I.T. Cost Control is More Than a Fire Drill

Quintin Sykes

January 4, 2008

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A MEMO FROM THE CEO

“2008 marks a pivotal year in the history of Wrongway National Bank,” noted Richard Thurston Barnstable, III, President and CEO. “After a frustrating 2007 of continued margin pressure, higher-than-expected credit losses, mortgage revenue declines and higher costs from opening several new branches, our very survival as an independent entity is at stake. We must return to the solid earnings we are known for in 2008.”

“So, how does that happen overnight?” Wrongway managers ask themselves. And then they find it in the last paragraph: “…and so I am asking all of you to pitch in.” Uh oh, he’s not asking: “Effective immediately, all departments have had their 2008 non-interest expense budget reduced by 5%.” In their state of shock managers don’t bother to read the rest of the memo about sacrifice and the quotes from Churchill and Beecher.

Without a culture of cost control, Wrongway found itself in a panicked, cost-cutting exercise every few years. It was easy to execute one-off cost cuts, but the bloat invariably crept back into the expense base without substantive changes to processes surrounding non-interest expenses.

With less-than-stellar earnings in much of the financial services sector these days, Wrongway’s CIO probably wasn’t the only one that found a ray of sunshine like the memo above in his inbox. The memo says to reduce costs right now, so there’s not a whole lot of time to think strategically, at least for the moment. These types of directives can come in one of two flavors, too: budget reductions and spending run rate reductions. There’s a big difference in difficulty between paring down an inflated budget (a la government “budget cuts”… whoopee, spending only went up 4% instead of 8%) and actually cutting into the actual spending run rate.

The Easy: Round Up the Usual Suspects
CIOs can always turn to some tried-and-true quick hits to reduce their budgets:

• Deferring hiring into new and open positions, reducing salaries and benefits expense
• Deferring projects that don’t have revenue tied to them or a regulatory deadline, reducing projected depreciation and maintenance expense
• Cutting out some of the “fluff” inserted into a few of expense line items—come on, is software maintenance on every system really going to go up 7%?

A Little Harder: Cost-Cutting Brought to You by the Letter ‘R’
The quick hits above will probably reduce the rate of budget increase but do nothing to actually cut into spending. To get serious about cutting, here are some tactical items to consider for 2008.

Rationalize Projects

• Eliminate (not defer, eliminate) projects that don’t have a positive ROI, a regulatory deadline, or tie back to an internal SLA (service level agreement) or non-financial metric from your strategic technology plan.
• Reduce the contract personnel expense line item down to that which is necessary to support the remaining approved projects.

Renegotiate, Renew, Replace, and/or Retire Contracts

• If an inventory doesn’t already exist, gather technology-related contracts. Identify the ones that are up for renewal this year and next. Don’t let those contracts auto-renew without a thought — get vendors to sharpen their pencils! For contracts expiring more than a few months out, there may be an opportunity to take advantage of better pricing now in exchange for an extension.
• Obviously, if systems and their associated contracts can be retired that’s even better. Maybe there’s an opportunity to dispose of a software module or two that’s part of an upcoming contract renewal.

Reduce Waste

• Examine processes for acquisition and reimbursement of non-capitalized equipment and communications and adjust them immediately. Can anybody just go out and order a fancy wireless mouse and keyboard? Can they order a flat panel monitor because it’s cooler than their tube? What kinds of cellular phone-related expense are getting reimbursed?
• Same for acquisition of computers and printers. Is unused hardware that meets minimum specifications getting redeployed or is new equipment finding its way onto the books? What are the criteria for someone getting a laptop vs. a desktop computer? Color printers vs. black-and-white? Individual printers vs. networked/shared?
• Look for waste in contracts with per-user charges. Getting billed for inactive users that ought to be removed from the system entirely (bill pay and ATM/debit card base, anyone)? [Note: before the nastygrams start rolling into Gonzo HQ about how shortsighted Q the Impaler is, yes, let the Marketing department (or whoever owns those delivery channels) try and get inactive customers to use those services before removing them.]

The largest opportunities for cuts are likely going to be in the first two categories, but a lot of base hits from reducing waste won’t hurt. Remember, without changes to process a CIO might just wind up in the same boat again — get those tactical cuts made, but may I suggest…

Disciplined I.T. organizations employ and consistently execute sound processes, policies and tools for technology financial management, eliminating the need for cost-cutting fire drills. Disciplined technology financial management, among other things, is about understanding the costs, the decisions that drive those costs, and the value realized from those decisions. We’ll start getting disciplined by understanding costs.

Identify Your True I.T. Expense Run Rate
The income statement and budget are there to manage and project so-called I.T. expenses, but not all financial institutions understand where those expenses really are and fail to account for them when trying to understand their total I.T. costs. In many cases, particularly for business unit-specific applications, costs don’t wind up in the I.T. rollup. That goes not only for the hardware and software associated with those applications, but the people (or portions of people) that support them.

The first step in technology financial management is to have a complete understanding of true I.T. costs. Again, those costs aren’t always found in the I.T. rollup, particularly in the case of strategic systems, so ensure you’re looking for expenses across cost centers. CIOs participating in our technology spending survey* are routinely surprised by the I.T.-related expenses and even headcount they find outside the technology area.

Take a look at 2007 I.T. expenses, looking both inside and outside I.T. cost centers. Some CIOs choose to normalize expense run rate by backing out non-recurring expenses or including full-year impact of initiatives implemented in 2007.

With an understanding of what the costs are and where they are, some thought can now be given to opportunities available to influence them.

Attack Weak Processes That Affect Expense Run Rate
Cost-control ninjas execute sound processes throughout the life cycle of their technology investments. Drawing a table or creating a spreadsheet as described below may help stimulate some creative thought about where expense control opportunities exist. This could even be called a framework to sound all enterprisey and impress colleagues.

• On the top axis, list the major I.T. expense categories. My example uses Cornerstone’s categories but feel free to use your own expense categories if desired.
• On the left axis, major drivers of I.T. costs. There are certainly more cost drivers than these, so feel free to add your own.

• At each of the intersections in the matrix, think about whether or not there’s an opportunity in policies and processes to influence costs. If applicable, put one or more policy or process name abbreviations in each box.

Considering key questions associated with the cost drivers may trigger thoughts on what processes/policies may need some tuning or enforcement:

• Justification: Were projects approved with sketchy justification? Are new I.T. purchases required to meet a standard architecture?
• Functionality: Do you buy software modules based on requirements? How much customization was purchased and what was the justification?
• Capacity: What projections did you use to determine licensing levels purchased (users, seats, assets, volumes, etc.)? What projections did you use to determine physical capacity purchased (storage, speed, bandwidth, etc.)?
• Contract: Did the business impact analysis determine vendor service level requirements? How were prices negotiated (competitive bid, for example)?
• Operations: Do you know where your hardware software, network, and information assets are? Are purchased systems being utilized and if not can you get rid of them? Are you looking for waste in contracts you have?

The wrong answers to these question can result in undesirable side-effects including:

• Increased costs from installing systems with little/no benefit
• Increased costs from increased complexity of technical environment
• Increased system costs from modules you “got a good deal on” but aren’t using
• Increased depreciation and maintenance costs from unnecessary customization
• Increased system costs from buying more capacity than you actually need
• Increased maintenance costs from paying for a service level you don’t need (24×7 support instead of 12×5, for example)
• Increased system costs from single-sourcing vs. competitive bidding
• Unnecessary hardware/software purchases from poor asset management
• Unnecessary outsourced fees (see inactive user example above, for example)

The nearest-term opportunities for cost control lie in the areas of operations and contract management. For example, non-capitalized equipment purchase polices can be changed fairly quickly and improvements can be made to asset management process get to a decent handle on equipment inventory (even if it’s manual to start) in a short period of time. Moving up the list, contract-related processes can be adjusted in a reasonable period of time to support upcoming expirations and new contracts—don’t just let those agreements roll over unreviewed anymore!

On the other hand, governance-related changes can take longer given the mindset shift that has to occur (“What’s a hurdle rate?”, “What do you mean we can’t do everything?”, “What’s an architecture review?”, “But I used [insert system name here] at Brand X.”).

After changes are made, ensure processes are applied consistently for all I.T. purchases, even if the expenses aren’t in the I.T. rollup. Everyone will get the benefit of the improved processes (note they may not all see the ‘benefits’ at first, particularly when the processes mean saying “no”).

NOW SHOW ME THE MONEY!
Hopefully you haven’t been forced into cost-cutting mode (not that everyone didn’t hear the message during budget season!) like Wrongway’s CIO and you’ve got an opportunity to make strategic changes to your technology financial management processes. Stepping back and looking at the entire life cycle of a technology investment is an eye-opening exercise in just how many places costs can get out of line. I hope you’ve found a few holes to plug and can start 2008 on the right foot, budget-wise!
-QS