De-Investing In IT – How To Cut 15% In A Hurry…

…And Get Away With It

Over the past two years, our clients and prospective clients have examined their IT spending plans, cut costs, cut staff, deferred projects, and adopted “bare bones” IT operating and development plans in hopes that the economy would soon be on the upswing and more “normal” planning and execution would return. Unfortunately, that has not happened. Meanwhile, conventional wisdom, as well as our fundamental beliefs, argue that a top management mandate to “cut IT by 15%” (or another arbitrary target) would be folly, leading to uninformed, undisciplined, counterproductive, possibly even dangerous decisions. But for some companies, the continuing realities of the marketplace now make such cuts necessary for continuing corporate viability. In many cases it simply must be done now and quickly.

How to cut IT by 15% in 30 days: To help clients answer this prevalent question, we flipped our IT Strategic Planning Methodology on its head. We reasoned that what works for IT investment would work for IT de-investment if condensed into a laser-focused “quick-cut” process that has integrity and gets results – that is, that cuts IT expenses in ways that cause the least damage to the organization and position the company for rebuilding when better times arrive. The resulting IT De-Investment Action Plan can be developed in just a few weeks by taking the following seven steps:

1. Assemble the Strike Team
2. Draft the Criteria for Cutting
3. Look at IT Spending from a Different Perspective
4. Identify Solutions that Reduce Business Costs
5. Brainstorm Novel Solutions
6. Develop the Action Plan
7. Execute

The following paragraphs describe the critical success factors for each step – the key, breakthrough ideas that can make downsizing not only a reality, but one that won’t expose a firm to undue risk and will position the organization to exploit the economic recovery when it arrives in its industry.

1. Assemble the Strike Team – The CFO or the CIO must not undertake this decision-making alone. It is crucial to bring other executives into the decision-making process, especially the key line managers who anticipate degradation in service. They must have a say in and be committed to the outcomes. Have them understand that the cost reduction issue affects the entire organization and their cooperation is essential.

2. Draft the Criteria for Cutting – They are three areas of cutting on which the strike team should focus: taking existing costs out of IT (see 3 below), restricting IT spending to initiatives that reduce business costs (see 4), or finding alternative or novel approaches for avoiding costs associated with IT (see 5). We have found that the strike team will make rapid progress by considering these three areas sequentially as a group, or by splitting into sub-teams to consider each area in parallel. In either case, the charge to the strike team must be to specify criteria for each area that in total combine to equal the targeted cost reduction.

3. Look at IT Spending from a Different Perspective – To reduce the cost of IT, prepare an activity-based cost model of IT. Instead of the traditional chart of accounts/line item focus, summarize IT spending by its basic components: Development, Maintenance, and Operations (because each must be looked at slightly differently).

a. For Development : Identify the development or replacement projects that are underway, and note where they are in their project life cycle, including a realistic cost-to-complete and due date. Recalculate the expected ROI and kill projects with a negative or marginal ROI and stop projects without a sensational ROI that are early in their life cycle. Work with the end-user department to slow-down or delay selected projects in order to cut direct costs. Be ruthless.

b. For Maintenance : Categorize all existing and any new maintenance efforts into three types: emergency, routine and discretionary. Emergency maintenance aims at something that is broken and must be fixed. Routine maintenance is that which is required to keep the business running, to comply with requirements/regulations, or are quick wins, i.e. can effect significant cost savings in business processes. Discretionary refers to good ideas that can be deferred. Put discretionary efforts on hold; proceed with verified emergency and routine maintenance efforts.

c. For Operations : Treat operations (or infrastructure) projects as in “a” above. Allow operation upgrades/additions for increased transaction volume, storage requirements and security considerations only.

4. Identify Solutions that Reduce Business Costs – Facilitate a Strike Team discussion of proposed and in-process positive ROI development projects. Identify and protect those that create the largest total dollar amount of cost reductions in other parts of the business. Identify and protect those that are beneficial to running the business, especially those dealing with customers and the order-to-cash business process. Defer those development projects that are not mission critical, not cost reduction in nature, or those that are justified based on increased revenue. Rank the deferred items in add-back order in anticipation of improved economics.

5. Brainstorm Novel Solutions : Often solutions can be found in IT that are not strictly IT cost reduction or deferred IT expenses, but that can nevertheless save the enterprise money or improve its cash flow in the short term. These will be unique to the business and its IT environment and hence will require a brainstorming approach. Some examples can be illustrative:

a. Outsource Selected IT Components : Companies seeking near term savings in IT are cautioned from jumping on the current outsourcing bandwagon. Experience has shown savings from IT outsourcing can require extensive time before being realized and worse, can represent a significant investment upfront. In some cases, however, outsourcing of the IT infrastructure can result in an upfront return on invested capital assuming IT assets are owned and the outsourcing arrangement involved purchase of this equipment.

b. Re-Sourcing : Companies that already have outsourced all or major parts of IT may find that renegotiations with the outsourcer due to reduced volumes or use are possible. This is particularly true in the case of telecommunication contracts. In other cases, a single component that has been outsourced under a master agreement may be re-sourced to a more cost effective vendor. Also, Service Level Agreements with existing outsourcers should be reviewed to see if defaults exist that can result in claims for damages or provide leverage for renegotiations.

c. Investigate an Application Service Provider (ASP) for Major Packaged Systems : A few firms we know of have found that their major application packages (ERP, CRM) if acquired from one of the leading vendors, can quickly (in weeks or months) be given over to an ASP and result in significant savings in staff and equipment lease costs.

d. Reassign Resources to Decentralized Business Units: Depending on the nature of the mandate for reduction, decentralizing assets and resources of the corporate IT department to the supported business units may satisfy several objectives including the one for significant cost reduction of corporate departments. If viable, consider dispersing all corporate IT responsibilities and activities except those needed to continue to operate corporate applications, enforce IT standards, administer data and conduct IT R&D. The effect, depending on how IT is structured in the organization, may far exceed the mandated reductions.

6. Develop the Action Plan – Re-write the IT Spending Plan and invest time and effort in communicating the service level reductions to the employees that are most affected. Engage them in the process of “doing more with less” until the economics improve.

7. Execute – Make the cuts. Monitor the execution. Convene the Strike Team quarterly to report status, discuss the negative ramifications of cuts and actions to minimize the impact, and continue to refine the plan.

We believe companies committed to significantly reducing IT costs who follow these steps will find the short term savings they seek without placing the business at risk or hindering their ability to quickly exploit technological opportunities when economic growth returns.

Return to Articles Page