Non-Traditional ways of Managing the IT cost

In the current economic environment, most of the IT Managers are finding themselves in a very difficult positions – they are asked to reduce the IT spend and at the same time demand for the IT services are growing. It is quite understandable that other functional areas within the organization will need more IT services to reduce their cost. For example, Supply Chain group in one of my client’s organization achieved significant cost savings by automating the booking request/booking response and shipment document preparation processes. Any measures to manage the IT cost should account for the growing demand for the services as well.

There are several traditional ways of managing the IT cost – it starts with renegotiating major contracts to laying-off employees to cutting the capital and operational budgets. All of these options are commonly used by IT Managers to immediately deliver the bottom line reduction. Basically the first option is to curtail the discretionary spending and then see if it can help in managing the overall spend.

I would like to discuss some of the non-traditional ways of managing the IT cost in this post. Although all these options are fairly known to IT Managers but they are rarely used in a strategic way to manage the ongoing operations.

This brings to the interesting topic of finding non-traditional ways of managing the IT cost.  IT organizations are traditionally very poor in managing the demand for the IT services. I have seen very few organizations who have established a formal discipline and even less who have mastered the art of for managing the IT demand. Typically IT met the rising demand for services by simply fulfilling it. The demand prioritization process is simply not defined. Building a governance around the demand management process and getting the buy-in from all other business units can help in streamlining the services which will result in significant cost savings.

Another often ignored area is application portfolio rationalization and management. Most of the IT organizations has grown organically over a period of time. Over the years, typical stove-pipe applications were developed to meet the departmental needs. This has created a complex and very heterogeneous application landscape. Most of the organizations have addressed server consolidation and application software standardization over the last 5-8 years. So you can see standards for specific servers, Operating Systems, Databases and application servers. However, few organizations have addressed the issue of application harmonization.

System Integration is another major contributing factor in the IT cost structure. Typically integration is an afterthought in the application development process. This usually results in an “accidental” point to point interfaces which are very cheap to develop but prohibitively expensive to maintain and manage. All of us have seen increasing interest in SOA based technologies. If implemented correctly, SOA-based system integration approach can provide long-term sustainability and reusability of the IT assets.

Renewed focus on demand management, application harmonization, standardization and SOA-based integration approach can provide the needed leverage to build an agile IT which can withstand the vagaries of the economic ups and downs.

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Time Warner to Spin-off AOL

Time Warner decided to finally spin-off AOL as a separate publically traded company. I’ve been following this transaction for a while now and it feels like both parties missed the opportunity. Some of you may remember couple of years back, a python tried to swallow an alligator in Florida. Both died in the process!

AOL bought Time Warner in 2001 in a $147B deal. Within 2 years, Time Warner took a charge of $100B to account for the diminishing value of AOL. AOL started with approximately 26M dial-up subscribers in US and as of 2008 they had 6.3M subscribers. Probably the business school professors will analyze and teach the rise and fall of an empire in more details. I always felt that AOL management never understood, planned or executed a solid broadband and content strategy. All of us knew that sooner or later people are going to go for the DSL and high-speed internet access. Dial-up access was not going to support the internet driven society which even AOL was marketing heavily. They never had a strategy to supplement their constant subscriber  losses in the dial-up business with broadband or content business.

I also felt that AOL was using the Dial-up subscriber base as a stepping stone to build their content business. The subscriber losses were just a matter of time with the hope that they will be able to build a strong content business to support the growth. Unfortunately, they were not able to execute on it.

AOL has three major parts: the MediaGlow content studio; People Networks, which includes Bebo, as well as AOL’s communications assets like AIM instant-messengering service; and its Platform-A advertising unit. AOL has bought recently Userplane social-media apps unit and its Truveo video search service as well. Some of us may not know that TMZ is a joint venture of Telepictures Productions and AOL. Going forward, if AOL has any hopes for revival or survival then it has to find a niche for all these services. All these services individually compete with some of the well know brands. It also has to figure out the monetization and compete with other providers in this space including Google, Yahoo, and Microsoft among others.   They now have a good leader in Tim Armstrong and hopefully he can figure all this out and build a path forward for the company.

So what is in it for Time Warner apart from getting rid of a big drag on its stock prices. Some of their businesses including Film and TV will continue to do fine but I’m not sure about the magazine publishing business. They may consider to spin off Time Inc as well at some point of time to consolidate on their Film and TV business.

Another perspective on IT Cost Take out

Reducing the IT cost was on top of the agenda for most of the CIOs even before the current economic melt down. So no one is really surprised with the renewed interest in finding innovative ways to reduce or manage the cost of the IT.

Traditionally IT is always perceived as a cost center and this contributes to the way we try to manage the  cost. This is essentially one sided approach which takes into account the cost but not the value. The dialogue about the IT cost should start with the IT value first. The services and innovation from IT are mostly taken for granted and most of the organization often focus on the cost of the IT. The cost of the IT can only be put in the perspective if we can also quantify the value created by the IT. This will make the choices very clear – reduced IT cost will mean reduced IT value, if I can simplify the equation. However, this equation is not clear and that to some extent complicate the problem.  IT organizations should first do this exercise and complete a value analysis. There are several benchmark data defined in terms of IT spend as %age of revenue for various industries. IT spend may range anywhere for 2% to 20% depending on the industry but essentially it is a factor of revenue and not factor of the value produced  by IT. One can make an argument that value finally contributes to the revenue but I would like to see how much revenue both top line and bottom line will be impacted by controlling the IT spend.

Benchmarks more often generate debate and sometimes turns out as a target given to CIOs – if my competitor can run their IT organization at 5% of the revenue then why am I running at 10%? This type of discussion and dialogue is very understandable. It is a good starting point for introspection  and analysis. However, this approach is too simplistic. This needs to be analyzed in the overall context of the entire business and not just the IT. IT cost may be higher due to the problem somewhere else in the organization. There may be difference in the business processes. Higher IT cost may be offsetting some other cost.

So I would like to  make a case for analyzing and documenting the business value for IT first and then focus on managing the cost. This will give a clear starting point.

This is an interesting topic. More to continue…