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October 22, 2008

Slashing IT Spend with Service-Based Costing and Demand Management

Ever since the financial meltdown on Wall Street, corporations all around the country have been scrambling to cut costs, tighten their budget belts, and cut out inefficiencies from their various departments - and IT is no exception. Gartner painted a grim picture of the future of IT spend at its Symposium/ITxpo 2008 on October 13, telling IT execs to brace themselves for hiring freezes and layoffs. According to Peter Sondergaard, Gartner's global head of research, "The next big thing in IT is not a technology - it is cost reduction, risk management, and compliance."

So how do we achieve this cost reduction? The battle cry for reducing IT spend has traditionally been met with marching orders toward improving the IT organization's efficiencies. Common methods include outsourcing, virtualization, cutting out unnecessary expenses, and yes, job cuts. These are all sensible cost-cutting measures, but they only deal with one half of the IT business equation. It is important to remember that the responsibility for IT spend does not rest solely with the IT organization - the business customers who consume IT services bear a large chunk of this responsibility as well.

By focusing exclusively on wringing efficiencies from the supply side, many companies miss the low-hanging fruit on the demand side. Applying well-established service-based costing and demand management techniques can dramatically reduce an organization's IT spend by influencing IT customers' behavior and directing them toward IT service choices most appropriate for their needs and budget.

This is where Service Unit Cost Strategy for Enterprise Shared Services comes in (we call it Lontra SUCSESS™ methodology). This is a seven-phase process that can help a company take advantage of these low-hanging fruit on the demand side, while making the transition toward running IT like a customer-centric business with full transparency around IT offerings and their unit costs. We have recently applied this approach at three Fortune 500 companies with glowing success.

Phase 1. IT (Technical) Services Inventory. Catalog all technical services offered by your IT organization. These are the underlying services used to support IT's customer-facing offerings, such as application hosting, disk space, web analytics, etc.

Phase 2. Business Services Inventory. Catalog all business services consumed by your customers. These are IT's customer-facing offerings, which may include email access, use of various applications, Internet access, etc.

Phase 3. Hierarchical Service Model. Map all the business services from phase 2 to their underlying technical service components from phase 1. For instance, the business service providing access to a finance system may be built on top of several technical services, such as an Oracle database, a managed server, and a backup service. This will help you align your IT services with business needs.

Phase 4. Service Cost Modeling. Create a full cost model by mapping the service model from phase 3 to the appropriate general ledger (GL) cost centers, such that every IT cost element is appropriately assigned to business services depending on it. Identify consumption drivers for each business service.

Phase 5. Service Unit Costing. Identify the consumption volume for each business service, and calculate unit cost for each service using this consumption volume in conjunction with the service cost model from phase 4.

Phase 6. Shadow Invoicing. Begin generating monthly or quarterly "shadow invoices" for each organizational unit, based on the business services offered, their unit costs, and actual monthly/quarterly usage. This will give you insight into how much each business unit actually spends on IT services.

Phase 7. Demand-Driven Budgeting and Planning. Use the service hierarchy and cost model set up in the previous six phases to help IT's business customers plan their IT usage in terms of service units (and their associated unit costs), revise the IT budget appropriately, plan effectively for demand increases, etc. This is the phase where you can really cut down on some IT costs.

Once you have a fully developed service hierarchy and cost model, service costs become transparent to the business customers, which translates into an extremely powerful tool in your IT organization's cost-cutting effort. Here are just a few of the things that you can do using this framework:

  • Determine which services are driving up your IT costs, and do something about them. You can benchmark your unit costs against industry data to see if they measure up, and then focus your efforts on the services that lag behind industry standards.
  • Determine which business units consume more than their fair share of IT resources, and take measures to control their demand.
  • Influence customer behavior by driving them toward the most cost-effective solutions. This can be done by providing flexible service choices and different SLAs at different price points.

Applying the Lontra SUCSESS™ methodology will have a profound effect on your IT organization. It has the capacity to significantly reduce IT spend and reveal inefficiencies that you did not even know existed. In today's economy, this is not just a nice-to-have, it could be a matter of survival.

Posted on October 22, 2008 | Permalink

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