By Cindy McNeese,Owen Hayes, Scott Bonneau and Open the door to any business unit and you'll likely find "business analysts" or "functional engineers" on staff performing tasks that are supposed to be within the purview of the official IT department. No matter the industry, "shadow staff" lurk in the corners of most large enterprises. These positions can add anywhere from 10 percent to 80 percent to total IT head counts. In the case of a large telecommunications carrier with which Booz Allen Hamilton worked, the "shadow" IT staff was three-quarters as large as the entire official IT department. As one CIO client put it, "Even the shadow organizations cast shadows".Largely ignored during the booming 1990s, shadow staffs are coming into focus as companies intensify their cost-reduction efforts. Shadow staffs are leading indicators of problems they serve as workarounds for failed or inadequate processes in service delivery models. If corporate IT isn't meeting the particular needs of a business unit, the business will plug the hole by hiring its own personnel. The typical prescription for shadow staffs has been to identify and eliminate the redundant positions. But this approach is flawed. Simply weeding out shadow staffs in the business units addresses only the symptoms of the problem, not its root cause. A shadow staff position is like the head of a hydra: Cut it off, and two more grow back in its place. To eliminate duplicative and wasted effort to really improve operational efficiency over the long run companies must understand the reason shadow staffs exist, and then remove the reason.The addition of a few positions here and there seems innocuous at first, but the proliferation of shadow staff can debilitate a company by compromising its productivity. While the official IT budget might seem reasonable, once you identify and add shadow staff, IT spending is shown to be excessive. In addition to the direct costs of duplicate labor, there are collateral costs associated with breakdowns in communication and cooperation among organizational units.Shadow DriversPeople are rational creatures. They make the best decisions they can based on the information available and their ability to process it. Shadow staffs exist for a reason. They address meaningful gaps in the overall business model in any of five areas: cost, availability, access, quality, and governance.Cost of service - It's cheaper if we just do it ourselves. "We can do it for less" is the most common rationale managers use to justify their shadow organizations. Usually, though, they're reacting to what they perceive as excessive cost allocations or outside-vendor invoices without full information. Often, they fail to consider the life-cycle support costs of providing particular services or developing specific applications. Fully evaluating the cost of providing a service means assessing the complete economic impact of that decision, including associated overhead charges, and it's up to IT to make sure managers do so. If the analysis shows they really can do it for less, they should be encouraged to go ahead-and IT should take a hard look at its business model and economics to find ways to stay competitive in the market.Availability of service: We don't have a choice. If multiple managers in the company are independently hiring staff to fill similar service gaps, you've clearly failed to provide the services the enterprise needs and squandered the opportunity to capture cost savings from economies of scale. Certainly, a business unit can have unique needs, and it sometimes makes sense to keep that service-for example, an application-specific help desk-close to the customers in a business unit. But even that decision should be the result of a deliberate dialogue between IT and the business unit. If the IT organization can't cost-effectively provide the service, it often can play a valuable role in brokering the service for the business unit, thereby leveraging the enterprise's full scale.Access to service: Sorry, we're all out. Even when a needed service is available at the enterprise level, all managers might not have ready and equal access to it. Access is an issue particularly important in IT-application development. Smaller business units are often frustrated at their inability to compete for limited, budget-driven, centralized IT resources. Although critical to meeting their objectives, these projects promise returns that are relatively small compared with those of larger business units. Are these competing investments being evaluated in the appropriate context and with the right yardsticks? The appearance of a shadow staff can be a flag for further study of corporate IT's demand-management and prioritization processes. Quality of service: Mercedes? How about a Chevy? Like any other consumers, line managers will shop elsewhere if they aren't satisfied with the products and services you offer. Dissatisfaction can result from poor quality-inadequate speed or accuracy-or simply a mismatch between what customers receive versus what they desire. Shared-service IT is often guilty of focusing on the sharing instead of the service, offering a one-size-fits-all option in pursuit of the best economics. The resulting shadow staff and incremental IT investments can mount quickly. When this starts to happen, it's time for a thorough review of IT's customer segmentation and service offerings.Governance of service: Who's gonna stop me? The lack of effective governance acts as the final green light in the development of shadow staffs. If there are no clear corporate policies defining roles and responsibilities-or measures and incentives to monitor and encourage desired behaviors-then shadow staffs become an unofficially sanctioned fixture in the corporate structure.Which driver is responsible for the appearance of a shadow staff in your company and how can your service-delivery systems be modified to disable it? Very likely, multiple drivers are the culprits, and the reasons will differ depending on the IT function and customer needs.A Solution for Every ProblemIn working with our clients, we've identified several best practices designed to reduce shadow staff by improving cost transparency and optimizing IT-service delivery. Among these are:Demand management: Companies traditionally have attacked internal service costs from the supply side, applying reengineering techniques to increase efficiency and productivity, or leveraging best practices and scale. Our recent client experiences, however, suggest that managing the demand for services yields as much, if not more, in cost savings and benefits.One of the most important tools for managing demand is pricing. Historically, internal services have been priced by allocation. But looking at pricing as a cost-recovery vehicle is the wrong approach. Instead, pricing should be viewed as a demand-management tool for driving customer behavior and eliminating the need for shadow staff by letting customers pay for what they value. Fit-for-purpose solutions: Conventional wisdom has long held that one-size-fits-all solutions result in the lowest overall costs. But our recent client work suggests that logic is faulty. Standardized solutions actually over-serve many business users while under-serving others. The results are unnecessarily high costs and dissatisfied users who aren't receiving an appropriate level of service. Conversely, if IT offers too many options-for example, supplying each business unit a customized menu of services-without establishing sufficient scale or standards, costs quickly escalate.Fit-for-purpose solutions represent the happy medium in this tug-of-war. They're tailored but efficient service-delivery solutions that align supply and demand for various customer segments at optimal levels. By assessing the economics of service delivery from cost-to-serve and ability-to-serve perspectives, and by segmenting customer needs and priorities, CIOs can radically restructure service delivery and offer a set of affordable yet responsive solutions. Shared services: More and more, companies across industries are consolidating support functions from headquarters and business units into centralized shared-services organizations. Rather than functioning as an arm of the central hierarchy, with costs allocated to the rest of the company, these support-service delivery organizations operate in a commercial context. They collaboratively plan requirements and pricing with internal business-unit customers-and, in effect, compete with alternative service providers to win business.This move to treat support services like a business introduces market discipline and incentives to the internal-service delivery model. The resulting transparency and responsiveness address all of the key drivers of shadow-staff formation: access, availability, cost, governance, and quality.Governance mechanisms: Corporate policies, processes, and performance measures can help drive companies toward one or more of these solutions. Policies should clearly define the roles and responsibilities of each unit in the provision of services. Key processes, particularly within the human-resources function, can serve to highlight the emergence of shadow staff, so you can respond swiftly. Finally, performance measures and incentives can motivate both business and service units to adhere to desired behaviors.As companies respond to an environment of economic and competitive uncertainty, cost reduction has risen to the top of executive agendas. In our experience, the expense of hidden and redundant staffing can runas high as 80 percent of IT payroll. That's the bad news. But from the CIO's perspective, there's an enormous cost-saving opportunity in addressing shadow staff.