Cost to Serve - Methodology

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Methodology Reducing IT Cost to Serve
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Table of Contents

• 1. Introduction
• 1.1 Context for Cutting Costs
• 1.2 The Cost to Serve Approach
• 2. Getting Ready
• 2.1 Sources of Cost Cutting
• 2.2 Types of Cuts
• 2.3 Right-sizing the Solution
• 2.4 Cost Cutting Resources
• 3. The Cost to Serve Methodology
• 3.1 Step I Discover Budget and Cost Reduction
  Targets
• 3.2 Step II Take Stop-Gap Measures and Develop a
  Strategy
• 3.3 Step III Review Services and Compile the
  Plan
• 3.4 Step IV Negotiate the Plan
• 3.5 Step V Execute Changes
• 3.6 Step VI Review
• 4. Closing Summary

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Introduction
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A history of lean and mean wont help avoid new
cuts
1.1 Introduction Context for Cutting Costs

• Most IT departments have experienced pressure to
  reduce costs on an ongoing basis for many years
  now. Therefore, the idea of keeping a tight rein
  on costs is nothing new.
• However, sooner or later, worsening global
  economic conditions will impact every
  organization, be it directly or indirectly,
  strategically or operationally.
• Do not be complacent even though many IT
  leaders say they are already running lean and
  mean, IT will not be immune from the next round
  of business cost reductions.

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Take cost-reduction action before being asked
1.1 Introduction Context for Cutting Costs

• Dont cut costs just because of the economy cut
  costs because it makes sense.
• Cuts that are made during times of financial
  pressure should be treated as permanent changes,
  i.e. the new way of doing business. They must be
  done as effectively as possible to ensure future
  manageability.
• In challenging economic times, inaction on the
  expense management front is not a feasible
  response. Doing nothing will create severe
  competitive vulnerabilities, if not
  vulnerabilities that jeopardize the basic
  survival of the organization.
• IT leaders repeatedly highlight the need to take
  initiative in anticipation of negative
  conditions. Taking initiative means exploring new
  ways to cut costs. One way, which will be
  explored here, is the Cost-to-Serve method.

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Make expense management proactive and ongoing
1.1 Introduction Context for Cutting Costs

• The key to expense management success is to take
  proactive steps to set a healthy foundation for
  overall cost reduction.
• Those organizations that have taken a proactive
  approach to holistic expense management are more
  likely to benefit from the measures taken, and
  even identify new opportunities for growth.
• Those who arent proactive run the risk of making
  damaging mistakes unless thoughtful action on how
  and where to reduce costs is taken.
• Expense management should be an ongoing exercise,
  regardless of financial conditions. Preparedness
  paves the way for proactive response versus
  panicked reaction.

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Services are the direct link between IT and the
business
1.2 Introduction The Cost-to-Serve Approach

• While there are many ways to approach a
  discussion about IT cost reduction, Info-Tech
  proposes the Cost to Serve method.
• An IT service is defined as a set of related
  components (i.e. hardware, software, and
  documentation) that work together in support of
  business processes.
• Although the components of a service may cross
  multiple technologies, the service is perceived
  by the client as a single, coherent entity.
• Many IT organizations are moving towards
  service-oriented models. Examining costs from
  this same service perspective is consistent with
  emerging IT organizational and operational
  structures.

IT Service Areas IT Service Areas
IT Administration Workstation and Peripherals
Disaster Recovery Planning Servers, Mainframe, and Storage
End-user Support Network and Telephony
Application Development Application Maintenance
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Reducing cost-to-serve offers a business-oriented
approach
1.2 Introduction The Cost-to-Serve Approach

• The ultimate goal of the Cost-to-Serve approach
  is to directly map and forecast the impact that
  changes in spending on IT services will have on
  the ability to achieve business strategy.
• Cost-to-Serve examines the relative cost to
  deliver specific IT services, such as servers and
  storage services, end-user support services, and
  application maintenance services.
• When activities have been categorized into
  services, its much easier to decide what
  spending changes to make. Changes could include
  reductions, decisions to outsource, or
  eliminations in services.
• Those spending changes that will negatively
  affect business strategy are avoided, and those
  that will positively impact business strategy are
  prioritized and pursued.
• The Cost-to-Serve approach differs from
  traditional line-by-line assessments of capital
  and expense budgets. Traditional methods do not
  show the causal relationship between expenditure
  change and the impact on business strategy.

IT departments should take a proactive approach
to cost management by evaluating the cost to
serve IT and focusing on areas that will have
minimal or no negative impact to the business.
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Getting Ready
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IT writes checks to only two groups staff and
vendors
2.1 Getting Ready Sources of Cost Cutting

• In general terms, organizations spend money on
  two things staff, and vendor products and
  services. As a result, direct cost reduction can
  be found in these two areas only.
• All other perceived cuts, such as gains made
  through process optimization, will ultimately tie
  back to one or both of these two expenditure
  areas.

Staff Staff expenditures can be cut by reducing headcount, reducing salary, wage and bonus payouts, reducing training expenses, and increasing staff productivity.
Vendor products and services Vendor product and service expenditures can be cut by reducing license and service fees, negotiating deals, acquiring more cost-effective technologies, and practicing preventative maintenance to extend product lifecycles and defer equipment replacement.
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Reduce, replace, reprioritize tie types of cuts
to timeframes
2.2 Getting Ready Types of Cuts
Cuts can be made by doing one or all of the
following reduce, replace, or reprioritize.
Type Impact Description
Reduce Immediate (3 months) This is the reduction or elimination of IT services, and can be performed quickly when faced with an urgent need to cut. This is done by reducing headcount, reducing consumption of a service, or directly eliminating spend. Cutting the training budget, layoffs, and trimming back service levels are ways to do this.
Replace Mid-term (6-9 months) This is done by replacing a technology (or even a person) with a less expensive alternative to achieve greater cost effectiveness. More extensive assessment is required to make replacements, so timeframe to execution is typically longer. An example of a replace strategy would include choosing commercial-off-the-shelf applications over customized ones.
Reprioritize Long term (12 months or longer) This is achieved by reprioritizing expenditure and choosing to invest in technologies (or people) that more clearly support the business strategy. Reprioritization usually requires expenditure and longer-term implementation timeframes before ROI and cost reductions are ultimately realized. An example would be implementing a Storage Area Network (SAN) to centralize data storage, consolidate storage hardware, and reduce storage management complexity.
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Cut opportunities vary depending on organization
size
2.3 Getting Ready Right-sizing the Solution
Large enterprises have more flexibility in where
to reduce costs, but complexity is a barrier.
Size Enablers Barriers
Small Enterprise Low complexity levels of small shops mean that fewer technologies and supporting structures are ingrained. Must have elements are more obvious. The effects of removing a piece of the IT puzzle are more visible, and therefore less risky. IT staff counts are already at a minimum. Achieving cost savings through staff reduction may not be an option without jeopardizing basic operations. Small shops may have less pull with vendors when negotiating licensing agreements, but are more likely to benefit from open-source and freeware solutions.
Mid-Sized Enterprise More likely than small shop to find cost management solutions by leveraging relationships with vendors. Consolidation and centralization may allow for closure of redundant service desks. Mid-sized enterprises show elements of both small and large organizations, and are often in transition. They may be complex like large shops, but be resource constrained like smaller operations. This can reduce option flexibility.
Large Enterprise Large staff headcounts allow flexibility for staffing cuts and redistribution of responsibilities. Large vendor agreements bring renegotiation clout. Out-of-cycle renegotiation may be an option. Many end users means slight changes to service levels or number of end users supported will yield significant cost savings. Large organizations are often complex and slow to change. Simple logistics and compounded risk factors could protract timeframes for cost reduction.
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IT cut decisions rely on knowing business plans
2.4 Getting Ready Cost Cutting Resources

• There are specific business documents that
  provide invaluable information when making
  cost-cutting decisions. Seek them out to make
  informed decisions.

See Info-Tech OptimizeITs collection of IT
Strategy tools to help document strategic
business and IT information.
Information How to Use It If You Dont Have a Formal Document
IT Budget Contains financial information that is the baseline for IT cost cutting. If a budget does not exist, then collect available spending information for the past year in a spreadsheet. Include totals for staff, hardware, applications, and outsourced services.
Business Strategic Plan Describes the enterprises core business and direction, which may change in light of a challenging economy. Ensures that work is prioritized and cuts are made within the context of the businesss overall strategy. If the strategic plan for the coming year is not documented, then meet with the senior management team to rough out a one-page strategy statement document to use as a reference. The document should include a list of strategic goals and planned initiatives to reach them.
IT Strategic Plan The enterprises IT strategy is derived from the business strategic plan. It will help determine the difference between necessary and nice to have. If an IT strategic plan does not exist or does not map to the business strategic plan, then list the services and projects that IT supports and show their linkage to the business plan.
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Understanding IT team activities is key to
creating baseline information
2.4 Getting Ready Cost Cutting Resources
See Info-Tech OptimizeITs Project Prioritization
tools to help track and assess your project
portfolio.
Information How to Use It If You Dont Have a Formal Document
IT Project Portfolio Projects consume resources. All projects, either planned or underway, must be accounted for and documented so that each can be reevaluated against the business strategy. Use a simple spreadsheet to document basic information for each project, including its relationship to the business strategy, project stakeholders, and project financial cost to completion.
IT Service Catalog The service catalog is a menu of IT services provided to the rest of the organization. It can be used to identify activity-based costs for IT services. If one is not in use, then draft a brief list of IT services provided to the business in a spreadsheet. Include each service within the organization and its relative criticality (high, medium, low) to business goals and operations.
Internal Service Level Agreements (SLAs) SLAs describe expected baseline IT service levels. SLAs may need to be renegotiated in order to reduce costs. If internal SLAs do not exist, then at least consider how business may react to reductions in the level of services currently provided. For some organizations, documenting primary service levels that exist informally may be worthwhile to set a starting point for negotiation.
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Retaining the right skills brings IT a strategic
advantage
2.4 Getting Ready Cost Cutting Resources
See Info-Tech OptimizeITs Talent Management and
Policy and Procedures Management capabilities for
more helpful toolsets.
Information How to Use It If You Dont Have a Formal Document
IT Organizational Chart An organizational chart displays people resources and reporting relationships. This understanding allows IT leaders to revaluate staff-to-manager ratios and the potential for merging managerial responsibilities. If there is no organizational chart, its straightforward to create one from basic office productivity tools. Small IT organizations do not have enough staff to warrant this effort.
IT Staff and Skills Inventories These inventories document key employee information. Since IT salaries represent the largest portion of IT spend, they often play a major role in deep IT spending cuts. A single or multiple spreadsheets can be used here to document basic staffing information. Include compensation and potential bonus amounts, skill sets and skill levels, and primary tasks, responsibilities, and projects.
IT Policies and Standard Operating Procedures (SOPs) Operational efficiencies can be gained by documenting and reviewing policies and procedures. Any review of IT services will mean a review of associated IT operations and the policies and procedures that govern them. If no policies or procedures are formally documented, IT likely will not have the time to document them if cost reduction is urgent. Earmark this work as a future project, or include relevant policy and procedure documentation as a milestone in all in-progress or planned projects going forward.
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Getting Ready Summary

• Cost reduction activities inevitably target just
  two areas Lowering expenditure on staff, and
  lowering expenditure on vendor products and
  services.
• Cost reduction offers three types of cut
  strategy reduce, replace, and reprioritize. The
  size and timeframe of cut targets will drive the
  strategy taken.
• Enablers and barriers to cost reduction vary by
  organization size, which often dictates
  flexibility, available redundancy, and impact of
  cuts.
• There are key business documents that contain
  highly important information for making
  cost-cutting decisions. Track down these
  documents. If they dont exist, then gather the
  right basic business information to illuminate
  thinking and reduce risk.

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The Cost-to-Serve Methodology
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The cost-to-serve methodology is iterative it
begins with target setting and concludes with
process review
3.0 The Cost to Serve Methodology
Cost-to-Serve Methodology
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Executing cost cutting requires careful
consideration and review
3.0 The Cost to Serve Methodology
Steps in the Cost-to-Serve Methodology Steps in the Cost-to-Serve Methodology Steps in the Cost-to-Serve Methodology
Step I Discover Budget and Cost Reduction Targets Review and understand mandated cuts, timelines and the resulting effect on the enterprise and IT budget.
Step II Take Stop-Gap Measures and Develop a Strategy Take immediate measures where necessary and develop a go-forward strategy to address long-term targets that align with business and technology strategies.
Step III Review Services and Compile the Plan Conduct reviews of IT service areas to establish whether they offer cost-cutting opportunities for given targets and timelines.
Step IV Negotiate the Plan Obtain staff and management buy-in and rally around the cost management plan.
Step V Execute Changes Execute the related staffing, vendor management and process changes.
Step VI Review the Plan Measure success of cost cutting and cost management solutions.
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Understanding the urgency and depth of cuts
clarifies ITs response
3.1 Step I Discover Budget and Cost Reduction
Targets

• Gathering information about the enterprises
  situation helps define the internal economic
  climate and establishes expectations the business
  has of its IT department.

Information Why It Matters
Know the depth and timeframe of cuts Does senior management want a cut of 10 within three months and a total cut of 30 within 12 months? Fast and deep cuts indicate that senior management perceives the situation as urgent and that the enterprise itself is at immediate risk.
Understand ITs role How much say will IT leaders have in where and how to cut costs? Limited input in cost management planning will prove frustrating and may lead to mistakes.
Acquire situational information How much are the different departments in the organization being asked to cut? If cuts are broad and wide, there is also an opportunity for IT to reduce service requirements, and ultimately headcount.
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Dont assume explicit targets and deadlines will
be communicated by the business
3.1 Step I Discover Budget and Cost Reduction
Targets

• It leaders report frustration when cost targets
  and timelines are not clearly communicated.
  However, clear targets may never materialize.
• The Cost-to-Serve methodology begins by
  establishing time and scale criteria. A targeted
  approach need not rely on an executive order IT
  departments can develop internal cost management
  targets as well.

Executive Mandate Expectations from IT Examples
Targeted and immediate mandated cuts Actions with guaranteed results and by a guaranteed deadline. Freezing of capital expenditures Layoffs
Unclear statement about the need to reduce costs Fiscal responsibility and improvement to the bottom line. Reassess purchase policy Revisit application licensing structure.
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Understanding when to hit targets is as important
as the targets size
3.1 Step I Discover Budget and Cost Reduction
Targets

• To achieve a 5 budget reduction within this
  quarter will require a different set of tactics
  than it would a year from now.
• Some tactics represent a one time reduction which
  is not repeatable. For example, how long can you
  defer raises before losing talent to competitors?
• Some tactics require time. For example, a vendor
  contract may require the enterprise continue with
  a service to the end of the contract term.

We think IT might have to make another five or
ten percent cut. That's still up in the air right
now because it's hard to forecast revenue
projections that far ahead of time. But due to
anticipated revenue shortfalls, there will likely
be an additional 2 million hit to the
organization. IT Director, Public Sector
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Caveat ITs place at the table affects
decisions made
3.1 Step I Discover Budget and Cost Reduction
Targets

• The way cuts affect IT services is more often
  than not dictated by the nature of the
  relationships between CIOs and the other
  executives at the table.
• While some IT departments work unpaid weekends to
  deliver next to impossible service levels, others
  use strong professional relationships to
  negotiate trade offs.
• IT leaders who are satisfied with the IT/business
  relationship with regards to managing service
  levels cited these factors and recommendations as
  a factor.

Factor Affecting Business and IT Relations Ability to Improve Recommendation for Proactive Improvement
Strong communication of IT efforts. High Demonstrate hard numbers in formal business communications.
Transparency of IT costs Medium Publish the IT budget. Negotiate Service Level Agreements.
Associating cost to service activities Medium Outsource IT activities to tie service to cost. Implement service catalogs.
Backing of the IT department from champions at the executive level. Low Time cost-cutting actions in accordance to enterprise-wide initiatives.
Pre-existing equal and leveraged relationships with the business. Low Increase face time with the corporate leaders.
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Step I Summary
3.1 Step I Discover Budget and Cost Reduction
Targets

• Understand the urgency and depth of cuts to
  clarify ITs position and response.
• Dont assume explicit targets and deadlines will
  be communicated by the business. A targeted
  approach need not rely on an executive order IT
  departments can develop internal cost management
  targets as well.
• Understand that target size and timeframe will
  determine the best types of cuts to make.
• Remember that ITs place at the table affects
  decisions made and take proactive steps to
  improve this position.

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3.2 Step II Take Stop-Gap Measures and Develop a
Strategy
Take stop-gap measures to meet immediate cash
flow needs

• Developing a strategy for cost cutting requires
  time however, immediate actions will be required
  where mandated cuts are
• Immediate (within the quarter).
• Significant (10 or higher).
• Some or all of the following steps can have
  immediate results on cash flow if deadlines and
  significant cuts must be made. These should be
  viewed as temporary measures.

Capital expenses Freeze and reevaluate all capital expenses, including purchases currently in progress.
Vendor contracts Revisit unsigned contracts that are still in negotiations.
Hiring Consider freezing hiring across the board.
IT salaries Consider freezing bonuses and raises for existing employees.
Project portfolio Temporarily hold off on the entire project portfolio, including projects currently in progress.
Other discretionary Place temporary limits on travel and training expenses.
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Build a strategy around targets discovered in
Step I
3.2 Step II Take Stop-Gap Measures and Develop a
Strategy
With stop-gap measures in place, a longer-term
strategy will be developed around the
opportunities and constraints uncovered around
cut targets, ITs role, and business strategy.
Know the Depth and Timeframe of Cuts
Understand ITs Role
Acquire situational information
These Considerations Build the Strategy
Cost-to-Serve Strategy
What are the major strategic thrusts of the
organization for the next year or two years or
five years? Lets identify the top five of those
and lets make sure that the IT spending is
aligned with that, and then make the cuts in the
areas where things are not aligned. IT
Consultant, Professional Services
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3.2 Step II Take Stop-Gap Measures and Develop a
Strategy
A cost reduction strategy is a high-level
declaration that seeks to achieve targets while
minimizing business impact

• The main benefit of the Cost-to-Serve approach is
  not random its primary goal is to control
  business risk.
• Committing to a strategy helps drive cost
  management and cost cutting decisions. A strategy
  ensures that the steps taken will achieve the
  required cost cuts without cutting off arterial
  business functions.
• Knowing where the enterprise stands and ITs role
  in cost management efforts helps drive the
  direction of cuts.
• There is no one-size-fits-all solution each
  enterprise is unique with its own sacred cow
  projects, technology strengths and weaknesses,
  and cost reduction targets.
• ITs cost cutting strategy will drive the types
  of tactics that are used. It may not specify
  which tactics will be used, but it should
  certainly point to a general direction.

Sample Strategic Statement
The IT department must meet its 5 first quarter reduction target without cutting back the quality of client facing Web applications. To do so we will employ actions that offer both immediate and repeatable cost reductions in IT operations.
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An enterprise under financial duress must select
an approach with immediate pay-off
3.2 Step II Take Stop-Gap Measures and Develop a
Strategy

• .

• The timeframe and size of a cut determines
  strategy, driving the real life tactics
  available.
• If timeframes are short, there is little time to
  gather information and make in-depth plans.
  Organizations must focus cost reduction efforts
  on low-hanging fruit that achieve quick wins with
  minimal effort and bureaucracy.

Strategic Approaches Description Sample Tactics Drawbacks
Short-term Includes tactics aimed at immediate impact. These must have cash flow implications. Cut travel costs, training costs, and perks. (Reduce) Eliminate contractor positions. Delay upcoming pay increases. (Reduce) Reallocate funds to essential services. (Reprioritize) Freeze projects. (Reprioritize) Short-term pay off. Potentially non-repeatable.
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Ongoing cost management improvement opportunities
appear in the mid-term
3.2 Step II Take Stop-Gap Measures and Develop a
Strategy

• Timeframes of six to nine months afford more
  opportunity to making lasting change built
• on research and planning.

Strategic Approaches Description Sample Tactics Drawbacks
Mid-term Primes the enterprise for continued savings through adoption of changes that involve day to day activities. Replacing expiring contracts and hardware with more cost efficient solutions. Revisit vendor contracts for renegotiation. (Reduce) Reassess software licensing for cost savings. (Replace) Increase hardware lifecycles. (Replace) Open up previously approved change requests for reassessment under new budgetary constraints. (Reprioritize) Requires planning.
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3.2 Step II Take Stop-Gap Measures and Develop a
Strategy
Where cuts are not immediate, focus on investment
for long-term upside

• If cut targets are 12 months or longer away,
  invest-to-save projects that require
• expenditure today, with the promise of future
  savings or returns, are now an option.

Strategic Approaches Description Sample Tactics Drawbacks
Long-term Cost management strategy involving invest-to-save tactics aimed at positioning the department for long-term cost efficiency. Evaluate services for outsourcing. (Replace) Standardize applications to reduce maintenance and development costs. (Replace) Develop service catalogs and tie costs to IT services. (Reprioritize) Longer implementation time. May involve costs before savings realized. Savings may be interpreted as cost avoidance versus an actual reduction.
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Step II Summary
3.2 Step II Take Stop-Gap Measures and Develop a
Strategy

• Take stop-gap measures to meet immediate cash
  flow needs.
• Develop a strategy that will meet target cuts and
  align with business initiatives.

1 Discover Targets
2 Develop Strategy
Cost-to-Serve Methodology
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Assemble the plan by reviewing each service for
opportunities
3.3 Step III Review Services Compile Plan

• Given a general direction in the way of a
  strategy, each service area can be assessed for
  tactical solutions that fit with the departments
  strategy.
• This step is repeated for each IT service to
  generate a set of potential recommendations.

4. Workstation Services Cost Management Tactics 4. Workstation Services Cost Management Tactics
Workstation refresh rates Workstation refresh rates can realistically be extended from the traditional 3-5 years to as long as six years. Cascading old high-end workstations to less critical tasks is another cost-saving tactic.
Desktop virtualization Explore the advantages of virtualized desktop technologies to make a long-term and very real impact on the bottom line.
Desktop images Reduce and standardize the number of desktop images supported so that end users have the applications and configurations they need, and only what they need.
Print management Reducing access to personal printers, centralizing on few multi-function machines, and setting limits on color printing via a print policy is a quick, and often overlooked, way to reduce costs.
IT Services
1. Internal IT Administration
2. Networks and Telephony
3. End-User Support Services
4.Workstation Services
Workstation Services
5. Disaster Recovery Services
6. Servers, Mainframes and Storage Services
7. Application Development
8. Application Maintenance
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3.3 Step III Review Services Compile Plan
Internal IT administration opens opportunities to
simplify and streamline processes
1. IT Administration Services 1. IT Administration Services
Travel expense management This represents a major area of loose discretionary spending in most organizations. Formalize a travel expense policy if none exists, or tighten approval considerations and enforcement if one does exist.
IT staff productivity Every work minute counts, especially if doing more with less is a reality. Track staff productivity levels and then identify ways to motivate and increase efficiencies.
IT staff headcount Finding the right staff headcount and staff-to-manager ratios are fast ways to dramatically reduce IT costs. But proceed with caution to avoid deficits of key skills.
IT administrative processes Streamlining existing processes and formally documenting others will reduce wasted time and errors.
Centralizing management of IT operations Bringing IT operations under a single management point of control reduces waste created by policy disparities and operational non-standardization.
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3.3 Step III Review Services Compile Plan
Optimizing network and telephony investments
returns cold, hard cash
2. Network and Telephony Services 2. Network and Telephony Services
Network and telephony infrastructure integration Explore all opportunities to consolidate data and telephony networks and support teams. This may mean standardization on IP and examining the costs and benefits of integration.
Network monitoring Monitor the performance of network components to ensure theyre operating appropriately and efficiently.
Bandwidth consumption Bandwidth may be oversubscribed. Monitor consumption for opportunities to right-size and pare back on costs.
Mobile device policy Explore which is more cost effective the enterprise supplying mobile devices, or the individual employee who then bills the company for business costs incurred. Document and enforce.
Teleconferencing solutions Explore where teleconferencing solutions can be implemented to reduce travel costs.
Second-hand equipment Second-hand and refurbished network and telephony gear can bring a good enough hardware solution at bargain prices.
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3.3 Step III Review Services Compile Plan
Analyzing end-user support activities is the best
way to gain IT process efficiencies
3. End-User Support Services 3. End-User Support Services
Analysis of problem root causes Understanding the real nature of end-user problems affords the chance to address and eliminate root causes, thereby eliminating them and reduce ticket volumes.
Logging incidents Document help desk tickets to be able find trends and uncover more effective practices.
Speed of ticket resolution Tier resolution rates based on business criticality.
Tickets per analyst Review the number of tickets per analyst to achieve more efficient demand management.
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3.3 Step III Review Services Compile Plan
Spend smarter with workstations and peripherals
4. Workstation Services 4. Workstation Services
Workstation refresh rates Workstation refresh rates can realistically be extended from the traditional 3-5 years to as long as six years. Cascading old high-end workstations to less critical tasks is another cost-saving tactic.
Desktop virtualization Explore the advantages of virtualized desktop technologies to make a long-term and very real impact on the bottom line.
Desktop images Reduce and standardize the number of desktop images supported so that end users have the applications and configurations they need, and only what they need.
Print management Reducing access to personal printers, centralizing on few multi-function machines, and setting limits on color printing via a print policy is a quick way to reduce costs that is often overlooked.
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3.3 Step III Review Services Compile Plan
Reassess disaster recovery investment in light of
real risks
5. Disaster Recovery Services 5. Disaster Recovery Services
Matching DR solution to system needs Not every system requires the same level of disaster recovery investment. Match the DR investment to the need, which may result in scaling back and cost savings.
Business recovery objectives Review recovery objectives with business stakeholders to determine if current objectives are too stringent based on assessed risk.
DR outsourcing Outsourcing DR may be critical to risk mitigation, or too costly to justify. Perform a cost-benefit analysis to determine if DR is best delivered in-house.
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3.4 Step III Review Services Compile Plan
Servers, mainframes and storage bring huge IT
capital costs, so theyre prime targets for cost
reduction
6. Servers, Mainframes and Storage Services 6. Servers, Mainframes and Storage Services
Server consolidation and virtualization Reducing the number of physical servers and virtualizing server instances is a proven way to reduce data center capital and operational costs.
External server collocation or hosting Explore cost saving opportunities in collocating servers or running applications on hosted external servers.
Second-hand equipment Refurbished servers can offer good enough solutions for common server functions.
Storage virtualization This can include implementation of SAN technologies. Perform a cost-benefit analysis to assess long-term savings.
Limited personal storage volumes Review and potentially reduce existing storage volume limits for end-user groups. If there is no policy on storage volumes, create and enforce one.
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3.3 Step III Review Services Compile Plan
Application development work can be reduced or
eliminated
7. Application Development Services 7. Application Development Services
Continuation of application development Consider stopping application development entirely if it is not absolutely required.
Prioritize projects Implement a process for selecting and prioritizing only those projects that bring a strategic benefit to the organization.
Document requirements Clearly documented requirements reduce wasted effort and ensure applications built meet business needs.
Test applications Detecting and fixing errors early costs much less than fixing errors released into production.
Contracting out application development Assess the relative costs of contracting out development work versus retaining full-time in-house staff.
Commercial-off-the-shelf (COTS) vs. custom builds COTS applications often cost less to procure and maintain. Set COTS as the preferred option when possible.
Open source alternatives Consider open source options for non-mission-critical deployments.
Software-as-a-Service (SaaS) SaaS alternatives can be more cost effective than COTS or custom solutions. Explore the options.
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3.3 Step III Review Services Compile Plan
Improving application maintenance processes
reduces wasted effort
8. Application Maintenance Services 8. Application Maintenance Services
Prioritizing maintenance work requests Implement a system for strictly prioritizing work requests to ensure time is invested in the most critical changes.
Bundling work requests and change releases Bundling work and releases maximizes efficiencies.
Redundant and isolated applications Unused and underused applications inflate licensing costs and impede integration efforts.
Software patching Patching presents a tradeoff between costs and benefits. Ensure the tradeoff is balanced cost-effectively.
Application testing and reviewing Ensure applications continue to meet business requirements. Its less expensive to identify and fix problems early.
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The Cost to Serve plan includes time to
completion and estimated savings
3.3 Step III Review Services Compile Plan

• The chart below is designed to reflect some
  generalities. For example, Internal IT
  Administration expenses such as travel and
  training are easy to reduce immediately, but
  dont reflect a large percentage of most IT
  budgets.

This table represents an example of what a top
level Cost-to-Serve plan might look like.
IT Services Example Service Components Percentage of IT Budget Estimate a portion of the IT budget that this service represents Estimated Potential for Reduction Estimate potential savings Estimated Time to Completion IT/Business Alignment Score Estimate alignment with top level enterprise strategy
1. Internal IT Administration Travel, training, supplies Low 30-60 Immediate Low
2. Networks and Telephony Monthly telecom expenses, network infrastructure Med-Low 10-20 Six months Medium
3. End-User Support Services Help desk salaries, support applications Med-Low 20-30 Six months Low
4. Workstation Services Laptops, desktops, printers Medium 10-20 Immediate to one year High
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3.3 Step III Review Services Compile Plan
The Cost-to-Serve plan includes time to
completion and estimated savings - continued
IT Services Example Service Components Percentage of IT Budget Estimate a portion of the IT budget that this service represents Estimated Potential for Reduction Estimate potential savings Estimated Time to Completion IT/Business Alignment Score Estimate alignment with top level enterprise strategy
5. Disaster Recovery Services Hot or cold sites. Low 30-60 Six months. High
6. Servers, Mainframes and Storage Services Backup procedures, server monitoring High 10-20 Immediate to one year Medium
7. Application Development Vendors maintenance costs, in-house development staff salaries. Medium-High 50-100 One year High
8. Application Maintenance Service Vendors maintenance costs, in-house development staff salaries. Medium-High 50-100 One year High
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Step III Summary
3.3 Step III Review Services Compile Plan

• Assemble the plan by reviewing each service for
  opportunities.
• Rate the tactics within each service area for
  fit.
• These recommendations will next be discussed and
  negotiated with business stakeholders to arrive
  at a final cost reduction list for execution.

2 Develop Strategy
1 Discover Targets
Cost-to-Serve Methodology
3 Review Services Compile the Plan
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Reducing IT services may be met with strong
resistance
3.4 Step IV Negotiate the Plan
Read the ITA Premium note, Save the IT
Department by Linking Budget Cuts to Decreased IT
Services.

• Departments faced with significant budget cutting
  mandates are often given the impossible task of
  maintaining, or even increasing IT services
  despite a reduction in available resources.
• Organizations with poor IT-Business alignment
  often find that the business is resistant to
  service level cuts due to the lack of
  understanding of the cost to serve IT.
• Cuts to the departments budget may necessitate
  cut backs on IT services, something that must be
  negotiated with the senior management prior to
  the execution phase.
• Having an executive sponsor lends credibility to
  the IT departments measures and will improve
  ITs position at the bargaining table.

I think the biggest thing that enterprises need
to really understand is to know your cost. You
really need to understand what your cost is So
when business comes to you and says they need you
to reduce my cost, then youre in a better
position to say okay. You can negotiate with them
and say this is what it is. What is it you want
to take out? IT Director , Tech Services
Industry
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Acknowledge ongoing cuts and specify planned
measures
3.4 Step IV Negotiate the Plan

• Both written documentation and meetings with key
  stakeholders will be required to negotiate and
  finalize the cost reduction plan. Follow the four
  steps below.

Negotiation Steps Description
1 Communicate Ongoing Measures Already Taken Demonstrate ITs ongoing cost management efforts to the business through a presentation of recent accomplishments. Detail how recent steps taken affect the bottom line, whether positively or negatively. It is important to highlight areas where IT has made itself or the business more efficient. These proof points will help gain buy-in for future invest to save initiatives. Demonstrating ITs current efficiency helps validate anticipated service reductions, signaling that IT has already taken measures to maintain service levels. Use tangible numbers whenever possible.
2 Detail the Planned Cost Cutting Efforts Document the future steps that will be taken (e.g. reductions, postponed projects) and demonstrate alignment of these steps with the enterprise and departments cost-cutting strategy. Use hard numbers to show expected cost savings from each individual measure.
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Communicate consequences to senior management to
finalize the plan
3.4 Step IV Negotiate the Plan
Negotiation Steps Description
3 Explain Consequences and Impact to Stakeholders Transparency of the IT budget changes the perception that IT is a free service and helps enable senior management to understand what needs to be done in order to accomplish cost cuts. Demonstrate the potential consequences of cutting expenses. For example, We can save 5,000 per year on maintenance, but if a breakdown occurs the department will require additional funds to make repairs. It is important that each individual measure to be taken is evaluated in terms of consequences and impact to stakeholders. By outlining each one, senior management can easily understand what impacts to expect. Where cuts will impact current ongoing projects, specify how timelines will be affected.
4 Finalize the Plan IT and senior management should work together to negotiate the final plan. Where drastic cuts are required, IT will have to give up core resources and, subsequently, core services. As a result, senior management should decide where service levels can be cut back.
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Step IV Summary
3.4 Step IV Negotiate the Plan

• Acknowledge ongoing cuts and specify planned
  measures.
• Communicate consequences to senior management to
  negotiate and finalize the plan.

Cost-to-Serve Methodology
48
Executing cost management tactics can make or
break the plan treat it like a full, formal
project
3.5 Step V Execute Changes

• Changes to staff, organizational structure and
  service levels must be accompanied by strong
  communication.
• Measures built on changes to procedures and
  policy must be enforced to remain effective.
• Without strong vendor management practices, cost
  reduction efforts surrounding purchasing may be
  ineffective or even backfire to increase costs.
• To make all of these things happen well, it is
  best to approach cost management tactic execution
  as an actual project with formal deliverables,
  milestones and measures.

IT Leaders on Challenges in Strategy Execution IT Leaders on Challenges in Strategy Execution IT Leaders on Challenges in Strategy Execution
Communications Policy Vendors
If I cut staff by x, what does that mean to the business? It means a lot of things. Its tough to nail it down to the actual effect on service levels. IT Director, Technology Industry The problem we have here is this is, by and large, a trusting organization. Its quite difficult to actually get a policy in place that says that users cant do stuff. IT Director, Manufacturing Industry Youll never have as good a negotiating position as when youre buying When were out there negotiating, were smart. IT Director, Manufacturing Industry
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Communication is crucial to successful
implementation of cost cutting plans
3.5 Step V Execute Changes

• Communicate the plan to business users. The IT
  cost reduction plan should be communicated to end
  users especially if service levels or business
  facing projects are being impacted. Once the plan
  has been communicated, the department will embark
  on executing proposed plans.
• Continue to make efforts visible. Proactive cost
  management should not go unrewarded. The
  challenge of being a good corporate citizen is
  that when costs are managed on an ongoing basis,
  there is much less fat to cut from the IT budget.
  Be an active IT advocate and employ departmental
  PR.
• Share news on cost cutting efforts in monthly or
  weekly meetings.
• Use weekly or monthly bulletin e-mails to laud
  ITs cost cutting efforts. For example,
  communicate to end users why theyve had their
  personal printers taken away and show how much
  money the company has saved as a result.

Peer Example
An IT Manager at a small professional services organization keeps its end users constantly informed of ITs major initiatives via their Weekly Edition. This weekly newsletter educates end users on what IT is doing, the pros and cons of why they are doing it and how it impacts the organization.
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When cut backs are necessary, IT must take extra
steps to retain current staff
3.5 Step V. Execute Changes
See ITA Premiums Theres No Crying in IT How
to Make Tough Staffing Cuts and Redefining Job
Roles Due to Downsizing for more guidance.

• Cost cuts can result in employees being forced to
  take on new, unfamiliar tasks, affecting morale
  and productivity. Practice change management to
  minimize potential impacts.

Execution Step Description
IT Communication Expectations Management Communicate changes honestly and proactively. While honest and proactive communications do not guarantee success in minimizing negative impact due to staffing changes, they can help boost employee confidence. Set clear expectations. Employees must have a clear understanding of what is now expected of them due to the changes.
Reassigning IT Work Tasks Responsibilities Ask for individual preferences. While not always possible, reassign work tasks to encourage learning and knowledge transfer. Track skills/competencies. Document current skills and future needs.
Coaching IT for Success Provide coaching support. When training and travel budgets are frozen, it is even more crucial for staff to receive the coaching that they need to grow. Set up new coaching relationships that will give senior employees coaching experience and junior employees guidance and support.
Reward IT Successes Recognize accomplishments. Reward staff who take on initiatives or additional duties and perform well. While financial rewards are important, providing non-monetary bonuses, such as flex time, is also effective.
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Policies and procedures are necessary for process
change execution
3.5 Step V Execute Changes

• Policies. Having identified several policies as
  means to cost cutting (e.g. printer policies,
  laptop policies), its up to IT leaders to
  execute on these policies. Strong policies are
• Capable of being enforced by management.
• Aligned with organizational culture and values.
• Accompanied by other barriers such as spending
  limits on company credit cards or bandwidth
  limitations on company laptops.
• Well communicated from a legitimate and central
  point of management.
• Procedures. Well documented procedures are
  essential to an organization undergoing changes.
• Documenting procedures captures knowledge that
  may be lost in staff layoffs.
• Establishing repeatable processes establishes
  consistency where high staff turnover is
  expected.
• A repeatable process eliminates time spent asking
  questions, and offers a learning curve which
  improves exponentially with each iteration.

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When purchasing, get a better price or forego the
purchase altogether
3.5 Step V Execute Changes
Visit Info-Techs Cost Reduction Center to read
Negotiation Tips How to Save With Vendors.

• Negotiate with vendors. The same economic
  conditions that drive IT to manage costs provides
  opportunities for renegotiating costs with
  vendors.
• Consider TCO. Dont let the pressure of finding a
  cheaper solution drive purchases entirely.
  Consider total cost of ownership as well the
  costs associated with IT solutions that dont
  achieve their intended purpose.
• Making do with less. Expect some disappointment
  when IT users start noticing slower replacement
  of hardware and the IT staffs toolset.

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Step V Summary
3.5 Step V Execute Changes

• Develop and enforce policy and procedure.
• Communicate changes to business users and make
  change visible.
• Take steps to retain remaining staff.
• Negotiate a better price when purchasing or
  forego the purchase altogether.

1 Discover Targets
2 Develop Strategy
Cost-to-Serve Methodology
3 Review Services Compile the Plan
5 Execute Changes
4 Negotiate the Plan
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Measure cost reduction success to continuously
improve
3.6 Step VI Review

• The value of a cost to serve approach is the
  ability to cut costs without damaging the core of
  the business and its technology assets.
• A numbers only approach does not tell you what
  effects cuts will have on the organization down
  the road.
• The benefits of reviewing efforts are twofold IT
  can tout its successes and learn from the
  challenges. Both should be documented and used to
  continuously improve the cost reduction process.
  

Goal Key Question Measurement
Meets mandated cost cutting targets Did IT meet required budget cuts? Compare actual IT spending to strategic plan, initial IT budget.
Meets mandated timeframes Was the cost cutting plan reached in the original timeframe? Compare estimated time to completion to actual. If there are any variances, explain reasons behind delays.
Minimize negative impact to business Is IT still able to meet service level agreements? Adherence to SLAs, client satisfaction surveys.
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Measure cost reduction success to continuously
improve continued
3.6 Step VI Review
Goal Key Question Measurement
Minimize negative impact to IT operations Are IT staff more productive with the new procedures and processes? Track staff productivity to compare before and after cost reductions.
Minimize negative impact to IT morale Is morale down within the IT department? Gauge IT satisfaction through coaching and one on one sessions. Take action with non-tangible rewards if possible to recognize successes.
Minimize negative impact to end user morale Is morale down within the organization? If user facing IT employees notice a change in end user attitudes, IT management should make senior management aware.
Achieve invest to save improvements Are current projects improving business or IT processes? Calculate formal ROI or payback of projects completed.
The review process of cost reduction should
identify areas which can be improved going
forward. Cost reduction should be viewed as a
continuous improvement cycle.
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Step VI Summary
3.6 Step VI Review

• Assess efforts and tout success.
• Measure cost reduction success to continuously
  improve.

Cost-to-Serve Methodology
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Closing Summary
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Cost to Serve Methodology in Summary
4 Closing Summary

• Step I Discover Targets
• Understand target sizes and timeframes to
  determine the best cuts to make.
• Take proactive steps to improve ITs position at
  the decision-making table.
• Step II Develop Strategy
• Take stop-gap measures to meet immediate cash
  flow needs.
• Develop a strategy that will meet target cuts and
  align with business initiatives.
• Step III Review Services and Compile the Plan
• Review each IT service for cost reduction
  opportunities and rate against strategy.
• Set cost reduction recommendations to negotiate
  with stakeholders.
• Step IV - Negotiate the Plan
• Acknowledge ongoing cuts and specify planned
  measures.
• Explain cut consequences to senior management to
  negotiate and finalize the plan.
• Step V Execute the Plan
• Communicate changes to business users and make
  change visible.
• Make changes to policies, procedures, and
  staffing contingents.
• Negotiate better pricing with vendors or forego
  purchases altogether.
• Step VI Review the Plan
• Assess efforts and tout success.
• Measure cost reduction success to continuously
  improve.