midst of an information revolution is simply a pipedream.
This view can be challenged: for instance, it is clearly not too difficult to reduce costs by moving off a mainframe to a modern server platform. Unfortunately, many IT managers feel threatened by cost-cutting, and so they develop their own agendas. It is hardly surprising therefore, from a business management perspective, that debates about cutting IT cost at budget time can be frustrating and inconclusive.
Manufacturers, in particular, are faced with the imperative to reduce fixed costs as far as possible as the relentless commoditisation of products drive down prices. Apart from niche areas such as process control, IT is often perceived to hold limited strategic value, and when it comes to budget cycles, IT projects are not immune from serious challenge and resulting budget cuts.
IT managers, being smart people, develop creative and innovative ways of presenting budgets in such a way that the formal budgets are approved, but the true costs of IT are conveniently hidden. This behaviour propagates poor practices because IT costs are never well quantified, cannot be measured and therefore cannot be managed.
Benchmarking
As a business manager, what can be done to measure IT expenditure and adequately assess whether IT costs are reasonable? In my experience I have found that there is one easy and effective starting point, and that is to gather benchmarking information.
Benchmarking is an essential mechanism for assessing whether IT costs are in line with similar companies and the industry as a whole. Benchmarking does, however, have a number of limitations. First, the availability of good benchmarking data is limited. Where data is available, the basis on which the calculations are done is often unclear. Localised benchmarking information is very scarce, and in SA there are only a handful of good numbers relevant to manufacturing companies.
Secondly, no two companies are the same (apples versus pears) and therefore benchmarks must be expressed as ratios to normalise the comparisons. The basis on which IT "apples" are compared with "pears" is always contentious (particularly if it shows up expenditure in a bad light).
Simple high-level metrics such as rand IT spend per rand turnover are very helpful, but only a guide.
Having said this, a sincere attempt by companies to execute a good benchmark comparison is possible among trusted, non-competitive participants, usually in the same corporate structure. However, it is a reality that corporate politics and powerful agendas may often make it easier to obtain benchmarking information outside the organisation than within the enterprise itself! Fortunately there are a number of credible consulting firms that specialise in obtaining objective localised industry-specific benchmarks, and their input and advice can be invaluable.
Cost benchmarks should compare key IT parameters such as total spend, headcount, total number of computers, number of employees, number of servers, number of desktops, turnover, customers and number of manufacturing sites. These variables can be expressed as ratios of each other. For example, useful benchmarks are IT spend as a percentage of sales; total cost per desktop PC per month, total IT projects per period as a ratio of total spend, and number of desktops per support engineer.
Hiding spend
A good starting point for collecting data is the IT budget, which usually breaks down expenditure into broad categories and separates amortised costs and depreciation. Depending on whether the budget has the necessary information, you may wish to include other costs from other departments (telephone, fax, printers, consumables). Be warned, however: these costs are often brilliantly hidden by creative people. I have even seen "office furniture" used to hide IT spend in ways that elude the most inquisitive manager. In manufacturing companies, process control costs can form a significant portion of IT spend and these costs should therefore be explicitly separated in the benchmark numbers.
Where an outsourced partner or partners are involved, these costs need to be included in the benchmarks as appropriate, and this will require some transparency on the outsourced partners` own cost structures.
Having done a simple benchmark exercise, you are well down the way to controlling or even reducing IT costs. Things not measured cannot be controlled. Once the benchmark reveals areas that are operating out of step, corrective action can be taken.
To reduce costs there are a number of best practice methodologies that can be employed. These include standards such as ITIL or CobiT, which will be the subject of a future discussion.
The corollary applies; if you do not measure or benchmark your IT expenditure, can you ever hope to manage IT in your business? A few of the reckless may succeed, but who can afford to be reckless in today`s climate?
Share