0. Penny Wise, Pound Foolish
GovTech 2013
George Ambler
George Ambler
GovTech 2013, Cape Town
Notes accompany this presentation. Please select Notes Page view. These materials can be reproduced only with written approval from Gartner. Such approvals must be requested via Gartner is a registered trademark of Gartner, Inc. or its affiliates.
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.

1. Can You Be Smart About Cost Cutting?
From the
Executive Management Team:
Given current circumstances known to all, the board requires that all managers cut at least 10% off their budgets in the next 30 days, preferably for nonessential items.
Countless managers in enterprises across the world have received messages similar to the one above. Enterprises are embarking on blind cost-cutting crusades, often with less than satisfying savings — and often with negative impacts on the business.
Although the overall objective of cost management is to contain or reduce costs, it is not always possible to cut costs in IT initiatives without severe business impact. Given their identifiable contribution to the business, expenditures that deliver high business value will need to be kept, and a few will even earn increased funding levels.
The key to the effectiveness of an IT cost management program is the analysis of the business value delivered by each initiative. Only a comparison of the business value of IT initiatives — with each other and with initiatives in other areas — will indicate what cost optimization alternatives to pursue.
That process of going through such an analysis requires a structured methodology and broad organizational involvement. The focus of analysis is a business case that considers the cost optimization alternatives and their expected consequences in terms of reduced business value or increased business risk.

2. Intelligent Cost Optimization Is Required
Jenga
Make sure you don't topple the business by removing the wrong costs!

3. Key Issues
What is Cost Optimization and how should IT leaders use this to make cost savings decisions?
How should the organization evaluate cost optimization options?
What are the best practices for implementing a cost optimization discipline?
The best IT leaders in large and small organizations will be challenged by the pressures put upon their IT budgets due to economic uncertainty. Some organizations will cut costs across the board, some will optimize their IT environments, and others will have limited ability to cut anything at all without changing the way the work is done. Once IT organizations cycle through the typical cost savings measures, the hard work of collaboration with business partners must ensue to meet cost, expense and productivity expectations to meet new business demands. For some IT organizations, this will mean switching gears from delivering world class IT services to being a cost leader in their industry, where service levels are changed to set expectations in times of austerity.
What is the Gartner Framework for Cost Optimization and how should IT leaders use this to make cost savings decisions?
What are the best practices for cost savings within IT, IT procurement and joint business and IT cost savings?
How can IT organizations prioritize the areas of largest cost savings benefit to the enterprise and how does this relate to risk and time to benefit?

4. Cutting Costs Versus Cost Optimization
Cost Cutting
Reactive
Short-term results
Across the board
Decisions often made in haste
Cost Optimization
Strategic
Decisions tied to business value
Cuts made selectively
Longer-term initiatives and longer-term results
Key Issue: How should you think about cost optimization, and where should organizations look for cost improvement opportunities?
In hard economic times, when revenue is harder to come by, companies often turn to cost-cutting initiatives to increase net income. Because cost cutting affects a company's bottom line directly, certain types of cost cutting can be the quickest way for companies to remain competitive. The typical revenue-to-cost ratio is about 3 to 1, which means, for example, that increasing revenue by $300 has about the same effect as cutting costs by $100. Cost-cutting initiatives are often reactive and across the board, and however necessary the cost cuts are, they create little long-term sustainable value.
It can easily be argued that IT infrastructure and operations (I&O) groups should always be involved in cost optimization initiatives. However, during times of economic growth, many I&O groups focus more on other initiatives that help grow and transform the business. In the wake of the recent financial conditions and budget cuts, many I&O groups have become more focused on cost optimization projects. Cost optimization projects are strategic investments in people, process and technology that can deliver both short- and long-term cost savings. Cost optimization projects can take weeks or years to complete and do include an additional outlay of resources, but the cost-saving benefits are substantial and long term.
Action Item: Develop a list of cost optimization projects across the IT organization and business and prioritize them based on ROI, ease and time to complete, just like any other IT project.

5. Six Pillars of Running IT as a Business From a Financial Perspective
IT Budget Mult Views
Investment Planning
Chargeback/Showback
Benchmark IT Costs
Cost Optimization
Performance Metrics
Opex versus Capex
Region/BU
Fixed vs. Variable
Projects
Services
Resource Type
Run vs Change
IT vs Business
TCO and Business Case
Funding
Tracking Project Cost
Benefits Realization
Post Project Audits
Investment Prioritization
Hard vs Soft Benefits
Choices
Allocation Methods
Fairness
Visibility
Demand Mgmt.
Cost Trans-parency
Appl TCO
IT Service Pricing
Account-ability
Defend or Justify
Highlight Areas to Improve
Per Unit Costs
Trust
Visibility
Internal vs External
Cost vs Price
Business Value
Run as a Discipline
Frameworks
Procurement
Cost Savings Within IT
Joint Business & IT Savings
Process & Innovation
Detailed Analytics
Strategy
Business Value of IT
Balanced Scorecard
Reporting
Operations
Financial Impact
User Satisfaction
Communi-cations
Visualiza-tion
Running IT as a Business requires IT cost transparency. The six pillars above enable effective IT cost transparency. The key is to understand each pillar, where your organization is within that pillar, what is required in your organization to succeed in providing effective IT cost transparency within each pillar, and what, if any, next steps are required to improve each pillar. The goal is to understand IT costs at the right level of detail within IT to effectively optimize costs and then determine the optimum level of IT cost transparency to the business so that they are informed and can make intelligent choices.
Running IT as a Business Requires IT Cost Transparency

6. Gartner Framework for IT Cost Reduction
Business Restructuring and Innovation
Process improvement, reorganization, new methods
Joint Business and IT Cost Savings
Implement cost-saving technologies with the business
Cost Savings Within IT
Identify opportunities to reduce IT costs
IT Procurement
Get the best pricing and terms for your IT purchases
Difficulty
Value
To reach big cost optimization goals, CIOs and other IT leaders must combine strategy with action that includes high doses of IT service-level optimization (i.e., mission-critical and non- mission-critical differentiation), IT service industrialization, and a reconciliation of which technology capabilities the IT organization should continue to manage.
In addition to other strategic shifts, CIOs and other IT leaders must shift their focus from just managing the supply of IT to improved direct and indirect demand management for IT services. This will reduce the enterprise pipeline of underperforming and unaligned initiatives, related capital expenditures and higher multiyear maintenance burdens.
CIOs and other IT leaders must recognize that there is a finite list of strategic levers for big cost optimization goals; by just focusing on three or four of these levers, the IT organization will be able to deliver the focus and purposeful force necessary to reach once-in-a-lifetime cost optimization goals.
IT Procurement. Partnerships with IT vendors means that each party benefits in the good times and make joint sacrifices in times of economic uncertainty. Each year, IT organizations spend billions of dollars for hardware, software, IT services and telecommunications services. How the IT organization approaches procurement issues will affect how much it can reduce spending to meet business goals. In the IT procurement element of the framework, we provide: guidance on getting the best pricing for your IT purchases; the best practices for contract negotiations and renegotiations; terms and conditions; selection of service providers, alternative delivery and acquisition models; and other issues related to procurement of IT inputs.
Cost Savings in IT. A priority for many IT organizations will be to identify opportunities to reduce baseline IT costs from the enterprise, and not just move them to another budget center. Where IT organizations focus is where they will be successful with costs savings. In the cost savings in the IT element of the framework, we provide specific cost savings opportunities by technology and service area, ranges or specific percentages of savings that are typical, things you have to do to achieve these savings, alternatives to the current status quo, with pros and cons related to possible cost savings actions.
Joint Business and IT Cost Savings. There is often a limit the amount of cost savings that the IT organization can achieve by itself without working with internal business partners to make decisions on the trade-offs and benefits to a specific course of action. Often, 100% of discretionary spending is based on direct new business demand. In this element of the framework, we provide specific guidance on implementing cost-saving technologies in conjunction with the business, that may include investment to reduce cost in the long term or alternatives to current technologies. Also explored are energy-saving strategies with technology, modernization, total cost of ownership, and alternative delivery and acquisition models.
Enable Innovation and Business Restructuring. As the immediate emergency of economic uncertainty passes, cost optimization will be refocused on efforts to implement long-term process improvement and enable business structuring and innovation. This element of the cost optimization framework focuses on IT and business process improvement to reposition the business to competitive advantage using IT and the resumption of economic expansion. Businesses that do not focus on innovation in their business models are destined to the whims of a mature marketplace and this research area help IT organizations better organize to help lead their enterprises to competitive advantage.
Different types of cost optimization involve different parts of the organization and varying IT department decision rights

7. 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 7

8. Biggest Opportunities for IT Budget Reduction by IT Domain
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
This is what we have found in surveying large numbers of Gartner clients.
The point here is that when we compare the IT cost savings of "Average" Gartner clients with those who are "Best Performers," there are startling differences in the level of savings that they have achieved.
There is a pressing need to ensure IT spending, which on average equals 4% of revenue, drives business value and financial performance not simply "keeping the lights on."
Failure to do so limits IT's ability to support the enterprise's strategic shift from cost control to growth
CIOs indicate IT is now more directly accountable for business results than it was 10 years ago when IT was seen as primarily responsible for providing technology results.

9. Barriers to Savings — There Are Many
Politics and Silos
Poor IT Cost Transparency
Lack of Accountability
Money
Low Tolerance for Risk
Lack of IT Credibility
Legal Constraints
Resource Availability
Technical Complexity

10. Treat IT Cost Optimization As An On-going IT Discipline
Traits of best-in-class companies:
Create a culture of continuous improvement
Operate from a basis of fact
Look at the Demand side of IT as well as Supply side
Alignment of the IT and business strategy
Present a long-term vision, not short term
Focus on successful execution, including a program in place for benefits realization to hold people accountable through measured performance
Use working capital from IT savings to self-fund improvements towards business
Evaluate
Strategize
Execute
Optimize
Manage
Strategize
Our services constantly evolve with clients' changing needs, but our focus on results never changes

11. Create Cost Optimization Team
Key Issue: What tactical cost optimization activities can organizations pursue with short payback periods?
Assign some of your best staff
Include a financially qualified professional
Strengthen relationship management roles
Define cost-cutting goals and project timelines
Establish rapid go/no
go approval process
Meet weekly
Many of the low-risk and low-effort cost optimization initiatives have already been completed by most IT organizations. New cost optimization initiatives can sometimes seem limitless, but each has varying levels of understanding, risk, rewards, required resources and involvement from all IT departments.
Identifying, categorizing, choosing, planning and completing a combination of tactical and strategic cost optimization initiatives requires a strong, cross-functional team. This team should not only be able to ferret out cost optimization ideas and understand the risks and rewards of each, but also to drive the initiative through IT senior management and staff, develop goals and timelines and see projects through their completion. Without a strong team in place to drive cost optimization initiatives, IT senior management is much more likely to resort to reactive and sudden cost-cutting programs when revenue and budgets fall.

12. IT Cost Optimization Program Formulation
Capture all IT service delivery costs — current year and five year forecast
Categorize by asset class — HW, SW, personnel, services, occupancy costs, and so on
Allocate into services — establish unit cost baseline for market and business tests 1
Establish Baseline 2
Identify Opportunities
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) 3
Develop Strategy
Develop strategy and road map for most viable opportunities
Analyze organizational change needs to manage people impact
Create communications plan 4
Track Benefits
Create an IT cost optimization (ITCO) program office
Monitor, measure, and report
Identify opportunities to accelerate while managing out risk

13. Business Consumption View
1. Establish Baseline
IT Investment Metrics
2013 Spend
IT Spending as % Revenue
3.5%
IT Spending as % Opex
4.4%
IT Spending per Employee
$13,197
IT Spending Distribution
IT Capital
28.0%
IT Operational
72.0%
IT Spending, by Asset Class
Hardware
17.1%
Software
20.5%
Personnel/Occupancy
41.2%
Outsourcing/Third-party Services
21.2%
IT Spending, by Strategic Category
Run the Business
64.9%
Grow the Business
20.4%
Transform the Business
14.8%
IT Spend, by Technology Domain
Data Center
22.2%
End ­User Computing
10.5%
IT Service Desk
7.4%
Data Network
9.0%
Voice Network
5.8%
Application Development
18.6%
Application Support
15.9%
IT Management
6.4%
IT Finance and Administration
4.2%
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.
Business Consumption View
Chargeback/ Showback
Productivity Measures Complement 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

14. 2. Identify Opportunities & Assess Viability
For each opportunity generated:
What's the upside?
Is it worth the effort? ?
Costs, Time, and Risks
Benefits
Potential Benefit:
How big is the saving if the action is implemented and how does it affect cash flow?
Benefits
Small
Medium
Large
Business Impact:
What impact will this have on the business?
Negative
None
Positive
Time Requirement:
Can you capture the savings in this fiscal year?
>18 months
6 to 18 months
<6 months
Degree of Organizational Risk:
Will your leaders ensure the changes are made? Is your organization capable of adapting to the changes?
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
Degree of IT Technical Risk:
Is there a risk that the change will undermine the ability of your systems to deliver?
High; impacts OS, DB, middleware, and applications
Moderate; impacts few components of the architecture
Low; little more than "moving boxes"
In doing IT cost optimization, it must be recognized that not all ideas are worth the effort. To this end, Gartner recommends a decision framework that takes into account all of the categories listed in the graphic above.
Potential benefit must be measured to get a sense as to whether the effort might be worth it. Customer impact must be assessed (though not necessarily quantified) to determine if an effort might have large financial benefits, but create ill-will with customers and thus undermine the value of moving forward. This is especially important in the public sector where customer impact is often a primary concern of elected officials.
But, in assessing the options, the IT governance decision makers must also take into account how long it will take to accomplish the reduction, whether the technical and organizational risks are so high that it may not be worth the effort, and whether an upfront cash investment is required to achieve downstream savings. The issues of time, risk and investment requirement may be so severe as to diminish the likelihood of ever achieving any of the desired benefits.
Advice: When considering IT cost optimization, do not focus just on benefits. Create a decision framework that assesses the impact on customers and the actual achievability of the intended reduction.
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?
High
Moderate
Low/None

15. 3. Develop Strategy & Ready Change Program
Application Portfolio Optimization
Is the risk worth the reward?
$8.0M
Outsource Application Development and Support
Improve Application Delivery
$10.5M
$5.7M
Reform IT Governance and Demand Mgmt.
Implementation Risk/Time
$6.0M
Improve ILM and Data
$1.5M
Optimize Infrastructure Service Delivery
$8.0M
Optimize End User Support
$1.5M
$2.0M
Re-compete Data and Voice Networks
Opportunities likely taken as natural part of business
Benefits/Cost Savings
Note: All figures are in millions of dollars

16. 4. Track Benefits & Watch for Lower Yields
Large Program Benefits Predicted
Mature S/W Asset Mgmt. Practices
Rationalize Applications
Increase Virtual-ization
Lack of Org. Change Mgmt.
Deploy Info. Life Cycle Mgmt.
Unanticipated Business Changes
Mature Key ITIL Processes
Re-negotiate S/W
Poor Estimation (Benefit Size, Investment)
Complex Technical Solution
Often Smaller Than Predicted Program Benefits Realized

17. After You Leave Here … Immediately…
Assess which of the tactical cost opportunities are still worth trying.
Determine how best to get executive engagement in your IT governance process to ensure the right decisions are being made.
Evaluate your IT optimization decisions across all of the dimensions listed.
Argue for pursuing cost optimization that can be done and has appropriate organizational support that will not do long-term damage to the enterprise.
In the Next 90 days….
Determine if your IT demand governance process is working and, if not, create a plan to fix it
Create an ongoing IT optimization program to ensure long-term efficiency.

18. Penny Wise, Pound Foolish
GovTech 2013
George Ambler
George Ambler
GovTech 2013, Cape Town
Notes accompany this presentation. Please select Notes Page view. These materials can be reproduced only with written approval from Gartner. Such approvals must be requested via Gartner is a registered trademark of Gartner, Inc. or its affiliates.
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.

19. Related Gartner Research
"Decision Framework for Prioritizing Cost Optimization Ideas" G , Barbara Gomolski, John Kost, 13 May 2009
"Cost Cutting in IT: Findings and Recommendations, October 2008 to March 2009" G , Ken McGee, 2 April 2009
"Method to the Madness: Applying a Methodological Approach to Cost Optimization" G , David W. McCoy, Barbara Gomolski, 13 May 2009
"How the IT Organization Handles the Three Stages of a Downturn" G , Jorge Lopez, 17 February 2009
“IT Cost Optimization Round 2: Strategic Shifts and Doing Less With Less” Kurt Potter (G )
“CFO Advisory: Enterprise Cost Optimization; Overview” Barbara Gomolski, Kurt Potter (G )
“The Four Levels of Cost Optimization” Barbara Gomolski, Kurt Potter, Mark Raskino (G )

20. IT Procurement
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
Financial Benefit
Time
Organizational Risk
Technical Risk
Investment Required
Renegotiate Network Rates
Moderate
Low
Renegotiate Contract Labor Rates
Consolidate Desktop Hardware Contracts
Consolidate Desktop Software Contracts
Renegotiate "Shelfware" Maintenance
Renegotiate HW/SW Maintenance and SLAs
Consolidate Commodity (Non-IT) Purchases
Consolidate Purchasing Staff (Shared Service)
Consolidate IT Contract Services Vehicles
Hire Lower Rates Than Contract Staff
High
Enable Shared Risk/Reward Contracts
Defer Desktop Purchases
This is a specific list of opportunities to reduce the cost of IT by centralizing buying and procurement across the enterprise and renegotiating rates with vendors.
Source: Gartner Research.

21. Cost Savings Within IT Opportunity Financial Benefit Time
Organizational Risk
Technical Risk
Investment Required
Stratification of Desktop User Types
Low
Automated Software Distribution
Moderate
Desktop Printer Rationalization
Standardize Desktop Products
High
Cell Phone Audits
Centralize Portal Management
Telecommunications Line Audits
Consolidation of IT Infrastructure
Server Virtualization
Storage Migration to SAN and NAS
Reduce Business Continuity Capability
Info Management, Capture DB Capacity
Application Audits
Application Maintenance Outsourcing
Turn off Legacy System Maintenance
Outsource Repetitive Software Testing
Assess internal IT Staffing Needs
This is a specific list of opportunities for IT to help reduce the cost of IT across the enterprise.

22. Joint Business and IT Cost Savings
Opportunity
Financial Benefit
Customer Impact
Organizational Risk
Technical Risk
Investment Required
Emergency Call Centers (Government)
High
Negligible
Moderate
Nonemergency Call Centers (Customer Service)
Positive
Teleworking
Low
Videoconferencing
Create/Expand E-learning Capability
Create Data Warehouse to Mine Opportunities
Enterprise Self-Service Integration
Workflow and Handoff Analysis and Automation
Asset Utilization Analysis
HR Self-Service Expansion
Deploy E-procurement Catalogs
Examine Storage Policy to Reduce Storage Size
Consolidate Radio Systems
Consolidate Geospatial Systems and Data
Enforce Modularization of Large Scale Procurements
This shows a specific list of opportunities for IT to assist business units with reducing operating costs.

23. Shared Services Opportunities
IT capability
Financial Benefit
Customer Impact
Organizational Risk
Technical Risk
Investment Required
Call Centers (Emergency and Nonemergency)
High
Moderate
Electronic Document Management System
Back-Office Applications
Low
Computing Centers (Mainframes, Servers, Storage)
Networks
Non-administrative Applications
Middle-Office Application Support
IT Contract Vehicles
Desktop Applications (Acquisition, M/A/C)
IT Help Desk
Self-Service Web Sites
Reassess Internal IT Staffing Needs
This shows key opportunities for consolidation or creation of enterprise or cross-enterprise shared services.