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IT spending smarts: strategies for paring costs and risks.

Today's business realities put tremendous pressure upon CIOs and CFOs to make optimal technology investment decisions. Although hardware prices continue to fall, some industry estimates suggest that, on average, organizations today spend more than 50 percent of their annual capital budget on technology investments. Other estimates show that of the total information technology (IT) budget, as much as 80 percent is spent on managing the current IT environment, leaving only 20 percent for new applications and systems.

With so much of the capital budget at stake, and so narrow a margin for error in making new technology investments, it's no wonder finance and IT executives are looking for new strategies to reduce the cost and risk of technology spending. Yet, too often, cost-control efforts focus on reducing initial acquisition costs, rather than the total cost of ownership over each asset's useful life. Much greater cost savings can be achieved through strategic management, over time, of the entire IT asset portfolio, including not only hardware, but also software and maintenance.

Here are four strategies for making smarter technology investments, using a portfolio management approach.

Strategy 1: Assemble a Detailed, Holistic View. In order to assemble a holistic view of your overall IT asset portfolio and the total cost of ownership over the technology's lifecycle, you must first establish a baseline of the current environment for all systems, software and maintenance. Creating a baseline involves a combination of steps:

* Verify current asset information through non-intrusive, automated inventory audit and software mapping tools and a physical walkthrough of the company's office(s) and data center(s).

* Review purchase or lease records to determine the age and life expectancy of each asset.

* Review maintenance contracts to ensure existing assets are appropriately covered and maintenance is not being paid on obsolete assets.

* Inventory and map current applications to the business processes they support and to the systems supporting them, all the way down to detailed configurations and dependencies. This provides the information necessary to determine the critical nature of different elements of the infrastructure and, thus, the business impact of planned or potential consolidations and upgrades to the environment. It also enables validation of business continuity plans.

* Gather all hardware, software, and maintenance information in a repository to enable a holistic view of the current inventory, technical and business interrelationships and supporting asset lifecycle information for the entire portfolio of IT assets. Keep the repository updated and use it to manage the portfolio over time.

By viewing the full environment--or portfolio--of interdependent IT assets as a whole, individual technology investment decisions can be reviewed and analyzed in context, and cost and risk management strategies can be optimized.

Strategy 2: Align Maintenance Coverage. Some organizations sacrifice cost reduction for risk reduction by purchasing maintenance at higher levels than they need for certain IT areas. They may have adequate support, but are overspending. Even worse, most maintenance audits uncover instances of organizations continuing to pay maintenance coverage--often in the tens or even hundreds of thousands of dollars--on assets they no longer own or use.

Alternatively, an organization may not have the coverage it thinks. Most business applications are highly interdependent, accessing multiple components of the infrastructure--including the network, security components, servers and storage. Business continuity is dependent upon identifying any maintenance support weaknesses.

The IT organization also must work closely with business units to understand their true support needs, which are sometimes overestimated. Take the example of a financial organization that was contemplating a fully redundant failover system for one of its critical business processes. Upon further discussion, it was learned that although the business unit in question had a mandatory daily deadline, it always completed processing at least six hours before the deadline. By accepting a downtime window within that six-hour margin, the company was able to select a maintenance option that provided the critical coverage, along with substantial savings.

Strategy 3: Ensure Software Compliance. These days, organizations that want to save money on software need to perform regular baseline audits on their software usage and licenses. Those unaware of what they have are learning the hard way when their software vendor sends them a bill for non-compliance. The bill is usually quite large, and it's frequently incorrect--and accompanied by enormous fines.

A major insurance company recently received just such a bill for $6 million. The amount was calculated based on the difference between the total number of user licenses the company held and the number of employees it had listed in its most recent annual report.

By performing an internal baseline audit, the company was able to prove that not all of its employees were using the software. It also was able to demonstrate that some users were being counted multiple times due to multiple sign-ons. The company calculated that it owed $1.5 million, which it paid. By researching the licensing options in closer detail, the company was able to trim its future costs by $600,000 a year by switching from a user-based licensing model to a server-based licensing model.

Strategy 4: Control Operating Costs Through Leasing. Typically, 75 to 80 percent of an organization's IT assets are modified or removed within three years of being installed, and up to 90 percent of the infrastructure experiences some level of change during its use. In addition, on average, IT equipment costs drop 50 percent over a three-year period, compared to the price of new equipment delivering similar or greater performance. Conversely, support costs after three years generally increase 20 percent or more, based on the original acquisition costs of the assets.

An important strategy for reducing an organization's risk and financial exposure is to match the financial life of its IT assets to their productive life. The most effective way to do this is generally through lease financing. Leasing enables organizations to lock in a predicable operating cost by balancing technology price declines against maintenance, software and operating cost increases.

As a rule, not all assets should be leased, just as not all assets should be purchased. Determining which should be leased requires evaluating the total cost of the assets to the organization, including the acquisition and depreciation costs, as well as the ongoing maintenance and software costs.

Reviewing historical information regarding manufacturer tendencies with regard to pricing actions, performance improvements, release time-frames for new products and support cost history for hardware assets and the software associated with them can help refine these calculations. In addition, it is crucial to compare the organization's intended productive use against its actual recent history of usage for various types of assets.

Leasing also reduces the burden upon IT operations by reducing the complexity of the IT environment. Some organizations find great value in the operational discipline instilled by the regular decision points (typically three years out) that leasing creates. Other benefits include freeing more capital for business investment and enabling ongoing investment in new technology to support changing business requirements.

The pressure to control the cost and risk of technology investments is likely to intensify. CFOs and CIOs can demonstrate spending "smarts" by taking a strategic IT management approach that begins with a detailed, holistic view of the IT environment. Once such a view is obtained, individual decisions with regard to issues such as maintenance renewal, software licensing and whether to lease or purchase assets can be made proactively and with better understanding of their impact on the overall environment and organization.

John Carcone is Senior Vice President of financial services for Forsythe Technology Inc., a technology infrastructure solutions provider in Skokie, Ill., that helps organizations manage the cost and risk of their information technology. He can be reached at or 800.843.4488.


* Some estimates show that of total IT budgets, 80 percent is spent on managing the current IT environment, leaving only 20 percent for new applications and systems.

* Greater cost savings can be achieved through strategic management of the entire IT portfolio, including not only hardware, but also software and maintenance.

* Understanding and managing four key strategies can produce smarter technology investments, using a portfolio management approach.

* Leasing enables organizations to lock in predicable costs by balancing technology price declines against maintenance, software and operating cost increases.
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Title Annotation:information technology investment
Author:Carcone, John
Publication:Financial Executive
Geographic Code:1USA
Date:Apr 1, 2006
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