Friday, March 27, 2009

Managing the Cost of IT with IT Optimization Techniques.

Most of the time IT optimization is seen as a cost reduction exercise, although examples can be found where IT optimization means increasing IT spending. All IT optimization initiatives will lead to a shift in IT costs.

 An IT optimization initiative may result (as part of a complete set of changes) in refocusing on activities around new technology and outsourcing cost-extensive activities like legacy maintenance and operations. This will lead to a shift in the cost distribution on the cost categories’ external service provider, personnel, and slightly on the cost categories’ communications and facilities, and probably (in the long term) to an overall cost reduction.

 An ABC study can discover that a large amount of the costs are made for the maintenance and operations of self-made applications; this can lead to a change in strategy towards package-based applications, which will lead to a shift from the cost category personnel towards especially software (licences, etc.).

IT optimization techniques
Different techniques can be used to reduce IT costs: standardization, consolidation, concentration, centralization, outsourcing (including out-tasking) and cost cutting. These are the most commonly used techniques.

Cost cutting is seen as a technique which focuses on the decreasing of IT costs. The targets are mostly short term, and focused internally on the IT organization. The effects on the value of IT and the business are not taken into account. Examples (real life) are:
 Decrease of IT budget for the following year of 15 per cent.
 Decrease of IT personnel of 10 per cent.
 No external personnel for the rest of the year.
Cost cutting will lead to both decreasing quality of service and fewer services. In some situations this can lead to increasing total costs. Although cost cutting can be used to decrease IT costs, it is not seen as a real optimization technique because of its short-term view and internal IT focus.

Outsourcing is not a cost saving initiative in itself, but more a lever for the realization of standardization and optimization.

Centralization is seen to create a situation where someone or something is under the control of one central authority, but does not include locations of people or assets. In IT optimization situations centralization can be used to centralize:
 Organizations, for example one central helpdesk instead of local helpdesks.
 Processes, for example one central incident management process instead of local incident management handling.
In most situations the overall quality of service will improve and the business will value IT more because they will better able to meet expectations. In other words: the differences between organizations, employees, services and users will be reduced and may lead to an overall improvement. Cost reductions can be found in the area of personnel; through standard processes personnel will be more effective and efficient and less management is required.
Centralization of hardware, software, communications and facilities will only lead to changes in the control and management. In other words the effect will be especially in the organizational area.

Consolidation can be best described as the uniting of things which results in an improvement. Consolidation is sometimes divided into logical and physical, but this division will not be used here. In IT optimization situations consolidation can be used to consolidate:
 Organizations, for example helpdesks, operations.
 Physical environments, for example data centres and research centres.
Consolidation is in these situations not just combining these organizations but also improving these organizations (second part of the definition). The quality of the new organization or (in case of physical consolidation) data centre or research centre should lead to improved quality of service. Cost reductions might be expected in the areas of facilities and personnel (more effective use of personnel, less management).

Standardization is changing something to conform to a fixed standard, type or form. In IT optimization situations standardization can be used for hardware, software and communications. Standardization simplifies the IT environment. Because specialties no longer exist, fewer interfaces are needed, fewer system images are needed, etc. Additionally less specific knowledge and skills are needed. Cost reductions may be found in the area of personnel (less specific personnel needed, more efficient use of personnel, less education), external service provider (less specific knowledge needed), software and hardware (fewer maintenance contracts and lower licence fees). Moving from one-of-a-kind to packages will increase licence fees. In case standardization means one service for one requirement (instead of multiple solutions) the licence fees decrease due to economy of scale.

When standardization is used for facilities corresponding cost reduction may be achieved because the devices are standardized and maintenance contracts may be simplified. For example, all data centres have the same type of airconditioning, network, power generator, etc. In addition people will make fewer errors because all facilities are equal.
Standardization of processes and procedures can be based on generally accepted models such as ITIL, IBM’s ITPM and CMM. In this area standardization is the first step towards centralization in which one process exits for the whole organization. In addition to cost reductions in the area of personnel, standardization of processes will lead to better quality of service. End users can better understand the way of working of the IT organization when this is similar in the whole organization; this will lead to a higher (average) customer satisfaction.
Standardization of organizations is only an improvement when it is combined with other optimization techniques such as concentration or centralization.

Concentration is the gathering of people or things in one location. In IT optimization situations concentration is used for organizations (personnel) and hardware (facilities). Concentration has a minor effect on the quality of service. Cost reductions will be especially in the area of facilities and personnel (less travelling). Concentration of hardware will result in different requirements for data communication, depending on the changing communication flows between servers and between servers and end users. In the hardware area concentration is a prerequisite for consolidation.
Concentration won’t apply to communications, processes and software.



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