How to cut IT costs without compromising service

Get ready for staff downsizing, outsourcing and frozen investments

For most public sector CIOs, 2010 will be about reducing IT costs. Paul Michaels looks at where to cut, where to outsource and how to do so without sacrificing all service quality.

Public services, including healthcare, local authorities and other government organisations, are under pressure to slash operational costs by up to 30 per cent. In many cases CIOs and procurement officers are facing a moratorium on new investment with existing programmes being delayed or cancelled, frozen or reviewed. Many of these, ironically, are strategic, such as regional information and shared service hubs, designed to deliver greater efficiencies and cost savings.

For those IT projects earmarked to proceed, every step of the procurement process is under the microscope to drive down costs, with strong-arm tactics often being used on service providers and outsourcers to drive down costs.

And there are often internal conflicts. The CFO will say, "You have to find savings of up to one-third of your budget," while the CIO says, "I have two more years on my outsourcer contracts and can't afford to reduce any of these services." The answer? To hand the problem over to the outsourcing suppliers to find ways to trim their costs without reducing service levels.

How far can you squeeze suppliers?
Of course outsourcers can always find ways to save if pushed. And many argue that passing on the pain to them is only fair since they've had things their way for a long time. The danger is that by pushing suppliers into a 'utility' or commodity-level contract, this may drive out the value.

That is, if pushed too far they will stop doing the extra goodwill value-adds needed to ensure a best practice service and only 'work to rule' - or will substitute the A Team for lesser-experienced and less knowledgeable staff. This in turn increases risk of error that may have greater cost and reputation implications than the money saved.

Negotiating outsourcing contracts
So how can CIOs identify where cuts can be made across IT services, from the front-to-back office and beyond? This is done by analysing cost and productivity ratios, legacy system complexity, levels of operational maturity, rationalising and shared services and comparing in-house and outsourcing costs for best value in any given component.

It is a fallacy to think a whole IT environment must be handled either internally or externally - some services are more cost-efficient managed in-house, while others are best handed over to an outsourced centre of excellence.

Where outsourcing is the better option, supplier contracts must be negotiated carefully. Each service should be itemised, service levels should be transparent and safeguard the customer from additional downstream 'cost creep'.

Unnecessary services, or higher-than-required service levels, are often responsible for inflated costs. For example, a platinum-level 24/7 service option may have been contracted to where a standard 5x10 service (weekday/10 hours) would suffice.

The key is to identify those IT services that need premium support and those that don't. Utility back-office administration may only require basic support, while an enterprise resource planning system that requires complex integration and data customisation may need premium professional services and mission-critical support.

Data management: The true costs
One area where IT costs are rising dramatically is in data storage and management. Because of ever-cheaper computing power, government departments are generating ever more information, particular in the area of CRM and 'know thy customer' ID and profiling applications for cross-service administration.

This data that is regarded as more or less free. However all this information needs sorting, integrating, analysing, sharing, storing and retrieving. Thus the more data we generate, and the more we do with it in terms of analytics and reports, the higher the processing costs.

Given increased volumes and the regulatory need for public services to retain records for seven years, data storage costs threaten to explode. Whether handled in or out-of-house, using virtualisation, cloud computing or other technology, data storage and management is an area where finding inexpensive alternatives will have an increasing impact on IT savings.

Lost opportunity costs
A mandate to reduce IT budgets typically results in suspending new investment or freezing projects in mid-implementation. While this may reduce short-term pressure on the bottom-line, it can have unintended consequences.

It can add substantial costs to re-starting a mothballed programme at a later date. At that point there may be new regulations to comply with, technology will have advanced and so a partially-installed system will have to be reconfigured to comply with these updates. This cost will most probably involve many man-days of expensive professional integration and data transformation services, not to mention higher overall labour costs.

The worst case is that the half-implemented project may no longer be relevant, which means all capital and implementation costs already spent on it must be written off. Just as costly, but more difficult to quantify, are the lost opportunity costs of not having had an application in production that might have paid for itself early by delivering extra operational efficiencies or supporting new revenue streams.

Paul Michaels is director of consulting at IT advisory firm Metri.