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ICT cost reduction - will it really deliver results?
There was much debate during party conference season over which high profile areas of public spending, such as health, education, defence or transport, will face the biggest budgetary squeeze. This debate will continue over the months to come but there does seem to be agreement that spending on front line services should be preserved if at all possible. This has clear implications for spending on supporting back office functions and ICT – these areas will be hit hardest and earliest. The Operational Efficiency Programme (OEP) report, published by the Treasury in May of this year, estimated that around 20 per cent of the approximately £16 billion per annum spent on public sector ICT could be saved without compromising the quality of service delivery. ICT spending is clearly in the firing line.
In response to this, many CIOs have already started to shift priorities: away from managing complex ICT procurements and implementations towards a much narrower focus on cost reduction and cost avoidance.
Understanding cost levers
To best support this prudent shift in priorities, we need a clear understanding of the most effective ways to deliver lasting reductions in ICT expenditure – steering well clear of indiscriminate ‘slash and burn’ policies. The OEP report is a good starting point for building a cost reduction programme, but for an ICT leadership team to be really successful, it will need to understand the organisation’s specific ICT cost levers.
In our experience, the best way to start thinking about this is to consider the two sides of the equation: demand and supply. Unfortunately organisations often rely on a narrow definition of supply side levers (e.g. people and hardware) and also tend to overlook the potential to control costs by influencing customer demand. This article argues that in order to meet the efficiency challenge facing public sector ICT organisations there is a clear need for a stronger focus on demand-side levers but also for a much broader consideration of supply-side levers.
Two sides to the story
On the demand-side, the two main cost reduction levers within operational IT are reducing the scope of services delivered and smoothing out demand patterns. For example, there may currently be a demand for intensive hands-on support from particular application or desktop experts, and this demand may peak at month- or year-ends, leading to excessive staffing levels throughout the year. With careful analysis of the operational demand across all business areas it should be possible to identify reductions without compromising service quality.
In the area of ICT projects, the key demand lever is to ensure that each project is genuinely business-led and structured to deliver tangible business benefits. If an ICT project is not focused on business outcomes it should be stopped or at least re-scoped. If a particularly large ICT programme needs to be stopped, it usually makes sense to follow a formal disinvestment approach. As with operational ICT, the smoothing out of demand for ICT projects can also contribute significantly to cost reduction or avoidance.
On the supply-side, there is a need to expand on the usual focus on people and hardware to ensure a broader consideration of supply side levers. These levers are best considered within six distinct but inter-related areas:
1. People. The first step is to ensure that all ICT resources within the organisation are brigaded under one management structure. Best practice would be for the structure to be consistent with industry standards such as ITIL. The staffing mix should then be analysed to ensure the numbers and skills accurately match the demand. In particular, the organisation should look for opportunities to reduce the numbers of contract or interim staff, who will invariably be more expensive than permanent staff. ITIL implementation has been quoted as saving £500 per user per annum, and against an average baseline cost of £5,000 per annum this represents a 10 per cent saving.
2. Processes. The key success factor here is to define and rigorously implement a simple set of processes that are consistent across all projects and ICT operational areas. Again, the processes should be in line with industry best practices, such as ITIL and COBIT It may also be appropriate, particularly with very large-scale or geographically dispersed organisations, to apply lean or six-sigma approaches to ensure complex ICT processes are as simple and cost-effective as possible.
3. Technology – applications. The key cost levers here are the number of discrete ICT applications, their complexity and the level of integration. Many public sector ICT estates have built up over time in a piecemeal fashion and it is common to find multiple applications supporting identical or very similar business functions. This leads to an overall application estate that is expensive to operate and maintain, particularly in terms of software licences, people costs and third-party support costs. The aim must be to drive towards a small number of common applications with a limited number of interfaces, and, wherever possible, using a single database, or at least a small number of different databases. For example, a government agency we have worked with was able to save over £300k per annum simply by eliminating duplicate applications and removing unused and under-used licences.
4. Technology – infrastructure. More and more of the ICT infrastructure layer is becoming commoditised. Local and wide area network components, telecommunications, servers and desktop components are all typically compliant with key industry or de facto standards, and therefore relatively straightforward to procure on a commodity basis. Again, as with applications, the other key factors that contribute to cost reduction are the simplification and standardisation of components, and ensuring sourcing decisions focus on meeting practical requirements rather than being over-specified. Server virtualisation is a particular example of simplifying and consolidating ICT infrastructure and it can lead to savings of 20-25 per cent of hardware, power and facility costs.
5. Procurement. A focus on procurement can deliver significant cost benefits for an ICT organisation, particularly if a large proportion of its spend is external. For example, in the health sector, our experience of collaborative procurement of telecommunications has shown that significant cost reductions can be achieved, typically ranging from 10-20 per cent, but in some cases as high as 60 per cent. A strategic sourcing approach to ICT procurement, and using tools such as reverse auctions, has led to a reduction of up to 20 per cent in the spend on ICT commodity items, such as desktops, laptops and peripheral components. We have also seen how a robust approach to contract change negotiation can deliver significant cost avoidance. For example, a central government department was able to reduce the proposed cost of a major contract change from £140m to £50m through a collaborative approach between customer and supplier, which resulted in a simplification of the requirement (demand) and reduction in the solution cost (supply).
6. Facilities. The key drivers for ICT facilities costs – such as space, light, heating and cooling – are the numbers of ICT staff and physical hardware volumes. Many of the supply side initiatives set out above, such as consolidation of the ICT organisation, reduction in expensive resources, standardisation and simplification of applications and infrastructure, will naturally lead to a reduction in space requirements and associated utility costs.
Making it happen
So far we have concentrated on key ICT cost levers and how they can be tackled to affect lasting reductions in ICT expenditure. However, these cost reductions must be done in the context of the wider business, in particular to avoid the ICT cost reductions leading to a reduction in the performance or, even worse, cost increases in other parts of the business. We would therefore always recommend a holistic approach to performance improvement and cost reduction that takes all key factors into account. In particular, the organisation should think in terms of business-centric and ICT-centric initiatives, and combine these with a ‘top-down’ and ‘bottom-up’ approach. Using this holistic approach will also naturally facilitate the development of an overall performance improvement and cost reduction programme, which is structured into a set of distinct well-planned phases:
- Short term initiatives – quick wins to be implemented in the first three to six months.
- Medium term – improvement projects to be delivered in the next 6 to 18 months.
- Longer term actions – major initiatives to be implemented over the next 2-5 years.
This will help provide clarity on when exactly results can be expected.
The key lesson from our experience in cost reduction and performance improvement is that you need to follow a tried, tested and rigorous methodology, which is then tailored to each client situation, as illustrated below.
A rigorous methodology will not be enough, however. There are other key success factors for achieving tangible, realistic goals, being:
- Make sure you have clear objectives from the outset and the buy-in of your key stakeholders
- Take a top-down strategic approach, as well as focusing on the details
- Make sure you gather all the facts and build a cost model for your organisation, identifying all the demand- and supply-side levers and how they interact
- Assign specific targets by area, rather than set broad-brush percentages
- Focus on realisation – take practical steps to identify, quantify, deliver and measure real cost reductions
- Apply good business disciplines including investment appraisal, good governance and programme management throughout the process
- Recognise that to achieve significant cost reductions you will need to invest up-front in the right skills and experience – you will need to ‘invest to save’.
Taken together these factors will substantially increase the chances of success.
So returning to the original question posed by this article – will ICT cost reduction really deliver results? If you just take a broad brush approach and apply a ‘slash and burn’ policy, then the answer is no. However, if you take the trouble to really understand your cost levers, both demand and supply, and apply the right combination of practical skills, experience and a methodical approach, then you can deliver significant and sustainable cost reductions. Now is the time to start.