Enterprise Architecture intersects with IT cost allocation methodology to identify application reduction targets
After the Consumer Electronics division split from the Enterprise Product lines (see Case Study #1), continued falling revenues forced the business to reduce operating costs. In early 2009, IT operating costs were over $500 million annually. The CIO set aggressive goals to reduce those costs, and set the bar high-a 50% reduction in operating costs. His staff finally identified the three primary IT cost drivers – people, sites, and applications – and rationalized 95% of all IT costs to those drivers. The methodology to determine how the IT costs were allocated to those three drivers may not have been absolutely perfect, but it was close enough that it enabled good decision making. So that made the task of talking to the various business teams about how their cost cutting decisions impacted the three IT cost drivers, and also what they could expect to see in the way of operating cost reductions to their budget.
The “people” related costs were itemized as:
- personal computers and laptops
- email services
- cell phones and services
- personal storage folders
- licenses required to support those devices and services
Since almost all departments had personnel reduction targets, they could predict the impact those cuts would have on their IT costs-it was certainly the most linear cost relationship. There was an intensive effort to round up stray laptops and make sure licenses were in line with actual usage.
Regarding company sites, there was a lot of flux in the situation due to previous facility plans that were still being revised due to changing product strategies and the staffing associated with each site. Country regulations for international sites, changes in product plans by country, and changing technology platforms all affected these plans. This was more of a reactive situation by IT to make sure there were plans and budgets for these changing site situations, but at least there was a direct understanding of the costs that were driven by having a presence in any site. These costs were typically:
- Wide Area Network
- Local Area Network
- Special HVAC or chillers
Finally, the third cost driver was the number of applications used by the Consumer Electronics company. These costs were categorized as:
- Internal Staff
- Application licenses
- External services (typically app support or SaaS charges)
One of the outstanding by-products of the previous company split was an accurate inventory of applications and which business functions used those apps. This enabled the internal business account representatives and the enterprise architecture staff to look at options for consolidating applications into fewer instances, or to find an application that replaced several current instances (a platform), or find a lower cost solution, including cloud or Business Process Outsourcing.
The initial inventory of applications was over 1100 production instances; relentless effort drove it under 600 instances in 2 years. This was enabled by categorizing and rationalizing all applications by business function, reviewing those lists with business function leaders, and then targeting applications for elimination due to:
- low usage
- high cost
- the availability of new apps with more functionality at a lower cost
The emergence of many new Software as a Service apps made this a viable option, especially in the rapidly emerging social media and marketing spaces.
For broadly used applications, the company emphasized a platform strategy where one application provided many business functions; these were deployed as global standards wherever practical. A notable example was swapping out the existing internal MS Outlook/Exchange email environment and migrating it to Google Mail corporate suite for about a 50% cost reduction, which came with over 10 times more personal storage space.
The other major platform plays were consolidating Oracle ERP instances from 5 regional to 1 global instance. This was a move to standardize many order management, supply chain, and financial practices as well. The company also moved from Siebel to Salesforce for CRM and related functions, plus the affiliated Force.com platform that yielded some smaller wins to eliminate more expensive apps.
Finally, there is no substitute for hard work. After reexamining all of the application support contracts, there were heroic efforts by the application support organization to lower their costs. Led by the VP of the application development and his staff, there was a total (and ongoing) review of all hardware, storage, and external support staff for each application. Every IT department manager had targets based on the previous cost analysis that was used for their performance metrics. The application team worked with Tata Consulting Services to review existing “service level” support staffing, review the names of who was actually supporting it, and then shift to named personnel as a further cost reduction measure.
There were other activities that reduced and maintained lower cost structures as well. Storage utilization was scrutinized to make sure that it was the appropriate level for the type and age of data to minimize costs, so the company developed and adopted a multi-tier storage. All service contracts were examined for utilization and renegotiated as they expired or as an opportunity arose.
In summary, this is an outstanding case of organizational motivation, will power, and execution that achieved remarkable operating cost reductions by focusing on the total cost of IT ownership to drive action.