Squeeze play: CIOs look to rein in IT spending


By THOMAS HOFFMAN
FEBRUARY 10, 2003

Content Type: Story
Source: Computerworld

Having spent the past two years paring back staff, consolidating servers and storage equipment, renegotiating vendor contracts and conducting selective outsourcing, CIOs are struggling to find new ways to reduce costs without cutting into the muscle of their IT operations.

"We've done all those things, and yet management still wants us to cut costs further," says a CIO at a Midwestern bank who requested anonymity. "I just don't know where else to cut."

In their quest to come up with even more ways to keep a lid on costs, dauntless IT leaders are exploring everything from barter agreements with vendors to reselling services and joining purchasing consortiums for volume price discounts on equipment.

Take Wyndham International Inc.'s chief technology officer, Mark Hedley. Like many IT executives, Hedley has taken advantage of the cutthroat competition that the economy has stirred up in the telecommunications sector and has reworked the hospitality firm's private branch exchange, data and voice networking agreements, thus paring $850,000 from the Dallas-based company's annual telecom budget.

Diane Bunch, senior vice president of information services at Tennessee Valley Authority

Diane Bunch, senior vice president of information services at Tennessee Valley Authority

Now Hedley is considering shifting Wyndham's private frame relay to the public Internet as a way to further reduce data communications costs by as much as 50% annually. But he must weigh the potential money-saving benefits of doing so against the security, stability and reliability issues involved with moving to a public network infrastructure.

He and his team are also evaluating a number of even more novel ways to cut IT costs. Among them is the possibility of offering hardware vendors hotel rooms in return for computer equipment.

"Trading the value of a guest room for the value of equipment is very doable for us," says Hedley. Last summer, he and his team began evaluating which IT projects might be a good fit for these types of barter arrangements, but he declined to discuss them further. And while he also declined to name the vendors he has discussed this option with, Hedley says the potential for establishing such deals is "very real."

Shared Savings

John Bielec, vice president of information resources and technology at Drexel University

John Bielec, vice president of information resources and technology at Drexel University

Many organizations have centralized their IT operations to help rein in costs over the past few years. But some global firms, such as Madison, N.J.-based Wyeth, a $14.6 billion pharmaceutical company, have taken centralization a step further and shifted to a shared-services model in regions where they've determined that it's efficient and cost-effective.

As a holding company with various businesses, "IT was decentralized, and there was no need to standardize or have a shared-services function," says CIO Bruce Fadem.

Since 1998, Wyeth has been migrating to a shared-services model under which its various businesses and geographic divisions share IT applications and infrastructure and their costs across the organization. Having completed the transition in North America and Latin America, Wyeth is hoping to consolidate the 80% of its European business that hasn't already been folded into the shared-services model. This includes outlying units that still have their own dedicated IT units.

"In 2003, we're doing the tough work, taking those relatively small businesses and working through the political battles" to migrate them into shared services to further reduce costs, says Fadem.

Still, there are limits to applying the shared-services model to all of Wyeth's international entities. In Asia, for instance, the company's divisions are much smaller and more widely distributed than those in other parts of the world, says Fadem. So instead of providing those units with shared services from regional IT centers, Wyeth for now will allow them to operate independently. The company will see how those businesses grow and determine at year's end whether it makes sense to revisit the shared-services model with them, Fadem says.

The cost savings generated so far under Wyeth's shared-services model vary greatly by the level of IT investment in each region and by other geographical differences. Fadem estimates that the approach has led to 10% to 15% cost savings in most regions. Once the European piece of the puzzle has been completed, "we'll be able to implement services like [regional] enterprise systems that we couldn't have done otherwise," he adds.

Cleaning the Attic

Some CIOs see the increased cost pressures they're under as an opportunity to clean house and get rid of some unneeded or rarely used applications. That's precisely what Tennessee Valley Authority (TVA) has done in conjunction with its migration from Windows 95 to Windows XP, which began in October 2001.

Since then, the Knoxville-based public power company has eliminated 2,300 of 4,700 desktop applications, databases and other software, which in some instances included multiple versions of the same application, says Diane Bunch, senior vice president of information services at TVA. The ability to avoid future PC capacity upgrades is one area of cost savings resulting from the move, since fewer applications mean reduced CPU and storage needs, says Bunch.

The house-cleaning exercise also gave TVA an opportunity to renegotiate site licenses for software that it will continue to use. For example, a reworked contract for a project scheduling package should save the company $40,000 per year, says Bunch. "We're working on several other licensing agreements, and $10,000 here and $5,000 there in cost savings can add up to significant cost avoidance," she says.

Pennies on the Dollar

A growing number of companies are taking advantage of used equipment that's still flooding the market from failed dot-coms and other businesses. Through online auctions, Corning Inc.'s Life Sciences division in Acton, Mass., bought what CIO Howard Piggee describes as some "cheap" servers. The servers cost 50 cents on the dollar and replaced most of the ones that were running the company's PeopleSoft Inc. enterprise resource planning system.

As a result, Corning cut its annual hardware licensing and support costs by $100,000 because the newer servers it bought online are less expensive to run than the older models they replaced.

Power in Numbers

A big-dollar software licensing agreement with a major vendor was placing a drag on Drexel University's IT budget, so John Bielec, vice president of information resources and technology, found himself in search of ways to bring those costs down. Research on the topic led him to a Middletown, Conn.-based educational purchasing consortium called the North East Regional Computing Program, which Drexel joined last year. By doing so, Philadelphia-based Drexel was able to lower its annual software licensing fees with the vendor in question, thanks to special rates for consortium members.

Says Bielec, "There's always power to negotiate if you have volume."

TOP 10 COST-CUTTING TECHNOLOGIES

TECHNOLOGY

BUDGET IMPACT

1

Self-service

Business unit

2

CRM

Business unit

3

Supply chain automaton

Business unit

4

Linux

IT department

5

Mobile

IT department

6

XML

IT department

7

Portal

IT department

8

Storage-area networks

IT department

9

Web services

IT department

10

E-commerce

Business unit

Source: InterUnity 600 Database and InterUnity Research, 2003

 

Top 10 Ways to Do More With Less

1 Accelerate time to market of technology-based business initiatives.
EXAMPLE:
Lower total initiative costs by restructuring projects to accelerate time to market.


2 Focus on short-term, high-return business initiatives.
EXAMPLE:
Take on short-term projects up to two months long that lower business-unit costs and transfer savings to the IT budget.


3 Transfer IT budget money from renewal and enhancement projects to business transformation.
EXAMPLE:
Double or triple new-initiative funding by reducing renewal and enhancement project dollars.


4 Selective process outsourcing.
EXAMPLE:
Outsource desktop management, PC support and printers.


5 Increase in-house IT staff.
EXAMPLE:
Transfer projects that use outside services to internal IT staff.


6 Renegotiate telecommunications contracts.
EXAMPLE:
Toll-free numbers, T1s, long distance and virtual private networks.


7 Rationalize and simplify your infrastructure.
EXAMPLE:
Simplify server complex to improve use and reduce maintenance and support costs, and to reduce the number of data centers.


8 Improve procurement practices for IT products and services.
EXAMPLE:
Restructure procurement to achieve a higher level of discounts.


9 Outsource development and support to offshore providers.
EXAMPLE: Establish targeted levels of outsourcing to lower-cost countries, such as
China, India, Croatia and Canada.


10 Review maintenance invoices, agreements and asset lists.
EXAMPLE:
Compare maintenance invoices to asset inventory for decommissioned assets.

Source: InterUnity 600 Database and InterUnity Research, 2003