This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other authorized recipients. This presentation may contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied, distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates.© 2011 Gartner, Inc. and/or its affiliates. All rights reserved.

George Ambler

IT Cost Optimization

Cutting Costs Versus Cost Optimization

Cost Cutting• Reactive• Short-term results• Across the board• Decisions often made in haste

Cost Optimization• Strategic• Decisions tied to business value• Cuts made selectively• Longer-term initiatives and longer-term results

Gartner Framework for IT Cost Reduction

IT ProcurementGet the best pricing and terms for your IT purchases

Cost Savings Within ITIdentify opportunities to reduce IT costs

Joint Business and IT Cost SavingsImplement cost-saving technologies with the business

Business Restructuring and InnovationProcess improvement, reorganization, new methods

Different types of cost optimization involve different parts of the organization and varying IT department decision rights

Difficulty Value

Cost Optimization Opportunities Remain in Every Area of IT

Differences Between Average and Best PerformersOverall IT Spend 38% difference in cost

Application Development 53% difference in cost per function point

Application Support 55% difference in cost per function point

Mainframe 35% difference in cost per installed MIPS

Unix Server 62% difference in cost per server

Wintel Server 32% difference in cost per server

Storage 44% difference in cost per TB

Desktop 22% difference in cost per device

Help Desk 33% difference in cost per handled contact

Wide-area Data Network 43% difference in cost per device

Local-area Network 51% difference in cost per active port

Wide-area Voice Network 27% difference in cost per minute

Voice Premise Technologies 34% difference in cost per active extension

Common Cost-Reduction Opportunities

Demand

Manage Demand 1. Chargeback 2. IT PMO 3. IT Governance

Shift to Variable Cost

4. Contingent Workers

5. Software as a Service

6. Capacity on Demand

Supply

Reduce Labor Cost

7. Staff Reconfiguration

8. Selective Outsourcing

9. Offshore Outsourcing

10. Automated Software Distribution

Reduce Technology

Cost

11. Server/Storage Virtualization

12. Voice/Data Network

Re-engineering

13. Voice over Internet Protocol

14. Open-Source Software

Change IT Operating

Model

15. Data Center Consolidation/Autom

ation

16. Standard Operating

Environment17. Teleworking 18. Refresh/Upgrade

Delay

Improve IT Business Practices

23. Contract Renegotiation

24. IT Operations Process

Improvement

25. Apps. Dev Process

Improvement

19. Asset/License Management

20. Print Fleet Rationalization

21. Telephone Expense

Management

22. Telephone Bill AuditControl

IT C

ost C

onta

inm

ent

Decision Framework For each initiative to cut costs: • What's the upside?• Is it worth the effort?

Benefits

A relatively small or (-) $ number here

A $ number here A relatively large $ number here

>18 months 6-18 months <6 months

Impacts OS, DB, middleware and

applications

Moderate impact on few components of

the architecture

Little more than "moving boxes"

Staff redundancies,and re-engineering of processes and

structures

Limited changes in roles, structures and processes

No staff reduction, nor changes in

organization and processes

High Moderate Low/None

Negative None Positive

Potential Benefit- How big is the saving if the action is implemented?

Time Requirement- Can you capture the savings in this fiscal year?

Degree of Technical Risk- Is there a risk that the change will undermine the ability of

your systems to deliver?

Degree of Organizational Risk- Will your leaders ensure the changes are made? Is your

organization capable of adapting to the changes?

Investment Requirement- Does the change require a large upfront investment before

savings can be captured? Is the organization willing to make an investment at all?

Customer Impact- What impact will this have on customers?

Benefits

Costs, Time and

Risks

?

IT Procurement

Source: Gartner Research.

Procurement Opportunity Financial Benefit Time

Organizational Risk

Technical Risk

Investment Required

Renegotiate Network Rates Moderate Low Low Low Low

Renegotiate Contract Labor Rates Moderate Low Low Low Low

Consolidate Desktop Hardware Contracts Moderate Low Low Low Low

Consolidate Desktop Software Contracts Moderate Low Low Low Moderate

Renegotiate "Shelfware" Maintenance Moderate Low Low Low Low

Renegotiate HW/SW Maintenance and SLAs Moderate Low Low Low Low

Consolidate Commodity (Non-IT) Purchases Moderate Moderate Low Low Low

Consolidate Purchasing Staff (Shared Service) Low Low Moderate Low Low

Consolidate IT Contract Services Vehicles Moderate Moderate Low Low Low

Hire Internally @ Lower Rates Than Contract Staff Moderate High Moderate Moderate Moderate

Enable Shared Risk/Reward Contracts Moderate Low High Low Low

Defer Desktop Purchases Low Low Low Low Low

Contract renegotiation — the first line of offense in saving money.Large enterprises have huge buying power. Act like it. Organize to achieve it.

Cost Savings Within ITOpportunity

Financial Benefit Time

Organizational Risk

Technical Risk

Investment Required

Stratification of Desktop User Types Low Low Low Low Low

Automated Software Distribution Moderate Low Moderate Low Moderate

Desktop Printer Rationalization Moderate Moderate Low Low Low

Standardize Desktop Products High Low Moderate Moderate High

Cell Phone Audits Low Low Low Low Low

Centralize Portal Management High Low Moderate Moderate Moderate

Telecommunications Line Audits Moderate Low Low Low Low

Consolidation of IT Infrastructure High High High High High

Server Virtualization High High Moderate Moderate Moderate

Storage Migration to SAN and NAS High Moderate Moderate Moderate Moderate

Reduce Business Continuity Capability Moderate Low Low High Low

Info Management, Capture DB Capacity Moderate Low Low Low Low

Application Audits Moderate Moderate Low Moderate Low

Application Maintenance Outsourcing Moderate Moderate High Moderate Low

Turn off Legacy System Maintenance Moderate Low Low High Low

Outsource Repetitive Software Testing Moderate Low Low Moderate Low

Assess internal IT Staffing Needs Moderate Low High Moderate Low

Joint Business and IT Cost SavingsOpportunity

Financial Benefit

Customer Impact

Organizational Risk

Technical Risk

Investment Required

Emergency Call Centers (Government) High Negligible Moderate Moderate Moderate

Nonemergency Call Centers (Customer Service) High Positive Moderate Moderate Moderate

Teleworking Low Negligible Moderate Moderate Moderate

Videoconferencing High Negligible Low Low Moderate

Create/Expand E-learning Capability Moderate Negligible Moderate Low Low

Create Data Warehouse to Mine Opportunities High Negligible Low Moderate High

Enterprise Self-Service Integration High Positive High Moderate Moderate

Workflow and Handoff Analysis and Automation Moderate Positive High Moderate Moderate

Asset Utilization Analysis Moderate Negligible Moderate Low Moderate

HR Self-Service Expansion Moderate Negligible Low Moderate Moderate

Deploy E-procurement Catalogs Moderate Negligible High Low Moderate

Examine Storage Policy to Reduce Storage Size Moderate Negligible Low Low Low

Consolidate Radio Systems Moderate Negligible Moderate Moderate Low

Consolidate Geospatial Systems and Data Moderate Negligible Moderate Moderate Low

Enforce Modularization of Large Scale Procurements Moderate Negligible Low Low Low

Shared Services Opportunities

IT capabilityFinancial Benefit

Customer Impact

Organizational Risk

Technical Risk

Investment Required

Call Centers (Emergency and Nonemergency) High High Moderate Moderate Moderate

Electronic Document Management System High High Moderate High High

Back-Office Applications High Low Moderate High High

Computing Centers (Mainframes, Servers, Storage) High Low Moderate High High

Networks High Low Moderate Low Low

Non-administrative Applications High Low High High Moderate

Middle-Office Application Support Moderate Moderate Moderate High Moderate

IT Contract Vehicles Moderate Low Low Low Low

Desktop Applications (Acquisition, M/A/C) Moderate Low Moderate Moderate Moderate

IT Help Desk Moderate Low Moderate Low Low

Self-Service Web Sites Low Moderate Moderate Low Moderate

Reassess Internal IT Staffing Needs Moderate Low High Moderate Low

No Pain — No Gain

Benefits

Costs, Time & Risks

Low

High

High

Mainframe Consolidation

Portfolio Management

Procurement

ArchitectureStandardization

Shared Services

Enterprise PMO

Deferral of Spending

Mergers

Application Standardization

Automate Software

DistributionNetwork

Consolidation

Server Consolidation

Audit Device Utilization Call Center

Consolidation

Leading Practice: Treat IT Cost Optimization As An On-going IT DisciplineSuccessful IT cost optimization programs have common characteristics that deliver sustained results as compared to typical cost cutting programs

Characteristics of IT Cost Optimization Programs

1. Have a clear definition of short- and long-term success

2. Operate from a basis of fact rather than speculation

3. Look at the Demand side of IT as well as Supply side

4. Prioritize cost savings opportunities taking into account risk to implement in addition to financial payback

5. Align IT Cost Optimization management disciplines with business alignment objectives

6. Focus on successful execution, including a program in place for benefits realization to hold people accountable through measured performance

7. Use working capital from IT savings to self-fund improvements towards business

Our services constantly evolve

with clients' changing needs, but our focus on results never changes

Evaluate

Strategize

Execute

Optimize

ManageStrategize

Create Cost Optimization Team Assign some of your best staff Include a financially qualified professional Strengthen relationship management roles Define cost-cutting goals and project timelines Establish rapid go/no go approval process Meet weekly

Market-Based IT Chart of Accounts (COA)Hardware Software Outsourcing Personnel

Procurement Commodity Taxonomy UNSPSC NIGP eCl@ss RUS Etc.

IT Asset Management/CMDB

IT Service Portfolio and Catalog

IT Performance Management

IT Portfolio Management

Benchmarking and Measurement

Chargeback/Cost Allocation

Finding Opportunities and New Ideas for Cost Cuts: IT Cost Transparency Elements

After You Leave Here …Immediately…• Assess which of the tactical cost opportunities are still worth trying.• Determine how best to get executive engagement in your IT governance process

to ensure the right decisions are being made.• Evaluate your IT optimization decisions across all of the dimensions listed.• Argue for pursuing cost optimization that can be done and has appropriate

organizational support that will not do long-term damage to the enterprise.

In the Next 90 days….• Determine if your IT demand governance process is working and, if not, create a

plan to fix it• Create an ongoing IT optimization program to ensure long-term efficiency.• Evaluate how your IT organization is structured to determine if it is appropriate

for maximum productivity.• Evaluate with your senior management whether there is alignment of

expectations for the role of IT in the strategic leadership of your enterprise.

Related Gartner Research "Decision Framework for Prioritizing Cost Optimization Ideas"

G00166206, Barbara Gomolski, John Kost, 13 May 2009

"Cost Cutting in IT: Findings and Recommendations, October 2008 to March 2009" G00166849, Ken McGee, 2 April 2009

"Method to the Madness: Applying a Methodological Approach to Cost Optimization" G00168120, David W. McCoy, Barbara Gomolski, 13 May 2009

"How the IT Organization Handles the Three Stages of a Downturn" G00165396, Jorge Lopez, 17 February 2009

“IT Cost Optimization Round 2: Strategic Shifts and Doing Less With Less” Kurt Potter (G00205937)

“CFO Advisory: Enterprise Cost Optimization; Overview”Barbara Gomolski, Kurt Potter (G00173955)

“The Four Levels of Cost Optimization”Barbara Gomolski, Kurt Potter, Mark Raskino (G00164219)

This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other authorized recipients. This presentation may contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied, distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates.© 2011 Gartner, Inc. and/or its affiliates. All rights reserved.

George Ambler

IT Cost Optimization

Link Costs to Demand

1. Use chargeback so the business can make cost-vs.-value trade-offs2. Create an IT PMO to improve project, program and portfolio

performance3. Establish IT governance councils to improve prioritization and

investment decisions4. Contract with contingent workers to fulfil variable demand and special

expertise needs5. Use software as a service (SaaS) to avoid capital costs, to vary costs

with usage and to achieve benefits sooner6. Use capacity-on-demand (CoD) to vary processing costs with workload

changes

Demand

Manage Demand 1. Chargeback 2. IT PMO 3. IT Governance

Shift to Variable Cost

4. Contingent Workers

5. Software as a Service

6. Capacity on Demand

Reduce Resource Costs

7. Reconfigure your staff for higher performance8. Outsource noncore IT functions for cost and service advantages9. Move selected work offshore to lower-cost labor locations10. Automate electronic software distribution to reduce support labor11. Pool server and storage resources for efficiency and flexibility12. Move toward IP-based converged networks for greater bandwidth at

lower cost13. Transition to VoIP telephony to reduce cost and to position for unified

communications14. Selectively adopt open-source software to reduce software costs

Supply

Reduce Labor Cost

7. Staff Reconfiguration

8. Selective Outsourcing

9. Offshore Outsourcing

10. Automated Software Distribution

Reduce Technology

Cost

11. Server/Storage Virtualization

12. Voice/Data Network

Re-engineering

13. Voice over Internet Protocol

14. Open-Source Software

Change Operating Practices

15. Consolidate, standardize and automate data centers for economies of scale and resilience

16. Implement a standard operating environment to reduce complexity17. Implement teleworking to increase employee productivity while reducing occupancy costs18. Extend the useful life of established IT assets to defer buying new ones19. Tighten software asset/license management to reduce overspending20. Rationalize copy and print services to control the output explosion21. Manage telephone expenses to gain control of the device explosion22. Audit telephone bills to find overcharges23. Renegotiate maintenance/service contracts for better prices and terms24. Increase IT operations process rigor for many benefits25. Professionalize application development processes to reduce costs and risks

Change IT Operating

Model

15. Data Center Consolidation/Autom

ation

16. Standard Operating

Environment17. Teleworking 18. Refresh/Upgrade

Delay

Improve IT Business Practices

23. Contract Renegotiation

24. IT Operations Process

Improvement

25. Apps. Dev Process

Improvement

19. Asset/License Management

20. Print Fleet Rationalization

21. Telephone Expense

Management

22. Telephone Bill AuditControl

Common Cost-Reduction Opportunities, Continued

33. Manage Technology Portfolio 34. Lean IT

31. Financial Engineering 32. BPO

30. Manage Apps Spec.(Mandatory,

Useful, Nice to Have)

26. Stop Low Business Value

Project

27. Reduce Apps Maintenance

28. Manage Apps Portfolio

29. Reduce Service Level

35. Grouped Maintenance

36. Reduce Project Length

37. Retire non-use Code/Module in Apps

38. Adopt Layered Model

39. Fiscal Optimization

40. Improve IT Financial Knowledge 41. ZBB for opex 42. Increase Span of

Control in IT Org.

IT C

ost C

onta

inm

ent

Demand

Manage Demand

Shift to Variable Cost

Supply

Reduce Labor Cost

Reduce Technology

Cost

Change IT Operating

Model

Improve IT Business Practices

Control

Savings Depends on Time Since Last Optimization Exercise, Implementation or Major Project/Program

• Apps. Portfolio Reduction: 50% for 20% Savings• Cancel Projects: Reduce Discretionary Spend by 75%• Teleworking: 20% Reduction in Net Occupancy Costs• PMO: 5-20% Productivity Improvement

• Virtualization & Consolidation: 20% Less Workload• IT Asset Mgt.: 8-10% Per Managed Asset Per Year• PC Power Mgt: 43% Per Year vs. Non-Best Practice• Apps. Dev. Reuse: 18% Over Five Years

• Open-source Software: 75% Savings in Maint./License• Software as a Service (SaaS): 80%• Enterprise SW Agreement: 20-50% Dropping Maint.• IT Outsourcing Offshore: 10-40%

Process Improvement, Business Restructuring &

Innovation

• Business Process Mgt. Technology: 18% Avoidance• Shared IT Services: 15-20% is Typical, 40% Maximum• Territory Mgt. Software: Increase Sales 1-3%• Online Marketing & Lead Mgt: Increasing Revenue 20%

IT Procurement

Cost Savings Within IT

Joint Business &IT Savings

22

Most Frequent Med.-Term Cuts • Server storage virtualization• Automated software

distribution• Print fleet rationalization• Contract renegotiation• Asset/License management

Most Frequent Long-Term Cuts• Selective outsourcing• VoIP• Network re-engineering • SOE• Offshore outsourcing• IT operations process

improvement

Across the Enterprise Cuts• VoIP• Teleworking• Telephone expense

management• Telephone bill audit

Most Frequent Ease of Use• Telephone bill audit• Refresh/upgrade delay• Contract renegotiation• Print fleet rationalization• Telephone expense

management

Cuts With Business Benefits • Server storage virtualization• Automated software

distribution• Print fleet rationalization• Contract renegotiation• Asset/License management

Most Frequent Short-Term Cuts• PMO and IT governance

working jointly• Staff reconfiguration• Refresh/upgrade delay if

scheduled for current period• Asset/License management• Contract renegotiation

Use a mix of short- and long-term techniques to ensure an on-going stream of benefits