Strategic IT Cost Cutting

Economic downturns consistently place government administrators in a reactive mode. When describing the state's projected budget shortfall during his first budget address, the Governor of Massachusetts, Mitt Romney, stated, "There is no time to restructure government or remake state programs. On such an emergency timetable, there is only time for cuts." These statements reflect the sentiments of any public-sector administrators facing budget deficits. However, arbitrary, across-the-board cuts fail to properly reflect the value that technology provides. As governments react to revenue shortfalls, IT organizations (ITOs) must put processes in place that identify, communicate, and measure the value of technology in delivering effective and efficient constituent services.

META Trend: Scarcity of budget dollars will drive enterprise rationalization of solutions across each government jurisdiction. Savvy vendors will emerge as winners, sacrificing short-term profits for long-term, enterprise contractual agreements. By 2006/07, this trend will accelerate, reducing the instances of customized applications and resulting in contracts enabling software reuse among jurisdictions.

Aggregate state budget deficits have reached $68.5 billion and are projected to increase next year; 18 states currently face deficits of more than 10% of their overall budget. During these depressed economic times, it is not surprising that the value of IT efforts (i.e., government expenditures that enable rather than directly deliver government programs) is in question. CIOs must spend more time rationalizing IT and developing business cases to demonstrate the value of IT solutions to the jurisdiction. Successful CIOs will take a strategic approach toward review of IT expenditures, coordinating IT implementations and working with program counterparts to better align IT and program processes. During 2004/05, the budget deficits and increased awareness of accountability created by Sarbanes-Oxley legislation will force CIOs to increasingly justify IT expenditures. Progressive CIOs will focus on short-term cost-cutting measures (e.g., contract renegotiations, project reprioritization, asset configuration) while initiating a long-term strategy for greater IT accountability and program alignment. By 2006/07, 10% of CIOs will succeed in creating true partnerships with their program counterparts and have formal processes for initiating IT investments based on program value; 40% of jurisdictions will have begun implementation of long-term IT cost savings programs and 75% of jurisdictions will implement processes for regular review of short-term cost saving measures.

Most jurisdictions realize that IT is a necessary expenditure for efficient delivery of government programs, as is evident in the fact that state and local IT spending is up 2% for FY03 and federal IT spending is up 14%. During tight economic times, jurisdictions must invest in the “grow” and “transform” buckets of the IT portfolio to drive down the overall costs of administering government programs, yet 80% of a jurisdiction’s IT budget currently focuses on the “core” portfolio elements that normally have lower-level review and do not require documentation of the business outcome to determine prioritization (see Figure 1). Jurisdictions must implement processes to evaluate value and drive down core portfolio costs. This will result in savings that can be redirected to higher-value opportunities within the IT or the overall jurisdictional budget through enhancements in program delivery (see Figure 2).

In taking a structured approach to IT cost cutting, jurisdictions must balance short-term savings against future transformational implementations. Improving IT processes not only enables the jurisdiction to obtain near-term savings but will position the ITO for success in future long-term implementations. Structured CIO processes enable demonstration of IT investment accountability, provide a discipline for measuring the business value, and build credibility for obtaining future funding.

Initial Short-Term Cost-Cutting Measures

• Inventorying contracts and determining unit costs: Jurisdictions must have an enterprise perspective of the various contracts held by individual agencies, the vendors those contracts are held with, and the unit costs. The traditional, decentralized process for obtaining IT products has resulted in duplication of IT investments as well as multiple contracts with the same vendor. Jurisdictions must begin inventorying all IT investments in an effort to begin managing contracts on the enterprise level and to drive down unit costs. Contract renegotiation will begin with implementation of an enterprise asset inventory - that is, obtaining an inventory of assets managed by each agency. Jurisdictions will begin renegotiating existing contracts, entering long-term contracts with vendors in exchange for a reduction in unit price (one small jurisdiction was able to obtain 23% savings in contract costs through renegotiations). Since the savings available through renegotiation are significant, jurisdictions must prioritize contracts, focusing first on the largest contracts that will yield the greatest savings. Renegotiating all contracts will frequently require additional resources (e.g., program experts charged with understanding requirements of the user, procurement officials, and IT staff). Therefore, jurisdictions must calculate the return on investment and determine the percentage of contracts that are good candidates for renegotiation and provide the internal resources necessary to obtain long-term savings.
• Prioritizing IT projects: Strategic IT cost cutting demands that jurisdictions focus on prioritization of projects that provide the greatest ROI to the jurisdiction. Project evaluation requires a governance process that ensures the intended results are attained, with a program management office or function in charge of reviewing potential projects using a consistent methodology that identifies which projects will provide the greatest returns. The program management function also provides oversight to ensure that the project is able to meet all of the predetermined key performance indicators (KPIs) while remaining within the initial project scope and budget. In addition, the project management office ensures that the project portfolio represents the right mix of short-term enhancement projects and long-term transformational, riskier implementations. Each jurisdiction must identify the amount of risk it is willing to incur at any stage in the political cycle and ensure that the IT portfolio is representative of this balance (e.g., most jurisdictions focus on transformational initiatives during the first year after election of the chief official, and place greater emphasis on enhancements just before re-election in an effort to demonstrate results and deliver good press prior to re-election).
• Reconciling inventory: Processes are implemented to obtain an accurate understanding of current assets (e.g., hardware, software, human capital). As jurisdictions expand enterprise agreements, they must first understand what current assets are in place and where they reside (leveraging the inventory developed for contract renegotiation) as well as which assets can be retired and which are mandatory for program delivery. Although the decentralized nature of government makes asset management a difficult task, it is a necessary initial step for determining the opportunities for savings and obtaining the baseline to measure long-term cost savings.

Once the jurisdiction has addressed these initial baseline assessments and taken advantage of short-term savings (these efforts should be complete within a three month), it is positioned to determine longer-term strategies for continued savings.

Long-Term IT Cost-Cutting Efforts

• Consolidation infrastructure: This entails centralization of infrastructure and applications that are used across multiple units/departments. Consolidation and centralization have received increased attention during the past several months, as the state of the economy has made the existence of duplicate infrastructure and application investments difficult to justify. Although the public sector has focused on network consolidation for a number of years, other consolidation efforts will deliver immediate savings (e.g., e-payments, business intelligence, help desk, servers). Beyond reduced licensing costs and savings via cost avoidance, jurisdictions will also obtain greater resource flexibility by having all staff trained on the same tools. This is a critical consideration as IT staff members become eligible for retirement and in light of public-sector careers currently being much shorter than the traditional 20-30 years.
• Refining IT processes: The current IT processes should be streamlined to ensure that the jurisdiction is delivering IT efficiently and effectively. ITOs must undertake a critical review of existing processes, documenting the various tasks performed by IT staff on a daily basis and refining processes to enhance efficiency. At times, process refinement will be augmented through additional investments in technologies. For example, IT staff will allocate time to customize reports for program executives, and if the time required to customize these reports does not align with the business value derived from reports, the IT organization might invest in a business intelligence tool and empower program executives to generate their own custom reports. Jurisdictions must begin by studying how time is being spent and then refine processes to achieve greater efficiency in service delivery.
• Aligning staffing costs with prioritized project initiatives: Staffing cost prioritization requires the right balance between IT resources and project value. Short-term savings require an analysis of existing projects, with resources reassigned to those that deliver the greatest ROI. In this step, jurisdictions must review the IT resources required for each project and ensure that resources are properly balanced with program value. In the previous step, jurisdictions refined IT processes to deliver IT services as efficiently as possible, during this step, the staff that has been freed up via the refinement process will be assigned by the jurisdiction to work on those projects that provide the greatest ROI to the jurisdiction. The project management office developed during the previous steps will help in the distribution of IT staffing resources based on alignment of skill requirements.

All of the IT cost-cutting measures listed above are internal to the IT organization and can be executed with limited coordination with program areas. Limiting the scope of these activities to the ITO enables quick implementation. Once the IT organization has accomplished the above steps, it will be streamlined, strategically focused, and efficient in delivering services for program partners. The CIO will then have the credibility to approach program executives and begin business discussions related to additional IT/program cost-cutting measures.

IT/Program Cost-Cutting Measures

• Managing demand: Management of demand entails reviewing the types of requests and projects IT employees are working on, the amount of resources required to perform duplicate requests and implementing processes to dissuade demand for those areas where staffing requirements do not align with value. IT organizations should review service requests with program partners and analyze which requests can be offloaded via self-service, which can be better serviced through centralization (avoiding support of duplicate applications), and which requests the ITO will no longer perform (requiring changes in business processes). ITOs will use the portfolio management methodology to accomplish this task.
• Rationalizing applications: In developing an inventory of applications that are being supported by the ITO, the CIO will work with business partners to retire old applications or converge and implement enterprise applications in those functions where similar applications are identified. As previously indicated, it is clear that most IT resources (i.e., time and money) are spent on maintenance of applications and the infrastructure on which they run, and the more fragmented the applications, the greater the IT support costs. Few jurisdictions have a process for reviewing applications on a regular basis and retiring or consolidating applications that are no longer necessary or redundant. In conjunction with program staff, jurisdictions must initiate a formal governance process to regularly analyze the application portfolio, including processes for determining application retirement. As the jurisdiction reduces the number of applications it supports, demand on IT staff will diminish, providing for redeployment of staff into higher-value program enhancements.
• Analyzing business processes: This final step entails reviewing current business and re-engineering processes to obtain the highest value for IT investments. Business process re-engineering is the most difficult step in obtaining savings since it forces a major cultural shift on program staff, yet this is where the greatest long-term savings will be attained. Jurisdictions must approach business process re-engineering as a project, defining a timetable for results and milestones to measure success. Commitment to cultural change from program executives is critical in obtaining this final cost savings measure.

Credibility will be achieved only after the ITO is able to demonstrate efficiency and effectiveness within its own operations. By following the structured steps above and focusing first on short- and long-term IT cost-cutting strategies, the CIO is able to establish or enhance the IT organization’s credibility and then begin influencing program change.

Bottom Line: IT organizations must identify and execute on short-term cost savings initiatives in order to build fiscal credibility with program counterparts and in preparation for longer-term transformational savings.

Business Impact: Jurisdictions must begin to take a formal, strategic approach toward IT cost cutting, or they will never be able to evolve from a reactive culture in which arbitrary cuts are made. Processes must be established that balance program delivery and IT investments, while enhancing overall governmental efficiency and effectiveness.

META Group originally published this article on 26 June 2003.