Rebalancing the IT Budget

By Mike Hales,

Julie Metelko

and Frank Fehrenbach

Managing technology has become increasingly challenging in the 21st century, particularly as new products cannibalize the role of existing equipment. Despite the complexity of new products, prices are dropping in some areas: from 10 percent in the PC and telecommunications market up to 30 percent in the storage market. At the same time, costs are rising in other areas such as software and data management. Few companies have the infrastructure to track and understand these changes, and even fewer take advantage of the pricing opportunities that result.

• The upfront hardware and software costs are only part of the equation: Maintenance and data management costs often take a bigger bite out of the budget than the technology assets. In fact, roughly 75 percent of IT budgets are allocated to the infrastructure and personnel needed to support ongoing operations.
• However, businesses that effectively manage their information technology spending can release anywhere from 15 to 45 percent of their total IT budget without sacrificing quality within their operations. These savings can be funneled into coveted upgrades or more strategic technology that couldn’t previously be accommodated in the budget.
• The most common sources of waste stem from buying technology that isn’t needed and significantly overpaying for technology that is. Now is the time for a careful reassessment.

Buy Only What You Need

How much data storage does our corporation need? How many servers? With regard to their cost base, few IT departments can offer specific answers to such questions with confidence. Corporations that can’t predict or quantify their needs typically buy more – and therefore pay more-than necessary (see figure 1).

Consider the savings opportunities in the following categories:

• Personal computers. An employee who uses a personal computer primarily for email and web surfing will not take advantage of the computing power of a typical 3GHz processor available in today’s top-of-the-line models. The high-end PC is designed to support high-resolution digital imaging, compute intensive financial modeling or CAD (computer-aided design) applications. Of course, the more powerful the computer, the higher the price. Matching the power of the computers to employee needs and procuring PCs in the later stages of their life cycles can reap immediate benefits.
• Think of the CPU in a typical desktop computer. We’ve found that the typical CPU will lose 50 percent of its value over a period of eight months (see figure 2). With an average life cycle of five years, the initial rate of decline rarely justifies the high opportunity cost of buying early.

  

  Companies that lease their PCs can contain their costs further by managing their hardware refresh cycles. For companies that can genuinely take advantage of newer technology, three years is generally an appropriate lease length. But in most cases, refresh cycles of four or more years will result in better managed IT costs.

• Data storage. Data storage is another area where companies typically overspend. Storage is typically 30 to 70 percent underutilized because it’s difficult to estimate need and historically it has not been scaleable.

  Corporations should not settle for such low utilization rates given the opportunities for increased efficiency. One of the biggest trends in IT storage is the so-called utility model (storage on demand), which allows an organization to select the storage configuration and software that best meets its needs, and pay only for the amount of storage used. With greater flexibility in adjusting storage volume requirements, organizations lower ongoing expenses and improve operational efficiency and cash flow.

  Companies that take advantage of the utility model can also save more by contracting for storage that meets their needs. For example, a “mission-critical” document may require frequent backup, while most files only need to be backed up once a day or archived for intermittent use.

• Servers. Midrange servers are the workhorses of the typical mid-sized corporation. The industry doesn’t specifically define “midrange,” but we are referring to servers priced at US$25,000 to US$1 million that typically run on UNIX- or Linux-based systems. Some companies can put these workhorses out to pasture. Smaller servers, priced up to US$25,000 and running on systems such as Microsoft Windows, have become more powerful and are stepping in to perform many of the tasks once reserved for their larger counterparts. If an organization runs out of space, it can combine several servers with clustering software and still pay less than the price of one bigger midrange server. As market trends dictate the slowdown of the high-end market, buyers that move to the lower end will thrive in more ways than one.
• Contract labor. The use of temporary IT labor is rife in most large-scale IT organizations. These workers are often the most expensive temporary resources employed in the business, yet their use is seldom truly based on demand. Organizations can save money by determining specifically what skills they need before bringing in external IT expertise. Unfortunately, many contractors become entrenched in the organization, and their high labor rates are not actively managed. Demand management, including canceling or slowing down lower-value projects and using internal resources when appropriate, are critical savings tools.
• Telecommunications. Typically the most complex area in terms of predicting an organization’s requirements is telecommunications spending, which requires thorough categorization and ongoing benchmarking. Companies have fallen into the trap of locking in long-term agreements with telecom companies only to see prices of both voice and data services fall due to commoditization. Meanwhile, telecom hardware components (including wireless local area networks, routers and voice over internet protocol) are increasingly facilitating worker productivity. Although the cost of hardware is declining, companies are buying more, ultimately increasing expenditures by 15 to 30 percent on average. Intense competition within the telecom carrier industry will continue in the medium term, particularly due to deregulation and low growth rates. The average decline for carriers has been 8 to 15 percent over the past four years and is expected to continue at this level.

Pay Less

Many technologies, including personal computers, storage and servers, are increasingly commoditized, but few organizations treat them as such. Just as cars perform in a similar fashion regardless of the brand of gas they’re guzzling, computer performance doesn’t vary significantly from one big name to the next. By introducing and maintaining competitive tension to the selection process, considering less expensive options such as third-party suppliers and remanufactured equipment, and negotiating contracts to capture future price declines, companies can secure a significant pricing advantage.

• PCs. Now truly a commodity, “white box” or generic computers are gaining popularity. Not only are they typically less expensive, they also offer the customer more choice as to what goes inside (such as alternative CPUs), making it possible to buy according to need rather than what the name brands offer. Companies such as Toshiba, Gateway, Sony and in some cases even Dell have offerings in this space. The parts are more likely to be non-proprietary, which makes maintenance easier and less expensive. The price decline in the PC market is expected to be 10 to 13 percent for the next two years.
• Maintenance. Third-party suppliers can also provide maintenance for PCs, storage and servers. The “fear factor” often prompts companies to stick with OEMs (original equipment manufacturers) for maintenance. But as IT hardware becomes more commoditized, maintenance becomes more straightforward, and third-party suppliers are a much more feasible alternative.
• Servers. Companies that use remanufactured servers can save upwards of 10 to 30 percent off the cost of new equipment. Although there are a few exceptions-such as companies that rely on cutting-edge technology for a competitive advantage-most companies can, but don’t, take advantage of this option.
• Storage. Data storage hardware prices are dropping an incredible 28 to 33 percent per year as offerings become increasingly commoditized. Here, too, it’s critical to build in future pricing when signing multiyear contracts. Storage buyers also need to keep an eye on new technologies that rely on networks rather than local hard drives for storage. .
• Telecommunications. Between local exchange, long-distance and wireless bills, companies have an administrative headache on their hands when it comes to ordering and paying for telecommunications services, particularly because of frequent pricing and service changes. According to the U.S. Department of Labor, overall telecom hardware and service prices are currently declining at about 10 percent annually. Telecommunications sourcing may soon change drastically if more innovative suppliers start offering integrated telecommunications services. Suppliers that offer ordering and billing systems can provide significant additional value to their customers since the average telecom bill has an error rate of plus or minus 10 to 15 percent.

Find the Best Balance

Corporations often mis-spend on basic technology and as a result have little appetite for IT innovation. As a result, over recent years, many business managers have come to the conclusion that technology doesn’t provide a competitive edge, but is simply the price of staying competitive. However businesses that spend wisely on their day-to-day IT needs have rebalanced their budgets, and are making time & money for technology that makes a difference.

A longer version of this article originally appeared in A.T. Kearney’s Executive Agenda in February 2005. See www.atkearney.com.

Mike Hales is a vice president in A.T. Kearney’s operations practice and is based in Chicago. Julie Metelko is a vice president in A.T. Kearney’s technology practice and is based in London. Frank Fehrenbach is a consultant in A.T. Kearney’s Chicago office.