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Jim McGittigan

Kurt Potter

2013 IT Cost Optimization: Strategy, Best Practices and Risks

@GARTNER_INC

Gartner at a Glance

902 Analysts

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Organizations

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Interactions

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in Nine Industries

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Engagements

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500 Consultants

This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other authorized recipients. This presentation may contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied, distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates. © 2013 Gartner, Inc. and/or its affiliates. All rights reserved.

Jim McGittigan

Kurt Potter

2013 IT Cost Optimization — Strategy, Best Practices and Risks

Gartner's IT Budget Tool Webinar Attendee Invitation

Compare your IT budget against the Gartner IT Key Metrics Data industry averages.

High performing IT organizations regularly leverage external benchmarking and consider best practices of like organizations.

3

- Get a personalized IT key metrics comparison report.

- Compare your IT spending and staffing metrics with Gartner’s Industry averages.

- Establish an external baseline comparison to improve transparency and communications.

Barriers to Savings—There are Many

Politics & Silos

Poor IT Cost Transparency

Lack of Accountability

Money Low

Tolerance for Risk

Lack of IT Credibility

Legal Constraints

Resource Availability

Technical Complexity

4

Key issues

5

• What are the proven practices for optimizing IT spending?

• What higher maturity management practices necessary to cut cost the “right” way?

• How can IT leaders mitigate the risks of traditional IT cost optimization practices?

Key issues

6

• What are the proven practices for optimizing IT spending?

• What higher maturity management practices necessary to cut cost the “right” way?

• How can IT leaders mitigate the risks of traditional IT cost optimization practices?

Everyone Does These Things to Cut IT Budgets — "Turn the Ship Slowly"

• Renegotiate contracts or make coterminous

• Reduce contract labor or cut staff via organic attrition

• Centralize, consolidate or create shared IT services

• Buy inexpensive IT to replace older IT

• Standardize IT or reduce complexity

• Cut maintenance and take service risks

• Reduce service levels

• Cut travel budgets

• Make across-the-board cuts

7 Gartner Research: During the Euro Crisis, Fight IT Cost Optimization Fatigue

With These Saving Strategies http://www.gartner.com/resId=1901914

Gartner Framework for Cost Optimization

IT Procurement Get the best pricing and terms for your IT purchases

Cost Savings Within IT

Identify opportunities to reduce IT costs

Joint Business and IT Cost Savings

Implement cost-saving technologies with the business

Business Restructuring and Innovation

Process improvement, reorganization, new methods

Different types of cost optimization involve different parts of the

organization and varying IT department decision rights

Difficulty Value

8 Gartner Research: The Four Levels of Cost Optimization http://www.gartner.com/resId=860512

Government Cost Optimization Initiatives —Meager Offerings Considering Big Goals

N = 70, 2Q 2009, Federal, State, Local Respondents.

20% Are Federal Govt. N = 13 to 30 for Savings;

Anecdotal

Already

Done

Plan

to Do SAVE

Process Improvement,

Business Restructuring &

Innovation

IT Procurement

Cost Savings Within IT

Joint Business & IT Savings

• Sharing citizen call centers across agencies 6% 17% 5%

• Sharing IT help desk across agencies 9 19 3

• Standardizing administrative applications (e.g. ERP) 19 34 7

• Hiring internally at lower rates than contract staff 20% 17% 12%

• Deferring desktop replacements 27 30 22

• Renegotiation of contracts 31 40 9

• Consolidation of hardware and software contracts 24 51 9

• Open-source desktop software 6% 19% 11%

• Consolidation of data centers within a single agency 19 19 14

• Automation of software distribution 31 30 5

• IT process improvements (e.g. ITIL, CMMI) 24 43 4

• Virtualization of storage and servers 43 36 11

• Asset utilization analysis 7% 31% 8%

• Teleworking 23 17 4

• Employee self-service 20 30 3

• Videoconferencing 23 33 7

9 Gartner Research: Government IT Cost Optimization: What Is Working? http://www.gartner.com/resId=1138412

10

How Low Can You Go? Sample Cut Averages of Those Cutting

Average IT Spending Decline, 2009 (Actual) to 2012 (Projected) (Percentages), Average IT Spending Change (Increasing, Decreasing and Flat)

Industry 2009* 2010 2011 2012

4 Year

Total

4 Year

Com-

pounding

Average IT

Spending

Change

2009-2012

All Industries -11.0% -10.3% -8.6% -10.3% -40.2% -34.6% 2.7%

Banking and Financial Services -11.9% -11.6% -10.9% -12.1% -46.6% -39.0% 3.5%

Education -7.7% -15.7% -6.5% -9.9% -39.8% -34.5% 2.1%

Government - State/Local -10.8% -8.5% -8.7% -8.7% -36.7% -32.0% 0.9%

Government - National/International -10.8% -9.4% -8.3% -10.0% -38.5% -33.3% 1.6%

Healthcare Providers -9.7% -9.6% -10.0% -13.6% -43.0% -36.6% 4.3%

Insurance -8.8% -9.9% -6.4% -7.4% -32.6% -28.8% 2.8%

Media and Entertainment -10.7% -7.6% -8.5% -9.9% -36.7% -32.0% 2.1%

Professional Services -9.9% -10.0% -10.6% -8.0% -38.5% -33.3% 3.2%

Retail and Wholesale -2.6% -7.3% -8.7% -13.2% -31.8% -28.5% 3.5%

Transportation -8.4% -13.3% -8.3% -9.7% -39.6% -34.2% 2.5%

Gartner Research: IT Metrics: IT Cost Optimization: Vertical Industry Perspectives http://www.gartner.com/resId=2053215

Biggest Opportunities for IT Budget Reduction by IT Domain

41%

Differences Between Average and Best Performers

Overall IT Spend 38% difference in cost

Application Development 53% difference in cost per function point

Application Support: 55% difference in cost per function point

Mainframe 35% difference in cost per installed MIPS

Unix server 62% difference in cost per server

Wintel server 32% difference in cost per server

Storage 44% difference in cost per TB

Desktop 22% difference in cost per device

Help Desk 33% difference in cost per handled contact

Wide-Area Data Network 43% difference in cost per device

Local-Area Network 51% difference in cost per active port

Wide-Area Voice Network 27% difference in cost per minute

Voice Premise Technologies 34% difference in cost per active extension

Gartner Research: During the Euro Crisis, Fight IT Cost Optimization Fatigue With These Saving Strategies http://www.gartner.com/resId=1901914

11

Polling Question #1

Question: What are the best hidden, yet biggest, opportunities or targets for optimization?

A. Enforcement of benefits promised in project business cases

B. Replacement or reduction in large standardized platforms with industrialized or tier 2 systems

C. Business process reengineering or optimization

D. Sharing IT resources with competitor or non-competitor enterprises

E. Better demand management for projects and services

12

Gartner Framework for Cost Optimization

IT Procurement Get the best pricing and terms for your IT purchases

Cost Savings Within IT

Identify opportunities to reduce IT costs

Joint Business and IT Cost Savings

Implement cost-saving technologies with the business

Business Restructuring and Innovation

Process improvement, reorganization, new methods

Different types of cost optimization involve different parts of the

organization and varying IT department decision rights

Difficulty Value

13 Gartner Research: The Four Levels of Cost Optimization http://www.gartner.com/resId=860512

Evaluating Level 1 (Procurement) Maturity

• Does the organization have consistent processes for IT procurement and contract renegotiation?

• How confident is the enterprise that it is getting the best pricing and terms, and how does it validate those assumptions?

Where is the organization on

Gartner's IT Score Model for Sourcing and Procurement?

14

Evaluating Level 2 (Cost Savings Within IT) Maturity

• Has the enterprise compared its IT costs against industry

benchmarks? Gartner has the capabilities to assist here.

• In which areas is the firm currently working to save IT costs?

• What are the biggest drivers of unanticipated IT costs in the enterprise?

Where is the organization on

Gartner's IT Score Model for

Infrastructure and Operations?

15

Evaluating Level 3 (Joint Business and IT Cost Savings) Maturity

• How does the enterprise manage its application portfolio and overall demand for IT projects and services?

• How do IT leaders work with the business to identify opportunities for IT and the business to lower costs?

• Where are the enterprise's best opportunities to work with business stakeholders to reduce costs?

Where is the organization on

Gartner's IT Score Model for

Applications?

16

Key issues

17

• What are the proven practices for optimizing IT spending?

• What higher maturity management practices necessary to cut cost the “right” way?

• How can IT leaders mitigate the risks of traditional IT cost optimization practices?

Move From Traditional IT to a Service Organization

• Supply driven

• Technology centric

• Functionally and technically silo'd

• Insulated and monopolistic

• Cost-obsessed

• Demand driven

• Internal customer centric

• Process based

• Competitive and engaged

• Service-obsessed

Optimizes Assets Service Outcomes

Attributes

Role Steward Service Partner

Cost center External service provider Behaves As

Traditional IT Service IT

18

Running IT as a Business: Six Pillars of Effective Financial Transparency

Pillar 4:

Benchmarking

Pillar 5:

Cost Optimization

Pillar 6:

Performance Metrics

Pillar 1:

IT Budgeting

Pillar 2:

Investment Planning

Pillar 3:

Chargeback/Showback

Running IT as a Business Requires

Effective IT Financial Transparency 19

Polling Question #2

Question: Of the remaining Six Pillars for IT financial transparency, what will help the most with cost optimization?

A. IT Budgeting

B. Investment Planning

C. Chargeback/Showback

D. Benchmarking

E. Performance Metrics

20

IT Cost Optimization Should Be a Discipline

• IT cost optimization is not a project; it's a discipline

• New opportunities and threats emerge as:

- Business imperatives evolve

- New technologies mature

- IT assets reach the end of their useful lives

- New service and delivery options proliferate

Our services constantly evolve

with clients' changing needs, but our focus on results never changes

Evaluate

Strategize

Execute

Optimize

Manage Strategize

21

ITCO Program Formulation

Establish Baseline

Identify Opportunities

Develop Strategy

Track Benefits

• Capture all IT service delivery costs - Current year & 5 year forecast

• Categorize by asset class – HW, SW, Personnel, Services, Occup

• Allocate into services - establish unit cost baseline for market and

business tests

• Analyze spend gaps against Market peers

• Identify high value opportunities for cost reduction, service

improvement and business enablement

• Assess benefit against risk to change (as well as time, investment)

1

2

3

4

• Develop strategy & road map for most viable opportunities

• Analyze organizational change needs to manage people impact

• Create communications plan

• Stand up ITCO program office

• Monitor, measure & report

• Identify opportunities to accelerate while managing out risk

22

1. Establish Baseline

By BU

Business

Consumption

View

By Services

Productivity measures compliment IT Budget Analysis

• Infrastructure

• OS Instances per FTE

• TB Storage per FTE

• Handled Contacts per Client Service Rep

• Applications

• Function points per Developer

• Defects per Thousand Function Points

Chargeback /

Showback

Complete the Gartner IT Budget Tool to help

establish an initial baseline (view at left). Such

views (options below) help form insights from

which to better manage IT Spend and set context

for IT cost optimization efforts.

IT Investment Metrics 2013 Figures

IT Spending as % Revenue 3.5%

IT Spending as % Opex 4.4%

IT Spending per Employee $ 13,200

IT Spending Distribution

IT Capital 28%

IT Operational 72%

IT Spending, by Asset Class

Hardware 17%

Software 21%

Personnel/Occupancy 41%

Outsourcing/Third Party Services 21%

IT Spending, by Strategic Category

Run The Business 65%

Grow the Business 20%

Transform the Business 15%

IT Spend, by Technology Domain

Data Center 22%

End­ User Computing 11%

IT Service Desk 7%

Data Network 9%

Voice Network 6%

Application Development 19%

Application Support 16%

IT Management 6%

IT Finance & Administration 4%

23

2. Identify Opportunities & Assess Viability

For each opportunity generated:

• What's the upside?

• Is it worth the effort?

Benefits

Small Medium Large

>18 months 6-18 months <6 months

High; impacts OS,

DB, middleware

and applications

Moderate; impacts

few components of

the architecture

Low; Little more

than "moving

boxes"

High; Staff

redundancies,

and re-engineering of

processes and

structures

Moderate; Limited

changes in roles,

structures and

processes

Low; No staff

reduction, nor

changes in

organization and

processes

High Moderate Low/None

Negative None Positive

Potential Benefit

- How big is the saving if the action is implemented and how does it affect cash flow?

Time Requirement

- Can you capture the savings in this fiscal year?

Degree of IT Technical Risk

- Is there a risk that the change will undermine the ability of your systems to deliver?

Degree of Organizational Risk

- Will your leaders ensure the changes are made? Is your organization capable of adapting to the changes?

Investment Requirement

- Does the change require a large upfront investment before savings can be captured? Is the organization willing to make an investment at all?

Business Impact

- What impact will this have on the Business?

Benefits

Costs,

Time and

Risks

?

24

3. Develop Strategy & Ready Change Program

Benefits / Cost Savings

Imp

lem

en

tati

on

R

isk/ T

ime

Reform IT Governance & Demand Mgt.

$5.7m

Outsource Application Development &

Support

$8.0m

Optimize Infrastructure

Service Delivery

$2.0m Re-compete Data and Voice Networks

$1.5m

Improve ILM and Data

Note: All figures are in millions of dollars

$8.0m

Application Portfolio

Optimization

$10.5m

Improve Application

Delivery

Is the risk worth the reward?

Opportunities likely taken as natural part

of business

$1.5m

Optimize End User Support

$6.0m

25

4. Track Benefits & Plan for Lower Yield

Increase Virtual-ization

Smaller than Predicted Program Benefits Realized

Mature S/W Asset

Mgmt Practices

Large Program Benefits Predicted

Unanticipated Business Changes

Complex Technical Solution

Lack of Org Change Mgmt

Poor Estimation (Benefit Size, Investment)

Mature Key ITIL

Processes

Re-negotiate

S/W

Rationalize Applications

Deploy Info

Lifecycle Mgmt

26

Key issues

27

• What are the proven practices for optimizing IT spending?

• What higher maturity management practices necessary to cut cost the “right” way?

• How can IT leaders mitigate the risks of traditional IT cost optimization practices?

IT Organizations Must Yield to the Winds of Change

28 Graphic Source: EDSA, Ms. Katy Hallgren, Senor Associate

The New Game-Face For IT Leaders: Transparency

• Accountability is ultimately more important than cost cutting

• Culture change is incidental to change in transparency

• If you can‟t cut, you can‟t innovate

• The frustration of transparency creates innovation

• Become an offensive IT organization

29

A Nexus of Forces: How Will Enterprises Pay for This?

30 Gartner Research: Cloud and the Nexus of Forces: A Foundation for Global Class Deployment http://www.gartner.com/resId=2063215

IT Organizations Struggle to Simultaneously Cut and Transform

Reduce Run by 5% to 10% Per Year

Maintain Flat IT Spend % Operating

Budget

Achieve ~50% Run % IT

Spend

3 Year IT Plan

31 Gartner Research: IT Metrics: Align IT Investment Levels With Strategy Using Run, Grow, Transform and Beyond http://www.gartner.com/resId=1961518

IT Management Costs Will Focus on Convergence of IT Services Portfolios, External IT Services and Chargeback Rates

Overall Goals for Most IT Organizations • Sustain Shared IT Services

• Prepare for Cloud Computing

• Prepare for the Next Recession

• Transparency

• Business Value

• Cost Optimization

• Competitiveness

• Legitimacy

• Economic Value

• Demand Mgmt.

• Investment ROI

IT Spending

Project-Based Consulting

IT Outsourcing

BPO Cloud Services

Contract Labor

IT Price List IT Service

Catalog IT Service Portfolio

Market Pricing Tiered Flat

Rates IT Domain Cost

Allocation High-Level Allocation

32

Gartner Research: IT Metrics: New Economic Rules of IT Spending and Staffing Metrics http://www.gartner.com/resId=1795816

Perspectives: Why Shared IT Services Succeeds or Fails

Why It‟s Successful

• Roadmap for Change

• Communication Plan

• Highest Level Support

• IT Financial Management

• Creation of IT Service Catalogs

• External Benchmarking

• Integration of IT Management Process Silos

• Acceptance of External Sourcing Options

Why It Fails

• Funding Model Does Not Change

• Chargeback is Too Basic

• No Policies on Use of Shared Service Center and Exception Allowances

• Technical Staff Repurposed to IT Business Management Roles

• Strategic Objectives Devoid of Shared Services

• No Relationship Managers 33

Polling Question #3

Question: What is the biggest risk from bad or misguided cost optimization efforts?

A. IT spending will increase due to centralization

B. Service levels for mission critical systems will be hurt

C. Decentralized IT spending will increase

D. Cutting will continue in the following years

E. IT management costs will increase

34

Risk: Centralization of IT Could Increase IT Spending in the Long Term (Case Studies)

Many Smaller Business Units Cannot Afford the Cost of Central IT Services and Standards.

23,520

11,428

Unix Cost per OS

Instance

Wintel Cost per Server

Shared IT Services Business Unit

• $500M Govt. Education

• Mandated Shared Services

• Decision to Standardize

on Unix Services

• BU IT Spending 400%

of Industry Benchmark

2,500

1,500 SAP Cost per

Named User

Tier 2 ERP Systems

Cost per User

Shared IT Services Business Unit

• $3B Professional Services

• Private Co. Goal of Global

Standards; Abandoned When Public

• Investment Payback Period

Changed From 7 to 3 Years

• IT Spending Easily Cut by 25%

After Abandoning Standards

35 Gartner Research: IT Metrics: New Economic Rules of IT Spending and Staffing Metrics http://www.gartner.com/resId=1795816

Risk: Cost Benefits From Cloud Computing Could Be Offset by Higher Consumption

Cost per Unit Market Forecast

2001 2011

2001-2011

10-Year

CAGR

Outsourcing

Segment

2010-2015

5-Year

CAGR

Wintel Server 14,800 11,428 -2.6%

Data Center 3.1% Unix Server 67,600 44,688 -4.1%

Installed MIPS 17,500 5,575 -10.8%

Client/Peripheral 1,580 1,039 -4.1% Desktop 3.0%

HD Contact 18.46 19.39 0.5% Help Desk 4.1%

LAN Port 231 111 -7.1% Network 4.7%

• Symptom: Declining Unit Costs and Increasing Vendor Revenue

• Enterprises Consume, Buy and Manage Resources Inefficiently When They Become Dramatically Cheaper

36 Gartner Research: IT Metrics: New Economic Rules of IT Spending and Staffing Metrics http://www.gartner.com/resId=1795816

The Cost of IT Cost Transparency & Running IT Like a Business: Office of the CIO Staffing (%)

• 13% of IT staff are OCIO staff.

• Median number of CIOs, CTOs and COOs is 1.0.

• OCIO excludes IT staffing in PMO, apps or infrastructure areas.

• Many roles may shift out of OCIO to PMO, corporate mgmt., lines of business or elsewhere in IT.

• By 2015, enterprises with long-term IT cost transparency initiatives will increase the size of the CIO team by 25% and cut IT costs by 25%.

• IT consolidation and shared services fail long term, due to lack of transparency.

5

6

6

7

7

7

7

7

8

8

9

10

13

Strategic planning

Governance

Change mgmt.

Human resources

Procurement/vendor mgmt.

Emerging tech. group

Financial mgmt.

Relationship mgmt.

Business process mgmt.

Security and risk mgmt.

Marketing/comm.

Enterprise architecture

Project/portfolio mgmt.

Source: Gartner, 2010; n=123 worldwide enterprises; multiple vertical industries, multiple responses allowed; total =100%

Assum

ptions

Worldwide

Gartner Research: IT Metrics: Office of the CIO Staffing Report, 2010 http://www.gartner.com/resId=1444614

37

Gartner's IT Budget Tool Webinar Attendee Invitation

1. Complete the survey on your IT spending and staffing budgets.

2. Receive Your IT Metrics Comparison Report vs. Industry IT metrics.

3. Review and Discuss your IT metrics vs. the industry in the context of your key initiatives.

I. Review and Discuss Total IT Spending figures

I. Above, below or on-par with average to be average

II. Level Set

I. Review and discuss accounting-based and asset-based distributions

III. Business Aligned Key Initiative Discussion

I. Review and discuss strategic-based distributions in the context of biggest drivers and change agents impacting IT spending

IV. IT Cost Optimization Discussion

I. Review IT technology based distributions and target those technology environments with the largest gap vs. average to uncover opportunities

V. IT Staffing Discussion

I. Review staffing metrics within the context of IT sourcing strategy to address IT staff right sizing and IT skills assessments to support future state business objectives.

Don’t miss out on communicating IT performance and business value as part of your budgeting process!

Wrap-Up and Recommendations

Improve relevant IT financial transparency elements before you need them.

Use IT financial transparency as a cultural change agent for IT staff and business stakeholders.

Use benchmarking for big changes in the enterprise; use measurement to sustain the big changes.

If you didn‟t or don‟t like the way you have to cut costs now, then use IT service portfolios and catalogs to do it the right way next time.

Improving or implementing one IT financial transparency element is tactical; changing three is “strategic.”

Run IT like a business means improvement in IT financial management and performance management processes and the attitude of a vendor.

39

Related Gartner Research

IT Cost Optimization Should Be an Ongoing Discipline

Jim McGittigan, Sanil Solanki (G00247911)

Run IT as a Business Using Six Pillars of Effective IT Financial

Transparency

Jim McGittigan (G00238696)

IT Metrics: IT Cost Optimization: Vertical Industry Perspectives

Kurt Potter Barbara Gomolski (G00232994)

During the Euro Crisis, Fight IT Cost Optimization Fatigue With These

Saving Strategies

Kurt Potter (G00229672)

IT Cost Optimization Round 2: Strategic Shifts and Doing Less With Less

Kurt Potter (G00205937)

IT Metrics: New Economic Rules of IT Spending and Staffing Metrics

Kurt Potter (G00217561)

40

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