News

Study Shows How IT Can Make Smart Budget Cuts

A new report by The Hackett Group can guide IT to make strategic cuts that reduce costs without seriously compromising service delivery

• By James E. Powell
• 05/09/2008

When the going gets tough, the tough start cutting -- budgets, that is.

Although the most likely candidates for trimming are the back-office costs (the so-called G&A expenses), the problem is determining what should be cut and by how much without compromising service delivery.

New benchmark data from The Hackett Group sheds light on the subject, especially for IT managers. Hackett's report drills down into specific processes within finance, human resources, IT, and procurement departments looking for the greatest savings potential with the lowest short-term and long-term impact to service.

The analyst firm found that the "five highest-potential IT processes infrastructure management; end-user support; application maintenance; application development and implementation; and functional management and administration) represent 87% of total IT process costs." By optimizing performance in these five areas, plus "selective lifting and shifting of routine IT processes to low-cost countries" (read: global outsourcing), an enterprise can cut baseline-process costs by up to 30 percent.

It's a tricky business; it "requires an understanding of the strategic alternatives; current cost structures compared to those of world-class organizations; and a clear-eyed assessment of risk." If an enterprise focuses on their highest-opportunity G&A processes," Hackett says an average company can reduce total G&A costs by 15 to 41 percent just by optimizing process costs. IT can help -- enterprises can save "another six to seven percent of total G&A cost ... though reduced technology spend."

The report's authors aren't naïve: "We recognize the reality -- and the necessity -- of immediate and meaningful G&A cost reductions, even if some business value may be sacrificed as a result. Therefore, in this analysis we used evaluation criteria focused on the areas that offer the maximum potential for cost savings in the short to medium term and that are likely to do the least amount of damage to the business in the medium to long term."

The firm cautions enterprises to avoid across-the-board cuts and recommends they focus instead on "savings in areas that are significantly out of line compared to world-class or world-class efficiency organizations, and have a relatively low exposure to risk." Hackett group defines “world class” organizations as those that have results in the top quartile within several weighted "efficiency and effectiveness metrics" when compared to other companies; the firm uses results from the past two to three years. "Efficiency metrics include those relevant to cost, cycle time, and productivity; effectiveness metrics include those relating to quality, information access, economic return, business alignment, and supplier leverage," the company told Enterprise Strategies.

Before figuring out what to cut, Hackett Group advises an enterprise understand where it currently spends its G&A budget. A typical Global 1000 company (one with $23.4 billion in revenue and about 56,100 employees) "spends 3.6% of its revenues on four core principal G&A functions to support the business, but world-class companies execute far better, by combining process excellence with technology leverage. This produces the optimal mix of efficiency and effectiveness of G&A service delivery."

The report notes that a typical Global 1000 firm spends $444 million on IT each year, but could reduce that by $34 to $171 million by adopting the IT practices of world-class enterprises. The report says these world-class enterprises have additional benefits: they have better financial results, recruit and retain better employees, and reduce supply-chain costs.

What to Cut

The Hackett Group compared G&A functions of typical and world-class enterprises to find what cost savings made the biggest impact, trying to balance the need (especially during recessions) to balance long-term process optimization and short-term cost-cutting.

Can IT really be cut? The report says yes -- by eliminating inefficiencies in a way that doesn't hamper an enterprise's future growth. The keys: keep it simple and keep it central.

Specifically, the report advises enterprise IT to:

1. Implementing "such tried-and-true best practices as reducing architectural and organizational complexity." World-class companies are characterized by "highly consolidated technology platforms and application landscapes, as well as consolidated data centers."

2. Focus on demand management and supplier management. Negotiate "flexible contracts that allow the organization to scale its license fees, infrastructure and networking up and down as swings in demand occur, for substantial technology cost savings."

3. Examine "demand aggregation, vendor consolidation, and vendor management" -- which are familiar practices to anyone responsible for procurement tasks.

When it comes to cutting labor costs, the study found several areas to outsource. To be a world-class organization, look at end-user support (a savings potential of $7.6 million for the typical Global 1000 enterprise), application maintenance ($9 million), and application development and implementation ($10.3 million).

The Hackett Group acknowledges the dangers of a globalization strategy, and says it has other research that can help companies make outsourcing decisions.

An enterprise must think carefully about IT cuts and not affect IT processes that are already operating efficiently.

"We have seen many companies that have taken an offshoring approach actually maintain or grow service levels at reduced cost. By the same token, we have seen companies meeting growing demand for application development services at lower cost through the offshoring of development work."

The full report is available at http://www.thehackettgroup.com/studies/ga/. A short registration form must be completed for access.