In-Depth

Hackett Research Quantifies IT Services/Demand Gap, Recommends Best Practices

IT demand expected to grow by 17 percent through next year despite stagnant IT budgets; report highlights best practices for closing "efficiency gap" through cost control, demand management, discretionary cuts

• By James E. Powell
• 05/11/2009

Doing more with less has IT looking for the best ways to close the gap between increasing demands for its services (up by 17 percent in the next two years) and a stable (if not declining) budget. The answer, The Hackett Group says, is to improve efficiency and productivity. The company studied practices and results of more than 80 global companies and describes best practices in three key areas: "IT cost control strategies, demand management, and discretionary cuts."

Senior IT research director at Hackett, Erik Dorr, noted in a statement that "What we see here is that there’s significant untapped potential for companies to cut costs and manage demand. While most companies in our study have implemented basic IT cost control strategies, other areas, such as demand management, have been largely ignored." Even in "traditional areas" such as discretionary cuts, Dorr sees "room for an increased level of sophistication to reduce the stress on the IT organization and to ensure that the cuts are sustainable."

The need for action is growing. companies studied expect IT budgets and staffing levels to remain essentially flat (growing by only 1 percent through 2010) compared to annual budget growth rates of 5.3 % and staff increases of 4.3 percent from 2006 through 2008. "This 75% decline in budget growth contrasts sharply with companies’ projections for IT demand, which will shrink by only 15%, to 8.6% annually for the next two years, resulting in an increase of more than 17% by the end of 2010," the company says.

Among the key points for IT to consider: if you can't increase the supply, then get a handle on the demand side of the equation. Although demand management can result in a strong return on investment, Hackett found that only 37 percent of surveyed companies use the technique, which includes cost allocation or using chargebacks to bill internal users for the volume of IT services used (or for IT work performed on their behalf).

Furthermore, fewer than 30 percent of respondents have established a service catalog that lists the discrete IT services offered and their price per unit. Hackett also recommends IT portfolio management (aimed at optimizing IT investment governance and maximizing the business value of IT investments) can reduce costs and help you ensure that the work with the highest value to the enterprise gets done first. A closer look at planned IT demand growth showed the volume of digital content and business intelligence analytics are (and will continue to be) the top sources of growing demand. For example, automated transactions are projected to increase by more than 13 percent, though business growth will slow to 3 to 5 percent. Furthermore, no company surveyed predicted lower demand, though the growth in the number of projects delivered will dramatically drop, and many projects are being scaled back.

Cost Control: Quick Payback Possible

Looking for the quickest monetary payback? Hackett's research makes it clear IT should examine its IT cost control strategies and put outsourcing at the top of its list.

Outsourcing and offshoring can bring "three times the savings of other IT cost control strategies, primarily because it affects the largest share of the overall IT budget." Hackett points out that "the scope of the outsourcing/offshoring initiatives for the companies participating in our study was about 25 percent of their total IT spend. The researchers found that over half (55 percent) of companies outsource IT processes, and of these, 42 percent are planning to expand their use of this cost-control technique.

Other cost-control initiatives include:

• IT reorganization (establishing shared services, eliminating management layers or reporting lines, or setting up competency centers)

• IT productivity and process improvements (including adoption of process models such as ITIL for IT service management or agile development)

• Managing suppliers and contracts (including renegotiation and re-bidding existing contracts).

Hackett concludes that no matter which of the four initiatives you pursue, "the realized savings relative to baseline cost for each, which range from just under 7.5 percent for IT productivity and process improvement to 9 percent for offshoring/outsourcing" should be heeded. "The key takeaway is that setting a goal of around 10 percent in cost savings is both realistic and achievable."

The last strategy to improve efficiency that Hackett examined -- discretionary cuts -- usually involves mandated budget and staff cuts "without underlying process improvement or rationalization." It's the least-attractive approach, and Hackett warns that it is the riskiest of the three strategies. "Unless process improvements are an integrated part of any discretionary cuts, they are likely to result in degraded service levels and reduced overall effectiveness." Techniques include cutting hardware, software, and telecom costs, terminating outsourced contracts (or trimming their scope), reducing internal staff or contractors, and reducing spending on projects (new projects are usually cut first). No matter which type of cut is made, realized budget savings are roughly the same, between 7 and 9 percent).

The cuts, Hackett warns, are usually not sustainable, and many companies quickly find that they have very little fat left to trim. "There are limits to efficiency improvements that can be achieved without deployging the transformation initiatives ... devoted to cost control methods.

To determine how to measure and analyze IT efficiency improvement performance, the researchers determined that although growth of individual components of IT demand (such as the number of IT users or automated transactions) were easily measured, combining them was problematic. The company instead defined nine IT demand components, collected empirical data about growth rates for each, and applied weightings based on estimated share in total IT demand. The weighted average was then used to estimate the total IT demand growth, and used along with IT budgets to determine IT efficiency.