Ann All spoke with Honorio J. Padron, Global IT Advisory Practice Leader, and Erik Dorr, Senior IT Research Director, for the Hackett Group, a  provider of best practice advisory, benchmarking, and transformation consulting services, including shared services, offshoring and outsourcing advice. Utilizing best practices and implementation insights from more than 4,000 benchmarking engagements, executives use Hackett's empirically based approach to quickly define and prioritize initiatives to enable world-class performance.

All: Hackett Group’s research shows demand for IT services will grow 8.6 percent through 2011 while IT budgets will grow just 1.3 percent during this time. Were you surprised at all by those numbers?
Dorr: Actually no. That gap has been there historically. Of course, you need a little Excel magic to aggregate the number of transactions and the amount of digital content, to translate those into IT demand.

All: In looking at the reasons for demand growth, it looks like business transformation is growing strongly while organic growth is declining. What, if anything, does this mean for IT departments? Does it suggest a need for new skill sets, for example?
Dorr: The shift is not a seismic shift. It’s not like IT overnight drops everything, and then all effort goes toward supporting internal transformation initiatives. But there is a change in the demand profile. In terms of skill sets, I don’t think you can just retool the IT organization overnight and bring in a bunch of new skills. What IT needs to do is to understand the nature of the changes and adapt accordingly. Just like, by the way, the business needs to do. When you go from being concerned about top-line growth to being concerned about bottom-line margin, you have to change your priorities.

Padron: Our research indicates technology has been implemented without a holistic view, without considering proceses and people. And as more shared services and global services emerge, we’re seeing that it’s reached a point where IT organizations are being asked to get involved and maximize the investment made in the infrastructure. It’s a shift in service delivery strategies. I don’t just mean IT. I mean G&A (general and administrative) services overall.

Dorr: The best IT organizations are those most in tune with what the business is doing. So that in and of itself doesn’t change. The best IT organizations are going to make that adjustment most effectively, and the worst are still going to be doing their own thing, with the rest somewhere in between.

All: The numbers show an obvious need for more IT efficiency. You identify IT cost  control strategies, IT demand management techniques and discretionary cuts as the three pillars of IT efficiency improvement. You then break each pillar down further. In the cost control category, you mention offshoring/outsourcing, IT reorganization, process/productivity improvement initiatives such as ITIL, and supplier/contract management. Which of these are used most often? Which yield the most significant cost savings?
Dorr: Offshoring/outsourcing initiatives yield the highest savings, but not necessarily as a percentage of the baseline cost. This is simply because of the fact that when organizations outsource, they tend to tackle a larger chunk of the overall activity. So let’s say you renegotiate your telecoms contract and you get 10 percent (savings). That’s beautiful, but if that 10 percent represents 5 percent of your spend, the overall budget impact is half a percent. If you take your entire applications maintenance activity and outsource it or offshore it and get 10 percent (savings), that’s typically a much greater portion of your overall budget, so the impact will be higher.

All: And I guess it can be difficult to tie process improvement directly to cost savings?
Dorr: If you take ITIL as an example, there’s a baseline cost of providing end user support from a help desk. If you put ITIL in place, you’re going to want to see a business case with reduced costs along with all the quality and cycle time improvements. Ultimately, people get into these initiatives for cost savings reasons. Let’s say you adopt a rapid applications development methodology and you change the way you develop software. Again, you want to see some real bottom-line productivity gains there, translating into hard dollar savings.

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