Be Bold with Smart New IT Investments: 5 Valuable IT Investment Steps for Difficult Economic Times, Part 1

Executive Summary

In response to the down cycle in which the global economy finds itself, businesses are doing everything they can to reduce expenses, conserve cash, and shore up their stock prices. Historically, one of the first expenses to get reduced in difficult times is IT spend, as we saw after the 2000/2001 dot-com bust. However, I have found this is a critical strategic mistake that extends the recovery period and can even cause companies to go out of business.

IT has a direct impact on a company’s growth, productivity and ability to adapt to dynamic market conditions. If your company is following the old approach of cutting IT spend to save expenses, then read on to see why you should immediately push for a change. Now is the time for great companies and leaders to follow a different path which will result in great rewards in the future. With the right strategy and careful use of IT spend, your company can grow market share and come out the other side of this recession stronger. Read on to learn five valuable IT investment steps that you can apply today to assist you in guiding your organization to make the right decisions.

Step 1. RTB Is the Enemy not CTB; Attack RTB with Passion

Run the Business (RTB) is the ongoing cost required to run day-to-day IT operations. Simply put, assume you were not trying to add customers, expand into new products or geographic regions, or make any changes to your business, but you were continuing to run daily operations. The IT cost to accomplish this is RTB.

Change The Business (CTB) is the cost of all new IT investments. This includes initiatives to expand your customer base, enter new markets, reduce cost, improve quality, and all other change activity.

In most businesses, RTB represents between 60% and 80% of the total IT cost, while CTB represents 20% to 40%.

With a portfolio management system including time reporting in place, IT organizations can easily determine how much they are spending on RTB vs. CTB, determine the number of applications they are running, break cost into fixed versus variable, and many other key metrics that will help them determine and address how they spend their IT dollars.

If a company has a cost issue it, should attack the biggest part of the problem (RTB) to get the biggest possible result. Reducing RTB must become part of the overall culture of every IT department and business. Every IT person should think about what actions he or she can take every day to save on spend. The more you reduce RTB, the more efficient your company becomes, resulting in important benefits like better expense to revenue ratios, lowered cost to manufacture or deliver services, and increased ability to handle price pressures of a competitive marketplace.

Companies that are the lowest-cost provider in their industries have a significant competitive advantage. With IT cost becoming a larger part of every company’s operational processes, you must attack IT RTB cost as a means to achieve this cost advantage.

Another benefit: The more you reduce RTB, the more you have to invest in CTB or return to your shareholder.

If RTB is the enemy, let’s review three examples of actions you can take to reduce the RTB cost for areas most companies spend a large amount of money.

1. Consulting cost

In good times, consulting companies made a lot of money from your company. Now it is time for them to share some of the pain. Request a 10% to 20% rate reduction. Make it clear this is temporary – but also that companies who participate will continue to be long-term partners when economic conditions improve, with the implicit understanding that not participating in the rate reduction will directly impact the long-term partnership with the consulting company.

2. Storage

Next, look at storage costs and policies, because technology changes in this area over the last few years provide a great opportunity for cost reductions.

a) Review your storage policies to ensure you are only keeping the minimum amount of data required to meet regulatory requirements and to run your business.

b) Move older data storage to offline or slower responding (thus lower cost) storage. While information is important, you need to make sure the value of online storage is really worth the cost. For example, do you need to keep every e-mail written online for, say, three years? What if you stored only one year online?

3. Applications and hardware

Reviewing applications for redundancies and IT hardware for replacement is the last area to review because it requires coordination between application developers and infrastructure staff. The implementation time will be longer, but the benefit is worth the time invested.

a) Normal cost reduction measures for hardware are to extend the useable life of the equipment and thus push off the replacement cost. While this works in many cases, it is not always the best alternative. What if the replacement hardware uses 50% less electricity, requires little to no maintenance, can handle five times the volume, or runs two to three times more efficiently than the old equipment? The total cost may be lower if you decide on a replacement strategy. Plus, hardware providers are also impacted by economic forces, so you should be able to negotiate a reduced price.

b) Data center equipment usually runs far below 100% utilization. Increase the utilization rate before you spend the money to add new hardware. The increased cost can be properly managed in the short run by the IT professionals. Also, you should reduce your projections of new equipment needed to handle growth due to the economic slowdown.

c) Pull together an inventory of your applications, their purpose, and the number of users. You can collect more information but start with the basics, which is easy and
low-cost to obtain, and progress from there. This inventory of applications will allow you to identify duplicate, low usage, and low value systems. Eliminating or at least reducing these will provide immediate pay back with little to no up-front cost. You will also find this is a great start to establishing your company’s overall IT system architecture. Using the portfolio management discipline and a tool can help collect the application inventory, costs, business, and technical risks to help with this decision process.

Another example of how to manage and reduce RTB is to look at it on a relative basis. Determine the amount of RTB spend that is required for production management (day to day running of applications). Then, as in the example below, plot this against the average number of outages per month. If the production percent is high and the number of outages is also high, you have a clear indicator of a quality and expense problem that needs to be addressed.

A portfolio management system makes it easy to access this information. Without one, estimate the cost of each application and compare to the outages as a starting point. Once you have implemented portfolio management, you can refine the estimate further and plan for next steps.

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