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by No Analyst or Consultant

Thinking Bigger About IT Cost

Sep 05, 20038 mins
CSO and CISOData and Information Security

By Gary A. Curtis,

Stephen D. Page

and John K. Kaltenmark

Can a company maintain strong, competitive information technology capabilities and still meet demands for reduced IT spending? Yes-by taking a bold, comprehensive approach that transforms every facet of the IT organization, from strategy to systems design to human performance.

For companies in nearly every industry, strong information technology capabilities have long been a competitive necessity. More recently, however, economic conditions have made sharp reductions in IT spending a financial requirement. Reconciling these two imperatives is one of the chief strategic challenges currently facing the world’s major enterprises.

Can these disparate challenges be addressed simultaneously? Yes, they can; indeed, they must.

Narrowly focused responses to IT cost and service problems abound. But evidence compiled across a range of industries indicates that the real IT payoffs come from thinking much bigger. The prize, after all, is not an IT budget that has gone from being a cost of doing business to being a slightly lower cost of doing business. It is an IT organization that creates greater value for the company.

Winning this prize requires, first and foremost, a willingness to be bold.

It takes a strong, top-level commitment to solving today’s problems in a way that puts IT in the mainstream of tomorrow’s corporate strategy. It takes an upfront investment, albeit a moderate one that pays off quickly and well. And it takes a broad range of tools and techniques that, grouped together, form a discipline Accenture calls IT transformation.

We use the word transformation deliberately. IT transformation is a holistic approach, addressing every facet of the IT organization and producing substantial changes not just in technology and supplier relationships but in culture and governance as well.

Comprehensive Approach

This comprehensive approach is mandated by the sheer scope of the challenges IT organizations face. Multiple acquisitions and the rush into e-business were among the features of a boom-bust cycle that has left many large companies with a legacy of unintegrated and hard-to-maintain systems.

Old applications often support customer-facing applications for which they were never intended. Complex architectures force the IT organization to manage many different suppliers. Key decisions are often made locally at a time when global coordination is needed. As an illustration of how pervasive these challenges are, in nearly every major survey of large companies’ IT functions during 2002, respondents cited “enterprise integration” as their top spending category.

All this shows how nondiscretionary spending dominates IT budgets. As a result, available resources are diverted from discretionary IT initiatives that improve competitiveness and add value to the business.

In some organizations cost-cutting programs are actually making things worse. For example, a slice-and-dice approach to sourcing-wherein individual technologies or processes are sourced independently to the lowest bidders-may initially create tantalizing cost savings. But piecemeal sourcing usually makes it harder for the organization to manage its day-to-day activities. Longer-range goals get blurred in negotiations with multiple suppliers. Often, such a sourcing approach locks an organization into yesterday’s inadequate IT.

Across-the-board cost cuts are equally ineffective. Scaling back projects until IT costs are capped at a notional limit can seem decisive. But the easiest cuts, normally made in discretionary spending, usually sacrifice initiatives with the real potential to create future value for the business.

IT transformation is about reducing costs too, but with a larger purpose. The major targets for spending reductions are nondiscretionary items-the things the organization does to keep the company functioning normally. A large portion of the savings is then channeled into discretionary, value-adding activities.

See Figure 1

IT Transformation

The specific changes being made within IT organizations fall into three general areas: changes in governance and culture; changes in technology and processes that produce cost savings; and the addition of new, strategically significant capabilities.

Governance and Culture

The most profound changes produced in the course of an IT transformation often occur in the decision-making process for IT resources and initiatives. What is the chief information officer’s role, and how much does he or she help shape overall business strategy? To what degree do the company’s other top leaders participate in IT decisions? How can the resources across a complex business be used in an integrated way?

IT transformations inevitably involve the IT unit more in the company’s critical decision-making process, and draw technical and business leaders closer together-the better to align IT with corporate goals and strategy.

Another key governance issue is local versus centralized control of IT decisions. For example, after a period of aggressive expansion via acquisitions, one global financial services group was operating 60 different companies around the world, each with its own IT profile. Giving those sprawling IT operations a common agenda, while providing the companies with sufficient independence in their local markets, then realigning and consolidating their service-delivery capabilities, was a major IT transformation challenge.

Linked to governance issues is the IT organization’s culture. How people are trained, deployed, compensated, promoted and (perhaps most important of all) led gets careful attention in an IT transformation. Here, too, the goal is forging tighter links between the IT organization and the company’s business objectives.

Consider, for example, the experience of Orange, the United Kingdom’s leading mobile communications provider. Orange’s runaway marketplace success and rapid growth, including the rollout of new services, required the company to revisit the technical organization’s ability to manage scale and complexity. Systems stability and project delivery are both critical to ensuring the quality of service.

Orange responded by transforming its IT organization, with an emphasis on building a strong, positive relationship between the IT teams and the rest of the business. Improved processes were introduced that aligned accountability, authority and responsibility, leadership development, the training of IT managers in team-building techniques, and new communications channels. The initiative helped create a shared vision within the IT team. In less than a year, the transformation of Orange’s IT organization reduced unplanned systems downtime by more than 50 percent and dramatically improved the reliability and on-time completion of solution delivery projects.

A new governance framework ensures that major IT initiatives are both aligned to business needs and achievable. Although cost savings were not the original driver, efficiency gains of 20 percent to 30 percent have been recorded, and output is up more than 20 percent.

Delivering Cost Savings

What are the main drivers of excess IT costs? Ineffective processes that are insufficiently and inaccurately measured, services that are over specified, technology rationalization that doesn’t go far enough, and weak supplier management, to name a few. To see how IT transformations tackle these and other problems, let’s review the experience of French insurer, Groupama.

Groupama is the product of a 1998 merger with GAN, a brand the organization still uses. The GAN acquisition triggered an initial round of IT rationalization at GAN, where IT inefficiencies had become a significant impediment to profitability.

Major changes were needed-and were made. Among them: improvements in purchasing, with major contracts renegotiated and the number of vendors reduced; the merging of two operations sites; and decreased reliance on subcontractors. Thanks to these and other measures, GAN’s 2002 IT budget was 30 percent lower than its 1999 spending of ¬184 million, and the organization was positioned for its ongoing integration with Groupama.

In 2002, a companywide IT transformation was launched. Many of the cost reduction measures applied at GAN have been (or will be) extended to Groupama. Other major initiatives are under way as well.

A reorganization of the group IT function will allow a reduction in the number of data centers, with hardware standardization producing further savings. Group IT costs, which were ¬508 million in 2001, will be 30 percent lower by 2007.

Adding New Capabilities

Because reductions in nondiscretionary spending produce permanent savings, they can provide the basis for permanent improvements in the organizations that achieve them-enabling the development of capabilities that would otherwise be out of reach.

Sometimes these capabilities take the form of dramatic new initiatives that can vault a company into the lead in a fast-changing industry. More often the new capabilities represent incremental enhancements to existing systems that enable, for example, improved customer service. In all cases, however, the new capabilities add new value to the business.

Orange’s IT unit is adding business value in equally significant ways. Better-managed systems and a more customer-focused IT staff are improving the company’s customer retention rate. More importantly, Orange’s technical organization is delivering innovation and more flexibility in new products and services faster and with less risk of disruption. And thanks to standardized processes and improvements in reliability, fast-growing Orange has improved its organizational capability to deliver the scalability it needs.

It’s doubtful that adding these new capabilities would be achievable had these companies taken a narrower view of their challenges. Because they were willing to be bold, however, these companies have not only reduced their IT spending in a durable way, but are also able to take important steps to position their IT organizations in tomorrow’s competitive landscape.

About the Authors

Gary A. Curtis, a partner in the Accenture Strategy & Business Architecture service line, is global head of the Accenture Strategic IT Effectiveness group. Mr. Curtis is based in San Francisco.

Stephen D. Page, a partner in the Accenture Strategy & Business Architecture service line, leads the Accenture Strategic IT Effectiveness group in Europe, the Middle East and Africa. Mr. Page is based in London.

John K. Kaltenmark, Accenture’s chief architect, oversees the development and deployment of the company’s suite of technology architectures. In addition, Mr. Kaltenmark is managing partner of the Global Architecture and Core Technologies group. Mr. Kaltenmark is based in Chicago.