Managing Costs in IT 2009: Maximising the Value of IT Assets and Budgets

ANALYSIS
Introduction
The increasing financial and economic pressures that many organisations have found themselves facing recently have led to an intense pressure for IT cost savings. Organisations are no longer willing to make speculative investments in information systems without a clear understanding of the costs and measurement of the benefits. Today, a new air of realism demands that cost efficiencies must be derived from existing systems, that costs must be firmly controlled, and that new projects must add value. IT organisations are increasingly tasked to both justify their expenditure on ‘keeping the lights on’ activities and demonstrate the value they provide to the organisation. Such business-as-usual costs are not inconsiderable, usually some three times the value of the change-the-organisation spend, and hence IT management must ensure that they understand how IT costs are derived and how changes in IT utilisation can affect both unit and total IT costs. The corporate focus on IT costs is often driven by the enterprise-wide mandate to ‘do more with less’ and growing demands for compliance and governance-led transparency. Consequently, IT management needs to understand, and closely control, the activities that drive IT costs and factors of demand and supply. It is only through the implementation of formal cost management activities that the IT function can deliver cost-effective IT service provision and maximise visibility into related cost structures.
When considering the opportunities for IT cost savings, it is important to appreciate that there is no ‘one-size-fits-all’ solution. Organisations will need to be selective and initially opt for those initiatives that will achieve the best returns in the shortest time period. However, IT cost reduction should be gained through a systematic and holistic approach, as well as being integral
to existing IT processes and management, in order to ensure that the best value is being achieved from the organisation’s IT investments.

Business Issues
Most organisations have very little visibility into IT performance. This needs to change – due in no small part to the growing compliance and regulatory pressures, which entail IT management having the wherewithal to prove the department is being run effectively and offering value. To provide this transparency and accountability many enterprises are turning to governance as an important mechanism for controlling the organisation. Butler Group recommends the deployment of IT governance which should be used in conjunction with the corporate governance initiative, and employed not just for compliance and management reasons, but also for providing a framework for measuring and controlling IT costs. The effectiveness of IT investments is a very significant factor in the ability of IT to provide value. Organisations must establish a clear IT service model against which costs can be allocated and performance monitored, including establishing a baseline for both these attributes. Most importantly, this measurement should then be linked to business activity, which enables rational decisions on IT cost management to be taken and understood in the context of business operations and objectives. It is important that the proportion of IT investment utilised to maintain the current systems is measured, so
that it can be conveyed to senior management and fairly charged out to the rest of the organisation. The IT department must grasp the thorny issue of chargeback: whilst the expectation is that in many instances no cash actually exchanges hands, how can the user perceive value when IT services are provided for ‘free’? IT projects should not be viewed in isolation but looked at holistically as one element for improving the effectiveness of the whole organisation. What has been found to work well is incorporating IT projects as part of organisation-wide initiatives, where the IT element is an enabler rather than the main driver. A good Portfolio Management solution helps an organisation select the right blend and balance of IT investment, as it is critical that those projects are selected that make the best use of both limited financial and human resources, and which provide the maximum value. Doing the right things is just as important as
doing things right. In order to provide the required levels of transparency IT management must put in place the foundations of well-managed IT assets and capabilities, comprising infrastructure, processes, and skills, along with the use of automation, which form very important enablers for successful cost-control processes. Ad hoc manual methods based on spreadsheets are no longer an acceptable or a practicable solution; especially as data quality for accurate and comprehensive IT reporting is now crucial. In order to reach the required level of
consistency the use of an architectural approach and the deployment of an integrated toolset and common repository must be an area of focus, as is the setting up of feedback loops and dashboards within an IT governance context.

Technology Issues
Given the amount of money being spent in running the part of the IT function that keeps the organisation ticking over, it is not surprising that ways of reducing spending in this are being considered. It is obvious that management of individual elements will be more expensive than centralised and automated administration. Isolated management, lack of chargeback mechanisms, and manual intervention not only lead to increased costs, but also fail to give visibility into how the IT function works and how it is serving the organisation.
The IT department must make the most of existing investments, as well as new technologies and application delivery methods found in the marketplace, such as outsourcing, near-shoring, new architectural and delivery models, infrastructure consolidation, virtualisation, and IT management/governance tools. In addition, the use of a common infrastructure platform and software
stack as a foundation for providing value through the benefits of integration, speed of deployment, and interoperability should not be underestimated. Both energy and operational efficiency are becoming more significant as organisations seek to lower power consumption and minimise the impact upon the environment. Migrating IT hardware from older, less-powerful infrastructure onto a modern, energy-efficient, high-performance resource pool can help to reduce operational costs. The growing amount of uncontrolled storage also cannot be allowed to carry on indefinitely. The time has come to address the mounting disparity between storage management capability and the increasing number of storage devices and capacity. Other technologies such as WAN optimisation, Radio Frequency Identification (RFID), and biometrics can also assist in optimising both the IT environment and business processes. Many organisations are now at the point where the large number of servers and distributed storage within the business have started to become unmanageable, from both a cost and an administration perspective. This distributed systems strategy is causing a considerable number of issues for the business as a whole, such as rising costs, poor response times, service unavailability, and the inability to cater for disaster recovery and business continuity. The deployment of a strategy to mitigate these issues and the adoption of a more centralised approach brings significant benefits to the IT department, and to the business as a whole. The overriding characteristic of modern systems management is the need to become proactive rather than reactive. There are a number of significant trends that have combined to create the conditions that make virtualisation a technology that will be increasingly utilised in the IT environment over the next two to three years. These include the need for organisations to reduce their energy consumption, the increased importance of the ability to respond to market volatility, and the increased shift towards automation as a means of reducing operational costs. The use of virtualisation technology is also bringing other significant benefits, including the creation of a more flexible pool of IT resources that are better able to support consolidation and optimisation strategies, along with improved workload management, and much better utilisation of hardware. Once a service is in the live environment the facility to track its performance and behaviour is an important capability. The highest costs are incurred once a service is deployed in the live environment. Reducing problems in this phase can bring considerable benefits to the overall life-cycle costs. From the very beginnings of IT there have been silos of one kind or another in the technology infrastructure, and also in
the functions and people aspects of the organisation. Within IT, better harmonisation of the application development and deployment areas can help the IT function become much more agile and cost-effective.

Market Issues
The impact of recessionary times has to be viewed from several different perspectives. From the point of view of initiatives within the IT industry, the fact that the crisis directly concerned the financial sector is a worry. This sector of the market is a major focus for IT development, and most vendors see this sector as a prime target for new initiatives, which could leave innovation on hold for a while. It is impossible to predict the full ramifications of the crisis, or even how long it will last, but one can say with a degree of certainty that it will be several years before new money is freely available for major initiatives.
The diversity of licence and deployment models available in today’s market provides organisations with an opportunity to reduce costs, maximise value, and improve flexibility. It is essential that organisations review existing licence agreements and service-provision mechanisms to ensure that they are meeting the needs of the business and providing value. The increasing use of
Open Source Software (OSS) in the enterprise environment is also causing vendors to review their licensing and pricing. From a user’s perspective licensing and service delivery should be an integral part of IT strategy, and not dealt with after the event. The need for an effective IT cost control process is again brought into focus by these issues. The collapse of major financial institutions and subsequent worldwide recession could well prove to be beneficial for Managed Services providers, as long as they can answer the needs of potential and existing customers.
Essentially, customer needs today can be summarised as flexibility and value for money. It is also important, however, to keep the longer term picture in mind. With most contracts being around three years long, there is every chance that the economies of the world could be back on an upward trend before they expire, meaning that the flexibility aspect of any agreement comes into play more than it might do initially.
For IT management there is a continual balancing act between cost, quality, and risk. Cutting costs too deeply could impact service quality or open up the organisation to unacceptable risks. It should also be remembered that an important business imperative remains customer satisfaction. An area that has long been undervalued within the IT function is risk management, and this too should start to move higher up the agenda – even if this may appear to be locking the stable door after the horse has bolted.

Report Highlights
KEY FINDINGS
-The current situation can be viewed as an opportunity to become smarter in the way technology is utilised, especially by sweating existing assets.
- All cost savings must be identified and undertaken as part of a systematic and holistic approach, aswell as also taking into consideration the impact on risk and quality.
-Key IT cost metrics for both ongoing performance management and the assessment of service improvement opportunities should include both unit and total costs.
-It is not a question of how much is invested in computer systems but the effectiveness of the spending.
-IT governance allied with an architectural approach can provide useful frameworks for controlling cost, providing value, and improving IT capabilities.
-Providing an IT capability is one thing: operating, maintaining, and managing it cost-effectively through its whole lifecycle is another.
-The adoption of consolidation and virtualisation will produce a more efficient and flexible IT operation.
-Organisations must undertake a review of service provision as part of a considered sourcing strategy.
-The days are gone when CIOs could afford to ‘wave through’ renewal of their existing outsourcing arrangements.
-Energy consumption is now a very important cost consideration for the IT manager.
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Contents – March 2009
Section 1: Management Summary 7
1.1 Management Summary 9
Section 2: Maximising IT Effectiveness 13
2.1 Report Introduction and Objectives 15
2.2 Managing IT in a Recession 16
2.3 Delivering Business Value 21
Section 3: Measuring and Monitoring Costs 27
3.1 Understanding IT Costs 29
3.2 Monitoring Performance 33
3.3 Budgeting, Accounting, and Charging 38
3.4 Asset Management 42
3.5 IT Governance 46
Section 4: Strategies for Reducing IT Costs 53
4.1 Lowering Infrastructure Costs 55
4.2 Effective Portfolio and Project Management 59
4.3 Cutting Application Development Costs 64
4.4 Decreasing Support Overheads 68
4.5 Reducing Service Delivery Costs 72
4.6 Economical Licensing Strategies 77
Section 5: Technologies for Improving IT efficiency 83
5.1 Infrastructure Technologies
5.2 Virtualisation 90
5.3 Application Modernisation 94
5.4 Unified Communications and Collaboration 99
5.5 System Management Capabilities 103
5.6 SOA 107
Section 6: Methodologies and Standards 111
6.1 Enterprise Architecture 113
6.2 COBIT 118
6.3 ITIL 121
6.4 Six Sigma 126
6.5 Frameworks and Approaches 130
Section 7: Case Studies 135
7.1 Case Studies 137
Section 8: Vendor Profiles 151
AMD 153
BT Group plc 153
Cisco Systems, Inc. 154
Citrix Systems, Inc. 155
Dell Inc. 156
Entuity 157
EMC Corporation 158
HP 158
IBM 159
Intel Corporation 160
Metastorm 161
Microsoft Corporation 163
Orbys 164
Sendmail, Inc. 165
Sun Microsystems 166
TANDBERG 167
VMware 168
Section 9: Glossary 169
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