Cost Optimization

Cost Optimization: Techniques and Success Strategies
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Michael Smith, Research Vice President 18 March 2009
Gartner Webinar
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Cost Optimization Techniques and Strategies

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Moving from Cost Cutting to Cost Optimization
Across all industries, IT spending is only 5.9% of total operating expenses, which means that 94.1% of total costs are outside of IT.
IT Costs Non-IT Costs
Go where the money is!

Key Issues
1. What are the IT spending statistics for 2009? 2. What techniques are being used to cut costs within the IT organization? 3. How do we extend the benefits of IT cost cutting by moving on to IT cost optimization?
IT Spending Change Projected For 2009

Database Average Information Technology Retail Professional Services Metals & Natural Resources Transportation Chemicals Government Utilities Consumer Products Construction & Engineering Pharmaceuticals Manufacturing Insurance Banking & Finance Telecommunications Education Health Care Electronics Energy Food & Beverage Processing Media Hospitality & Travel -20% -12.5% -15% -10% -5% 0% 5% 10% -3.3% -4.0% 2.7% 7.5% 5.7% 5.1% 4.9% 4.5% 4.4% 4.3% 3.4% 3.3% 3.3% 3.3% 3.0% 2.4% 2.1% 2.0% 1.9% 1.1% 1.1% 0.7%
Source: Gartner IT Key Metrics Data 2009
Participant Poll Question 1:

What are your expected changes in IT spending for 2009 vs. 2008? (Select only ONE response)
1. 2. 3. 4. 5. Increasing spending by more than 15% Increasing spending by 1% to 15% No spending increase or decrease Cutting spending by -1% to -15% Cutting spending by more than -15%
Please select the one option that best fits your situation Responses are confidential
IT Capital vs. IT Operational Spending
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 2008 26% 25% 36% 34% 31% 29% 29% 74% 75% 64% 66% 69% 71% 71%
Capital
Oper ational
Source: Gartner IT Key Metrics Data 2009
IT Spending on Running, Growing, and Transforming The Business
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 2008 2009
61% 63% 64% 62% 68% 67% 67% 66% 21% 22%
18%
15%
14%
22%
14%
24%
13%
19%
13%
20%
14%
19%
15%
19%
Run
Gr ow
T ransfor m
Note: These data were collect ed throughout 2008 and primarily in the last half of the year. The IT spending and business trends indicated for 2009 are likely to trend lower, depending on the depth and length of the current global economic recession. Source: Gartner IT Key Metrics Data 2009
A Framework for Cost Optimization

Enable Innovation & Business Restructuring
Implement Implement process process improvement, improvement, business business restructuring restructuring and and innovation innovation
Joint Business and IT Cost Savings

Difficulty Value Implement Implement cost-saving cost-saving technologies technologies in in conjunction conjunction with with the the business business
Cost Savings within IT

Identify Identify opportunities opportunities to to reduce reduce IT IT costs costs
IT Procurement
Get Get the the best best pricing pricing and and terms terms for for your your IT IT purchases purchases Execution of various types of cost optimization will involve different parts of the organization and varying levels of control by IT alone.
Participant Poll Question 2:

Please select the category from where IT has made the biggest impact in reducing business costs during the past year (Select only ONE response)
1. IT procurement--getting the best pricing and terms for our IT purchases. 2. Cost savings within IT--reducing costs within IT. 3. Joint business and IT cost savings--we have implemented cost-savings processes and technologies in conjunction with the business. 4. Enabling innovation and business restructuring--we have implemented process improvement, business restructuring and innovation using IT.
Please select the one option that best fits your situation Responses are confidential
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History of Below-Industry IT Spending Increases or Decreases Limits Cost Optimization Options

Average change in year over year IT spending 10%
Ability of IT to Contribute Independently to Cost Goals
8% 6% 4% 2% 0% 2.5% 1.4% 4.1%
Zone A Zone B
5.8% 6.1%
Cost Savings within IT and Procurement
Zone B Zone C
Joint Business & 4.9% IT Cost Savings

Process Improvement, Business Restructuring & Innovation
Source: Gartner IT Key Metrics Data 2008; Not To Scale
2003 2004 2005 2006 2007 2008 Under-Investment Can Mean Radical Changes are Necessary
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Some IT Cost Cuts are Not Efficient or Effective And are Often Delaying Tactics Wrong Cuts
Cutting where IT contributes to business efficiencies Easy wins with negligible actual savings Cuts that require huge organizational upheaval .
Downside for Trying

Actual operational cost may increase Undermines IT credibility Loss of credibility for wasting time with no value Distraction from other more fruitful efforts Cant be achieved by IT alone, needs engagement of more senior leaders Probably can't be done quickly enough Loss of credibility for asking for money when there is none Wont achieve necessary savings Distraction from other efforts Deferrals are actually popular because they give the impression of little effort for free money The problem/cost will be bigger later
Great ideas when there is no money for upfront investment Proposals that cant be done soon enough Defers problems to the future
IT Leaders May Have To Cycle Through Inefficient Proposals Before Getting Better
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Effective IT Cost Optimization May Require New or Continued Investments Effective Action
IT Vendor or Sourcing Management: Refresh Lean IT
.
.
Benefits
Enterprise Agreements Limit Vendor Excesses Creates Leverage to Encourage Partnership Behavior Prepare for Cloud Computing, SaaS, SOA Consensus on Value Steams Focus on Flow Reduces Waste Make What is Pulled by your Customer Connect IT Performance to Business Value Portfolio Approach for IT Investment Decisions Supports Continuous Improvement Methodologies Forced Harvesting of Value & Optimization Promises Instills Discipline & Rigor to Previous Decisions Better IT Value Communication Separates IT Demand From IT Supply Management Allows IT to focus on Supply side costs IT Alignment from Business Discussions Significant Overlap w/Traditional Optimization Goals Focus on Electricity Costs and General Frugality Improves Business Case for Optimization
IT Performance Management . IT Value Management
Chargeback
Green IT
Long Term IT Planning to Deliver Business Value & Make Better Decisions
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Efficient IT Cost Optimization Challenges IT Financial Management Capabilities Efficiency Targets

Centralization & Consolidation
Actions
Data Centers, Servers, Network Providers Help Desks, Storage, Data, Provisioning Modernization & Migration SaaS Alternatives Business Process Outsourcing Lease vs. Buy vs. Outsourcing Deferral & Renegotiation All IT Vendor Categories Install Additional Approval Gates to Delay Action Extend Useful Life of Assets From 3 to 4 Years Cancel Licenses Rationalize Multiple Tool Sets Focus on End User and Mobile Device Optimization Help Desk Change from 7X24 to 5X8 Availability: 99.100 to 97.500 Desktop Provisioning: 2 Days to 14 Days Define Quantitative Goals for Effective Cost Savings A Unifying Principle for Fact-Based Action What If Analysis for IT Legitimacy
Legacy Systems
Evaluate Procurement Activity
IT Asset Management
Lower Service Levels Internal & External Benchmarking
Many IT Organizations Are Now In the Middle of Significant Efficiency Programs

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Emergency IT Cost Optimization: The Future Is Now Emergency Cuts

Abandon Service Levels Guarantees
.
Tactics & Issues

Set Expectations Sometimes Be More Reactive Abandon Proactive Train IT Staff to Not Respond and Say No Push Direct Costs to the Owners of Those Costs Ignore Decentralization & Non-Standard Systems Parallel Processes: Turn-Off Automation Where a Staff-Based Processes Exist Lifecycle Management: Extend Replacement Cycles Traditional IT Outsourcing & Selective Outsourcing Procure the Cheapest Solutions All the Time Cancel Maintenance and Warranty Contracts Middle Performers Can Make Due for High Performers More Lawsuits as Former Staff Have Nothing to Lose Cancel All Training Austerity Forces Grass Roots Innovation
Shift Costs to Other Entities
Push-Out The Burdon of IT Spending to Future Fiscal Years
Keep The Right Staff
Arbitrary Cuts Now Creates Higher Future IT Baselines Some May Have No Choice
15
Cost Optimization Opportunities

IT Procurement Cost Savings within IT Joint Business & IT Cost Savings Shared Services
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IT Procurement: Moderate Opportunity With Minimal Effort

Contract renegotiation the first line of offense in saving money. Large enterprises have huge buying power. Act like it! Organize to achieve it! Procurement opportunity
Renegotiate network rates Renegotiate contract labor rates Consolidate desktop hardware contracts Consolidate desktop software contracts Renegotiate "shelfware" maintenance Consolidate commodity (non-IT) purchases Consolidate purchasing staff (shared service) Consolidate IT contract services vehicles Hire internally @ lower rates than contract staff Enable shared risk/reward contracts Extend desktop purchases Financial Benefit Moderate Moderate Moderate Moderate Moderate Moderate Low Moderate Moderate Moderate Low Time Low Low Low Low Low Moderate Low Moderate High Low Low Organizational Risk Low Low Low Low Low Low Moderate Low Moderate Low Low Technical Risk Low Low Low Low Low Low Low Low Moderate Low Low Investment Required Low Low Low Moderate Low Low Low Low Moderate Low Low
Do not expect your most important IT vendors to subsidize your IT budget. Prepare to defend your organization against vendors seeking to make good their own revenue shortfalls.
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Source: Gartner Research.
Cost Savings within IT: Identify Opportunities to Reduce Costs
Opportunity
Stratification of Desktop User Types Automated Software Distribution Desktop Printer Rationalization Standardize Desktop Products Cell Phone Audits Centralize Portal Management Telecommunications Line Audits Consolidation of IT Infrastructure Server Virtualization
Financial Benefit Low Moderate Moderate High Low High Moderate High High
Time Low Low Moderate Low Low Low Low High High
Organizational Risk Low Moderate Low Moderate Low Moderate Low High Moderate
Technical Risk Low Low Low Moderate Low Moderate Low High High
Investment Required Low Moderate Low High Low Moderate Low High Moderate
Innovation to Produce Future Business Value May Be Delayed or Overlooked Due to Economic Uncertainty
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Joint Business and IT Cost Savings:

Implement Cost-Savings Technologies in Conjunction with the Business Opportunity
Enterprise Call centers (Federal government) Local Government Call centers (customer service) Tele-working Videoconferencing Create Data warehouse to mine opportunities Consolidate Content & Data Integration Tools Workflow & Hand-off Analysis and Automation Asset Utilization Analysis HR Self-Service Expansion Deploy e-procurement catalogs Break Up Large Projects & Defer Pieces Financial Benefit High High High High High High Moderate Moderate Moderate Moderate Moderate Customer Impact Moderate High Low Low Moderate High High Low Low Low Low Organizational Risk Moderate High Moderate Low Low High High Moderate Low High low Technical Risk Low Moderate Low Low Moderate Moderate Moderate Low Moderate Low Low Investment Required Moderate Moderate Moderate Moderate High Moderate Moderate Moderate Moderate Moderate Low
Innovation to Produce Future Business Value May Be Ignored Due to Economic Uncertainty
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Business Restructuring and Cost Optimization: Shared Services Opportunities

Financial Benefit High High High High High High Moderate Moderate Moderate Low Customer Impact High High Low Low Low Low Moderate Low Low Moderate Organizational Risk Low Moderate Moderate Moderate Moderate High Moderate Moderate Moderate Moderate Technical Risk Low High High High Low High High Moderate Low Low Investment Required Moderate High High High Low Moderate Moderate Moderate Low Moderate
IT Capability
Create a Program Management Office Electronic document management system Back-office applications Computing centers (mainframes, servers, storage) Networks Nonadministrative agency applications Middle-office application support Desktop applications (acquisition, M/A/C) IT help desk Self-service Web sites
The inability of shared service organizations to make a profit and act like a true external IT service provider can create long term challenges.
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20 New Cost Optimization Research Documents - Since Oct. 2008

Easy Cost Optimization: Why Some Organizations Can Do More Than Others K. Potter, 12/18/08 IT Chargeback as a Tool for Cost Optimization K. Potter, 11/26/08 Case Study: Multifunction Firewalls Help Troon Golf Reduce Costs, Improve Security A. Hils, 12/16/08 Cutting Application Infrastructure Costs for SOA Projects J. Thompson, 11/25/08 How Governments Can Innovate and Cut Costs at the Same Time A. DiMaio, 12/4/08 How Telecom Carriers Can Optimize IT Costs J. DelCroix, 12/12/08 Business Application Budgets Are Under Fire in the Current Economy J. Van Decker, 12/3/08 The Gartner Business Value Model: A Framework for Measuring Business Performance M. Smith, A. Apfel , R. Mitchell, 05/31/06 Cost Cutting in IT to Cope With Economic Slowdown J. Kost, M. Claps, A Di Maio, 03/05/08
21
Michael Smith Research Vice President
Questions and Answers
22
Gartner Reduces IT Cost in Four Distinct Ways
Visit gartner.com/economy now to see exactly how Gartner takes cost out of IT
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Thank you for participating today!

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Submit your text questions now using the Webinar Questions pane A recording of this presentation will be sent to you within 24 hours If you would like a copy of todays presentation, contact your Gartner Account Executive or e-mail us at: GartnerWebinars@gartner.com
24

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Cost Optimization: Techniques and Success Strategies

Michael Smith, Research Vice President 18 March 2009

Cost Optimization Techniques and Strategies

Moving from Cost Cutting to Cost Optimization

IT Costs Non-IT Costs

Go where the money is!

IT Spending Change Projected For 2009

Source: Gartner IT Key Metrics Data 2009

Participant Poll Question 1:

IT Capital vs. IT Operational Spending

Source: Gartner IT Key Metrics Data 2009

IT Spending on Running, Growing, and Transforming The Business

A Framework for Cost Optimization

Joint Business and IT Cost Savings

Cost Savings within IT

Participant Poll Question 2:

History of Below-Industry IT Spending Increases or Decreases Limits Cost Optimization Options

8% 6% 4% 2% 0% 2.5% 1.4% 4.1%

Cost Savings within IT and Procurement

Joint Business & 4.9% IT Cost Savings

Source: Gartner IT Key Metrics Data 2008; Not To Scale

Downside for Trying

IT Performance Management . IT Value Management

Efficient IT Cost Optimization Challenges IT Financial Management Capabilities Efficiency Targets

Evaluate Procurement Activity

Lower Service Levels Internal & External Benchmarking

Many IT Organizations Are Now In the Middle of Significant Efficiency Programs

Emergency IT Cost Optimization: The Future Is Now Emergency Cuts

Tactics & Issues

Shift Costs to Other Entities

Push-Out The Burdon of IT Spending to Future Fiscal Years

Keep The Right Staff

Cost Optimization Opportunities

IT Procurement: Moderate Opportunity With Minimal Effort

Source: Gartner Research.

Cost Savings within IT: Identify Opportunities to Reduce Costs

Joint Business and IT Cost Savings:

Business Restructuring and Cost Optimization: Shared Services Opportunities

20 New Cost Optimization Research Documents - Since Oct. 2008

Michael Smith Research Vice President

Questions and Answers

Gartner Reduces IT Cost in Four Distinct Ways

Thank you for participating today!

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