In-Depth

An Rx for Cost Savings: Keep IT Simple, Study Shows

Companies that reduce the complexity of their IT systems can generate significant savings

• By Stephen Swoyer
• 08/09/2005

In the past, business process consultancy The Hackett Group has published counterintuitive research about the best practices of so-called world-class companies. Paradoxically, Hackett researchers found top-flight companies typically spend less on IT than do their also-ran competitors.

Last week, the consultancy's research shows another key to savings. The study concludes that companies reducing the complexity of their IT systems can generate significant savings, especially with respect to lowering the TCO of finance and human resources (HR) functions.

The rub, Hackett researchers concede, is getting business leaders to play ball: In fact, IT leaders must often combat an ingrained belief among decision makers that custom IT configurations are critical for business units to effectively compete.

Nevertheless, Hackett researchers say, companies that don’t make an effort to reduce the complexity of their IT systems pay a hefty price, typically spending 30 percent more on finance operations and 18 percent more on HR per employee than do companies that have successfully reduced their complexity.

There are other perks, too. According to Hackett researchers, world-class IT organizations spend almost one-fifth (18 percent) less than their also-ran competitors and complete budgets on time and under budget 25 percent more frequently. What’s more, they’re able to do so even though they maintain 36% fewer IT staff positions.

In fact, the research group says, world-class companies do more with less in virtually every aspect of IT. They use fewer customer and supplier databases, don’t have as many software and hardware suppliers, and make more consistent use of data standards.

"The bottom line is simple: our empirical research shows that companies which embrace IT complexity reduction as a mission spends less across virtually every area of the back office," said Hackett IT practice leader David Hebert in a statement. "But this can be a tough sell. CIOs are constantly faced with business leaders who truly believe that their particular group or unit is 'different,' and has unique requirements. These leaders will resist standardization efforts, fearing they will lose their competitive edge. IT leaders need to hold the line, sell the value of standardization and simplification, and at the same time be aware of situations where a valid business cases exist to support customization."

Complexity is often viewed as a function of application customization and integration, but as Hackett researchers stress, simply whittling down the number of primary applications in your portfolio can pay significant dividends, too. Companies that had 10 or more primary applications, for example, typically reported 30 percent higher finance costs as a percent of revenue (i.e., 1.3 percent of revenue as opposed to 1 percent).

The median HR cost per employee also tends to increase in tandem with the number of applications per 1,000 employees. For example, organizations in which HR functions aren’t highly integrated (i.e., are distributed across several HR applications) pay a median HR cost per employee that’s 18 percent higher ($2,338 per employee versus $1,976 per employee) than in companies where HR functionality is highly integrated. If Hackett’s research is correct, the evidence in support of highly integrated HR solutions is overwhelming: world-class organizations are 87 percent more likely than also-rans to deploy common HR applications globally.

Finally, reduced complexity translates into significant cost savings. In the financial arena, companies with 10 or fewer applications spend $3 million per $1 billion in revenue less than companies with more than 10 applications. In HR, organizations that aren’t using common or highly integrated applications spend more than $3.6 million per year more for every 10,000 employees than their more integrated competitors.