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Jan. 15, 2005 Issue of CIO Magazine

MICHAEL SCHRAGE | MAKING IT WORK IT'S ALL ABOUT THE EXECUTION

Prune IT Systems, Not Budgets If you want to cut costs but avoid painful consequences to the business, don't just slash IT spending; prune redundant systems, and make sure your CFO and CEO know why.

AT A LUNCH late last year, the CIO of a billion-dollar division of a Fortune 500 company vented his fury about his corporate CFO. "All the guy cares about is cutting costs," he seethed. "He doesn't really care how well the systems work; he doesn't really care what it means to maintain or improve them; and he doesn't care if spending a million more this year will save 10 million next year. He just wants to show what a hard-nosed, cost-cutting bastard he is."

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That's not verbatim, but it accurately captures the substance and sentiment of this CIO's bitter soliloquy. Yes, the global economy seems to be coming back. Yes, the IT spend has ticked upward. However, the post-bubble-bred tension between IT investment and IT spending is as fractious as ever. Finance may have switched from machetes to switchblades in its ongoing efforts to slash dollars and euros from global IT budgets, but its cost-containment culture appears unyielding. CIOs have good reason to be irked by this reflexive financial fundamentalism. But they frequently (and understandably) lack the credibility to make the case that cost-cutting can be a counterproductive waste of time, effort and money. Good news. Hard-won empirical evidence from several of the world's largest companies indicates that cutting IT costs is one of the most expensive things an organization can do. Cutting costs is rarely cost-effective. CFOs who measure their impact by the IT budgets they sliced and diced are not doing their jobs. Speaking at a recent CIO Summit, GM CTO Tony Scott disclosed that when the world's largest auto company (and, not incidentally, one of the world's largest enterprise consumers of IT products and services) reviewed the real impact of its IT cost-cutting initiatives, it discovered virtually no money had been saved. To the contrary, GM found that its traditional IT cost-cutting efforts provoked perverse consequences that proved painfully expensive. For example, IT had to put off a necessary upgrade of a mission-critical system for a year, even as clearly redundant systems were preserved. So what works? GM learned that the healthiest ROI came from "systems reduction" rather than "cost reduction." In other words, Scott says, you save more money by refocusing the business on cutting the number of IT systems instead of the volume of IT expenditures. The best way to prune IT budgets was to prune IT systems. According to Scott, system reduction savings proved more durable, sustainable and valuable than savings driven by the bean-counting budget slashers. Indeed, responding to a disbelieving question from the moderator (me), Scott acknowledged that CFOs who set their sights on cutting IT budgets were doing their company a disservice. Cutting IT budgets without cutting IT systems left companies with the worst of both

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worlds: underfunded and underperforming IT systems along with unhappy users and unhappier IT departments.

The War Against Redundancy Scott's message: Treat systemic causes, not budgetary symptoms. Too much time, money and effort go into preserving a welter of quasi-localized, pseudo-centralized IT systems and apps that may be justifiable on an individual basis but, as part of a dysfunctional networked whole, are a colossal waste of resources. Want to dramatically boost IT productivity? Don't cut 10 percent of the IT budget; cut 10 percent of the IT systems.

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For example, according to Scott, GM didn't really discover just how many SQL servers it had until it was struck (hard!) by the SQL Slammer worm and other digital infections. GM IT was overwhelmed with support calls. Needless to say, IT moved quickly to reduce redundant databases with all the associated licensing and gray market maintenance costs.

Want to dramatically boost IT productivity? Don't cut 10% of the IT budget; cut 10% of the IT systems.

But that was merely the lowest hanging fruit. GM and other companies have discovered that they have six or seven—maybe even 10 or 12—overlapping databases in three or four rival departments that could (and should) be consolidated into no more than two or three large shared databases. This doesn't merely reduce hard dollar IT costs; it provides a chance for operational and organizational efficiencies—layoffs, even. Any wonder why some executives prefer to pick on IT budgets?

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By shifting the analysis from dollars spent to systems reduced, the entire productivity and cost-savings conversation is transformed. CIOs are required to evaluate the total cost of ownership of the system or app, while CFOs are forced to realize the false economies of systems starving. Killing and transitioning away from an existing system for 30, 60 or 90 days will cause expenditure spikes, but even the crudest spreadsheet calculations affirm that enterprises could easily save big money over 12 to 24 months. Treating systems and apps—rather than budgets—as the medium to be managed puts the managerial focus where it truly belongs: on the business value of IT rather than its accounting cost. That's smart. Such an approach also begs an extraordinarily important implementation question. After the best candidates for reduction are identified and prioritized, IT's challenge becomes the disimplementation of systems and apps. Surgical systems extraction (as painless as possible, please) becomes the CIO's operational mandate. Or, for CIOs with more macabre predilections: How do you drive a stake through the heart of an app in a way that simultaneously kills it and its budget? Do you go for subtlety and stealth? Or are you better off with a high-profile execution?

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Verizon, a telecom provider all too rich in legacy systems but with an even greater reliance on IT than GM, opts for strategic systems strangulation. The company doesn't ax its larger legacies; it asphyxiates them. First, corporate IT "surrounds" them with systems that ultimately are capable of replacing the legacy target; secondly (and this is the truly devious element), Verizon's IT actually supplements the features and functionality of the legacy with some of the better bells and whistles of the new system now surrounding it. In other words, Verizon uses the "supplement" phase to wean internal users off the legacy while simultaneously training them how to use the new system. In the final phase, the new system supplants the legacy to the point of effectively replacing it. Many users barely notice that a final swap-out has occurred. Although undeniably time-intensive, Verizon—like GM—has found that the costs of temporary redundancy and transition are a better long-term deal than budget-cutting. You address root causes by pulling things out by their roots, not cutting off branches and trimming leaves. There is no small irony in the larger truth that being a cost-conscious, value-creating CIO means paying just as much attention to which systems you take out as those you put in. The economics of disimplementation are as important to enterprise success as the cost-effectiveness of systems implementation. CIOs should insist that their CEOs and CFOs recognize that. eMarkets Initiative. He can be reached at [email protected]. PHOTO CREDIT: PHOTO OF MICHAEL SCHRAGE BY JOHN

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SOARES; ILLUSTRATION BY VINCENT DESRUISSEAUX/COLAGENE.COM

Readers Viewpoint Cut Demand, Not Supply Posted: MAR 30, 2005 12:09:32 PM The best approach is to cut demand, not supply -- not budget, not headcount, not even systems (a factor of production), but rather clients’ expectations for IT products and services. Sure, cutting systems will cut deliverables (products and services). But systems are an input, not an output. Cutting systems (hence deliverables) without a conscious decision on the part of clients to forego those deliverables is suicide. You’ll save money, but appear to be failing at expected deliverables. The key to strategic cost cutting is forcing the business to decide what it will stop buying from IT. Once the deliverables are agreed, IT leadership can go about its job of trimming expenses associated with those deliverables. Of course, demand management isn’t trivial. For more on how to do it, see COST CUTTING: cutting a function’s budget (and perhaps headcount) by selecting what’s worth buying (versus traditional budget cuts and caps on headcount). Dean Meyer Author and consultant NDMA Inc. Prune IT Systems, Not Budgets Posted: FEB 10, 2005 11:27:18 AM Business enterprises now and then cut costs by slashing budgets, sometimes in the desperate belief they can save their way to prosperity, sometimes in response to a cash-flow crisis, and most likely because subordinates are not trusted to run lean unless pressured. Whatever the reason, when the axe swings, information technology is not immune. Nor should it be. Fat accumulates in the first place because staying fit is hard work, and not everyone works hard or smart: some managers need prodding. And there may be motivation issues: managers are less likely to run a tight ship if compensated the same as their lax brethren, or if told to make the same sacrifice. So, yes, there is usually fat to be trimmed. Periodic cost cutting is a way of life in most businesses: if only it were so in government. Given there are costs to be cut, how to go about it? The mindless way is to reduce budgets across the board, but cutting costs indiscriminately is liable to pare muscle as well as fat. General Motor’s CTO, Tony Scott, has been quoted as saying that traditional budget cutting does more harm than good. He sees essential services being impaired. Instead, Scott would cut the number and variety of systems. We can only agree that if systems can be dropped or combined, doing so is a great way to meet budget reduction goals. But why wait for a budget crunch to act on good ideas? If databases can be combined advantageously, why are they still waiting to be combined? Having set a cost reduction goal, one would hope top management is content to leave the manner of its attainment to others. Users are best positioned to decide what should be cut. Shouldn’t they have the discretion to reduce information technology services, or make equivalent cost reductions elsewhere? It is the users who bear the brunt of budget cuts, and therefore it is the users’ voice that should be heard in deciding which services to cut and which to preserve. Let the users make the trade offs. Let the users argue the case for this service or that, if argument is needed at all. And let the technologists respect the users’ decisions. David Hill President David H. Hill, Inc No War: Integration is Key to Internal Understanding & Value Posted: FEB 02, 2005 05:40:53 AM Although the article and comments reflected thus far attempt to solve the problem of mitigating IT risk and dollars, the fundamental question remains: Does the current infrastructure meet the company’s objectives to maintain a competitive advantage? Cutting budgets, changing systems, changing processes, adding an asset/inventory list of current infrastructures is only part of the bigger organizational picture. One of the key elements that still remains a gap is how IT is used as an effective tool that will apply to a company’s objectives. In keeping with the company’s overall strategy, IT can add value; however,not just by cutting costs, or making an application transition transparent. This discussion certainly addresses the IT problem, but this topic also permeates the continued dichotomy between IT and the ’rest of the business’. Hence, there is one step before this discussion should even take place: does the IT solution (or any business process solution for that matter) meet the desired objectives of the organization? And, what impacts will it have on the rest of the company? (because any investment decision to change, to increase, or decrease will ultimately impact more than just the IT group, or the one division in which the IT system is being used for)which could

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exponentially increase business expenditure if not identified before procurement. Albeit, we can assume that all IT systems procured are based on company objectives, the topic under discussion leads me to believe that we are continuing the ultimate divide and does not solve the core problem: integrating IT with a Commercial focus, or Commercial with an IT focus. Until there is a bigger percentage of CIOs who have both IT/Business savvy, and CEOs/CFOs have Business/IT savvy in industry, will this discussion continue to prevail. To avoid, or at the very least, mitigate internal confrontations regarding costs within the IT realm, the organization needs to create innovative job descriptions to incorporate both of these elements for better understanding and a real competitive advantage. Jennifer Peltenburg MD ETUTSA Cutting IT Costs Posted: JAN 31, 2005 02:48:58 PM The fact that Peter has to write an article about abundant waste in IS divisions speaks volumes about just how sorry a state our profession is in. CIO’s who have to be reminded to tend their gardens instead of bemoaning their self inflicted wounds deserve the budget hit; their organizations desereve better. The paucity of IT leadership has been a woeful disease for the past several years and the innoculation is still in the lab. Scorecard Tools for IT System Pruning Decisions? Posted: JAN 29, 2005 11:13:38 AM This is a landmark article on how smart IT organizations should approach the rationalization and evolution of their technology ecosystems. Unfortunately the tools to help with this have barely started to emerge. Various IT Asset Management tools can track what’s hanging off the network, but they don’t offer a way to capture the relative value these components deliver to the organization. One way we know for organizations to valuate and benchmark their technology portfolio is to use the free online technology scorecard service from Evalubase Research (www.evalubase.com). You simply input short ratings & reviews of any/all technologies you use and receive instant scorecards comparing cost, ROI, satisfaction, etc. versus similar organizations (same industry, size, etc). They link all evals from throughout your organization, then offer a set of scorecards you can use for vendor management and pruning exercises like those Michael describes. If ROI and other hard IT decision data are what IT organizations are lacking, this is a way to generate it without the usual vendor bias that taints nearly all other research sources. John Ladley, President, KI Solutions [email protected] John Ladley President Knowledge Interspace More comments on this article.

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