IT Cost Cutting and Revenue Enhancing Projects

scissorsIn the current economic climate the CIOs and IT managers are constantly pushed to “do more with less”. However, blindly following this mantra can be a recipe for disaster. These days IT budgets are getting squeezed and there are fewer resources to go around however, literally trying to “do more with less” is the wrong approach. The “do more” approach implies that IT operations were not running efficiently and there was a lot of fat that could be trimmed — quite often that is simply not the case. It is not always possible to find a person or a piece of hardware that is sitting idle which can be cut from the budget without impacting something. However, in most IT departments there are still a lot of opportunities to save cost. But the “do more with less” mantra’s approach of actually trying to do more with less maybe flawed! Instead the right slogan should be something along the lines of “work smarter” or “smart utilization of shrinking resources”; not exactly catchy but conveys what is really needed.

polar bearWhen the times are tough IT departments tend to hunker down and act like hibernating bears – they reduce all activity (especially new projects) to a minimum and try to ride out the winter, not recognizing the opportunity that a recession brings. A more productive approach is to rethink your IT strategy, initiate new projects that enhance your competitive advantage, cut those that don’t, and reinvigorate the IT department in better alignment with the business needs and a more efficient cost structure. The economic climate and the renewed focus on cost reduction provides the much needed impetus to push new initiatives through that couldn’t be done before. Corporate strategy guru Richard Rumelt says,

“There are only two paths to substantially higher performance, one is through continued new inventions and the other requires exploiting changes in your environment.”

Inventing something substantial and new is not always easy or even possible but as the luck would have it the winds of change is blowing pretty hard these days both in technology and in the business environment. Cloud computing has emerged as a disruptive technology and is changing the way applications are built and deployed. Virtualization is changing the way IT departments buy hardware and build data centers. There is a renewed focus on enterprise wide information systems and emergence of new software and techniques have made business intelligence affordable and easy to deploy. These are all signs of major changes afoot in the IT industry. On the business side of the equation the current economic climate is reshaping the landscape and a new breed of winners and losers is sure to emerge. What is needed is a vision, strategy, and will to capitalize on these opportunities and turn them into competitive advantage. Recently a health care client of ours spent roughly $1 million on a BI and data strategy initiative and realized $5 million in savings in the first year due to increased operational efficiency.
 
Broadly speaking IT initiatives can be evaluated along two dimensions cost efficiency and competitive advantage. Cost efficiency defines a project’s ability to lower the cost structure and help you run operations more efficiently. Projects along the competitive advantage dimension provide greater insight into your business and/or market trends and help you gain an edge on the competition. Quite often projects along this dimension rely on an early mover’s advantage which overtime may turn into a “me too” as the competitors jump aboard the same bandwagon. The life of such a competitive advantage can be extended by superior execution but overtime it will fade – think supply-chain automation that gave Dell its competitive advantage in early years. Therefore such projects should be approached with a sense of urgency as each passing day erodes the potential for higher profits. In this framework each project can be considered to have a component of each dimension and can be plotted along these dimensions to help you prioritize projects that can turn recession into an opportunity for gaining competitive edge. Here are six initiatives that can help you break the IT hibernation, help you lower your cost structure, and gain an edge on the competition:

Figure-1-Categorization-of-

Figure 1: Categorization of IT Projects 

Figure-2-Key-Benefits

In the current economic climate no project can go too far without an ROI justification and calculating ROI for an IT project especially something that does not directly produce revenue can be notoriously hard. While calculating ROI for these projects is beyond the scope of this article I hope to return to this issue soon with templates to help you get through the scrutiny of the CFO’s office. For now I will leave you with the thought that ROI can be thought of in terms three components:

  • A value statement
  • Hard ROI (direct ROI)
  • Soft ROI (indirect ROI)

Each one is progressively harder to calculate and requires additional level of rigor and detail but improves the accuracy of calculation. I hope to discuss this subject in more detail in future blog entries.

8 thoughts on “IT Cost Cutting and Revenue Enhancing Projects

  1. Ahmed,

    You mention “Recently a health care client of ours spent roughly $1 million on a BI and data strategy initiative and realized $5 million in savings in the first year due to increased operational efficiency.” and then have BI in the “low cost savings” arena. What were your reasons for this?

    All the best

    Peter

    • Peter,
      That is a great observation. This dichotomy between the sited example and the more general rule for the BI projects exists because BI projects can be used to target different aspects of the business. If a BI project is targeted towards improving operational efficiency it will result in cost savings as that is the primary goal of such a project. However, if it is targeted towards gaining greater insight in to the business operations such as:
      – Finding opportunities to up and cross sell
      – Leveraging corporate and industry data to determine market trends
      – Forecasting and data mining
      – Tracking KPIs
      – Decision support systems

      Then it will likely result in greater competitive advantage but not necessarily significant cost savings. Since BI projects don’t always result in substantial direct cost savings and often require non-trivial investment to implement them I placed it in the lower right quadrant. In the example that I cited our client used BI to find and remove operational inconsistencies and waste. They were able to realize savings by standardizing on process and equipment and removing wasteful procedures that did not produce results.

      How are you planning to use BI and what are your concerns?

  2. Hi Ahmed,

    Every BI implementation I have been involved with has had at least a small element of cost reduction associated with it (even if this was only saving the users time in compiling information). My experience is that such tangible paybacks sometimes help in project justification and can complement the less tangible benefits.

    Would it be fair to say that a chart with the two axes that you use doesn’t really capture the essence of the range of benefits of BI? BI is about driving better business decisions, so decisions about expenditure are often in scope.

    Peter

  3. Hi Peter,
    I partially agree with you — every project does have a component of cost savings at least indirect or soft savings. But it is hard to pin point them when trying to justify ROI. Therefore in my opinion the best way to justify a project is to identify the prime objective of the project (cost savings, efficiency, or improved competitive advantage) and focus on providing direct and hard evidence of that.
    You are right a simple two axis chart cannot capture the full complexity and multidimensional aspects of every project. However, it does quickly convey the central focus of a project.

  4. Ahmed,

    What I mean is that if you propose a credible impact on the top and / or bottom line (based on a thorough analysis) and follow this up with some hard cost savings, it can be a winning combination.

    Anyway, maybe we should just agree to disagree (slightly).

    Peter

  5. What is the standard or goal for IT cost as a % of sales revenue, including new development, and systems maintenance?

    • James that percentage varies somewhat depending on the business and the nature of the company. But a typical range is 1.5%-5% with an average around 3%. For retail less than 3% is norm with an average of around 1.5%. If your a forward looking industry leader like Amazon or Apple this is probably significantly higher. What does your experience say?

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