World-Class Companies Spend Less on IT

World-class performance goes hand-in-hand with world-class restraint, at least where IT spending is concerned

What’s it take to be a world-class company? A world-class IT organization, of course—but that’s just for starters.

Truth is, world-class performance seems to go hand-in-hand with world-class restraint with respect to IT spending. Sound paradoxical? Maybe not: According to research firm The Hackett Group, world-class IT organizations typically spend 18 percent less than the average company and operate with less than two-thirds (64 percent) of the staff.

Hackett Group, an AnswerThink-affiliated company, performs research into the best practices of what it calls world-class companies. The latter are determined by how well they rank on Hackett’s Business Value Index, an assessment of companies in terms of both efficiency and effectiveness.

As Hackett IT practice leader Beth Hayes observes, world-class performance is eminently quantifiable. “We can measure it through defined performance metrics. As a part of our world-class assessment, we determine what are the metrics that drive performance, and through a comparative assessment of those performance metrics, we’re able to isolate world-class performers from those that are performing less effectively than world-class,” she explains.

The Secret to Top Performance

It’s common knowledge that IT spending has slowed since 2002, Hayes says, but less well known—though no less intuitive—is the fact that the growth and the number of end users has also slowed. “What we had seen prior to this year’s analysis is that between 1999 and 2000, not only were costs per end user increasing, but also the penetration of IT into the business was increasing, from 58 percent of end users (as a percentage of employees) to a record-breaking 87 percent,” she explains.

Between 2004 and the present, Hayes says, that trend has reversed. “Not only has cost slowed as a percent of end users, but so has IT as a percent of employees. There’s actually been a reduction in almost 11 percent in total IT budget between 2002 and 2004."

This trend is even more pronounced in world-class performers, which spend almost one-fifth (18 percent) less than average companies on IT costs per end user.

“In the case of world-class performers, they were really focused and actually drove down their costs more,” Hayes notes. “I don’t think this was necessarily attributable to not spending on the business”—in fact, most companies re-invest money that they save in IT—“but I think IT was being more aggressive and managing systems costs, such as maintenance costs.”

Even more telling, world-class companies have 37 percent fewer IT personnel than the average company—or 28 for every 1,000 end users. “Not only did they get greater savings, but they really, really pushed hard with their internal staffings to make sure that they were as efficient as possible,” Hayes points out.

Perhaps most shocking of all: Leading-edge IT organizations use 65 percent fewer software packages than also-rans, according to Hayes.

Another practice that separates world-class IT organizations is that of infrastructure simplification. “Clearly we see world-class companies continuing to press on the overall complexity factors of their environment, and this is sort of resulting in fewer ERP systems for their organizations, as well a fewer number of applications per thousand of end users,” Hayes explains, noting that the average company has at least two ERP systems in-house, while world-class organizations have only one.

Intelligent Outsourcing

To a very large degree, world-class IT organizations make more intelligent decisions about outsourcing because they’ve first simplified and standardized their infrastructures, Hayes reveals. “These world-class organizations have been extremely aggressive in comparison to median companies in outsourcing 60 percent more from an infrastructure perspective, where they’re really going after the commodity items, and taking excessive cost and headcounts out of their infrastructure activities."

Not surprisingly, she adds, they also spend more on outsourcing: “World class companies are likely to spend 23 percent more on outsourcing per end user than median companies. If you look at that as a percentage of the total IT cost, what you see is an even more significant difference: World-class performers are spending 43 percent more on outsourcing.”

What’s interesting, Hayes notes, is just where these outsourcing dollars are going. World-class organizations, for example, tend to spend much less (34 percent less, in fact) outsourcing application management costs, but much more (60 percent) outsourcing technology infrastructure costs. The obvious lesson, she says, is that some costs (for example, technology infrastructure) are more outsourceable than others (such as application management).

“Median companies, by outsourcing more of the application management costs, there is some potential inherent business risk in doing so, because [IT] may not save any money,” Hayes confirms.

Better Project Management

It shouldn’t surprise anyone that world-class IT organizations also execute better when it comes to project planning and project management. One big reason, says Hayes, is that 93 percent of them adhere to common standards and methods—for example, standard project management and application development methods and lifecycles, along with a project management office (PMO) that coordinates many projects—versus only 68 percent of median companies.

The result? World-class companies complete 90 percent of their projects on time and on budget, Hayes indicates. “This is versus 68 percent for median companies. They [world-class companies] can do this because they run more of their projects through a project management office,” she explains, noting that PMOs manage projects in 50 percent of world-class organizations versus only 25 percent for median companies. “It’s quite perplexing that given the largely understood value of the PMO within basic IT service delivery, that median companies aren’t doing a better job using it.”

One problem for any median company with world-class aspirations is that the world-class best practices cited by Hackett Group are intrinsically linked to one another. An organization can’t simplify its infrastructure without first aligning its business goals with IT—and yet Hackett found that most median companies (69 percent) don’t involve senior-level IT executives in their C-level management committees (versus 100 percent of world-class performers). Similarly, companies can’t make intelligent outsourcing decisions until they’ve simplified their infrastructures.

So what’s a would-be world-class company to do?

Fear not, says Hayes. If companies start by aligning IT with the goals of business, they can tackle other issues in turn. “Before they can do anything else, there has to be a definition and alignment of the IT architecture with that of the business that they’re serving, sort of understanding where they are with the business in that lifecycle, and understanding what controls need to be in place to support [those business goals]."

About the Author

Stephen Swoyer is a Nashville, TN-based freelance journalist who writes about technology.