"Rightsizing" need not be ominous management-speak for losing your job. Here's how to make sure your IT infrastructure is the right size for the job.
If you buy the wrong sized pants from your local retailer, odds are that the store will let you bring the offending garment back for a refund without too much fuss.
Now try the same thing with your IT suppliers. Buoyed by optimism, perhaps you purchased excess Microsoft Office licenses several years ago, anticipating growth that left you holding the bag when your company's recent retrenchment reduced overall headcount by 40 percent. Or maybe those four backup servers you bought for redundancy are churning along at 10 percent CPU utilisation, meaning they're sitting idle 90 percent of the time. Wasted resources are wasted money, and the IT rush of the past few years has left businesses with plenty of both.
There's been little to do, except write off the expense and make a mental pledge never to be such a spendthrift again. Fiscal conservatism has become more common in recent years, as an anaemic economy forced companies to slash IT budgets and often extravagant or baseless spending came under the microscope. And in far too many cases, audits revealed a pattern of overspending that meant considerable financial resources were simply being thrown into an IT black hole.
Often, such overruns are the result of over-optimistic return on investment projections based on unreasonably high expectations from an upcoming software investment. Customer relationship management (CRM) software, a perennial favourite IT investment for many years, has been among the most overzealously purchased applications: in March, Gartner revealed that 41.9 percent of CRM licenses worldwide remained unused. Extrapolated to all of an industry that Gartner says sold US$2.8 billion worth of software last year, that figure suggests that poor planning is costing businesses US$1.6 billion a year in wasted CRM software alone.
That's US$1.6 billion a year going into the pockets of vendors who have built paper dragons through their ability to capitalise on bull runs in hot sectors of the market. Because it rang true with executives at all levels, CRM was particularly good as a magnet for IT budgets--even though other studies have suggested that anywhere from half to three-quarters of CRM projects will fail due to poor implementation and misguided executive decision-making.
Continued overspending, Gartner projects, will push the total cost of ownership for CRM initiatives up by 20 to 30 percent. Yet in a July poll of US companies, META Group found that three-quarters of surveyed companies plan to spend the same amount--or more--on CRM than they did in the previous 12 months. Are executives simply not learning their lessons?
Dr Kevin McIsaac, research director with analyst firm META Group, suggests the natural love of a bargain is a root cause of corporate overspending. "I've seen deals where vendors sold $2 million of software and, after two years, customers have only used $500,000 worth," reports McIsaac, explaining that vendors love the power-play in which they pressure customers to project their needs well into the future--and buy according to those projections.
"It might be more seats, servers, and products you think you need in the future, but usually your forecast turns out to be somewhat inaccurate," he continues. "Many places do large-volume purchases for an aggressive discount, but companies should really only buy what they're going to use over a 12 to 18-month period--and demand the discount anyway. But your typical IT person who goes to negotiations is not trained in negotiation, whereas your average vendor sales guy is cutting one to two deals a month and has a tremendously unfair advantage."
CRM is only one of many categories where businesses regularly overspend on IT. Servers, which have often been configured on a one-server-one-application basis thanks to the spread of relatively inexpensive hardware, are often extremely underutilised, with seemingly healthy usage readings of just a few percent hiding the fact that most of the server's computing power is simply being wasted.
Desktops are bought in bulk and usually do little more than run screensavers. Many companies, often those hampered by poor device management capabilities, buy software licenses in quantities far exceeding what they actually need, but never realise that only 10 percent of users actually use the software.
This problem is particularly pronounced in software upgrades, where companies often migrate all their users to a new version of an application without realising that few people actually needed the new features. Bruce McCurdy, CEO of Brisbane reseller Clariti, recently claimed that 60 percent to 70 percent of the company's customers had purchased upgrades--for example, from Office 97 to Office XP--without even understanding the benefits the new version might provide or weighing the real need for the upgrade.
The tables turned
Although overflowing IT budgets and executive apathy produced an ongoing field day for IT vendors, the economic slowdown of the past few years has put vendors on the back foot as IT spending dried up and executives quickly came to question the value of the money they'd already invested in IT. This process of "rightsizing" saw earlier excesses identified, wasted monies cut out where possible, and new software and hardware purchases put off until the company could better determine the value and lifespan of the equipment it had already purchased.
| “I’ve seen deals where vendors sold $2 million of software and, after two years, customers have only used $500,000 worth.” |
Increased scrutiny on IT spending is hardly news; in fact, the challenge of justifying projects to now-sceptical boards has become so great that IT organisations are actually underspending on IT: Gartner's Technology Demand Index showed that only 87 percent of budgeted funds for May were actually spent.
That's a far cry from the furious spending of a few years back, and the change reflects the general business push towards rightsizing. And whereas consultants and technology firms could more or less name their price just a few years ago, these days prudent companies are seeking to establish long-term relationships in which loyalty and a sense of common purpose replace the once-primal urge to make The Big Sale.
Such relationships need to be focused around identifying and delivering real business benefit for the customer. They may also, in many cases, force the consulting or technology supplier to concede that earlier overspending may have been unwarranted. But once moral reparations have been made, a close working relationship will be invaluable in driving rightsizing towards a successful outcome.
Unlike previous projects where each vendor had its own say in the progress of an IT project, it's now seen as advisable for businesses to keep just one or two strategic partners close to their proverbial chests. Everybody will want to be your partner, so make them work for it.
"We've changed in that we're always coming up with new ways to do something," says Ian Poole, CEO of systems integrator Integ, an Alcatel spinoff whose specialty in telecommunications and voice over IP has made it popular with companies wanting to rightsize their voice communications.
"We're doing as much consultation now as selling, and we would never go to a client with one way of doing something. Customer realise they can do a lot with less, which is why they want to engage with integrators. It's very much a different spin on things, and we have to be innovative."
Take care to choose a supplier with the technical knowledge, history of success, and future vision to match your own business strategies. They'll be more than happy to root out the inevitable inefficiencies in your current IT environment, and then suggest improvements. And with spending the way it is, you'll even be able to discuss options without having technology rammed down your throat.
What you need, when you need it
Recognising that businesses no longer accept the concept that servers must be complex and monolithic, IT suppliers have been working to build a more commoditised framework in which computing resources can be allocated according to customer need at any given point in time.
| “It’s very easy to increase an investment, but very difficult to decrease it. If you buy on demand, you’re trying to create a more flexible environment than you currently have.” |
The concept of buying what you need--just-in-time inventory--has long been entrenched in world's-best manufacturing, distribution, retail, and other practices, but has been lacking in the IT world. With the support of IBM, HP, and other utility computing advocates, just-in-time access to compute power could well become the mantra of the rightsizing movement--if customers aren't already too jaded to listen.
"It's about trying to get a better understanding of your environment in a business context so it's not an IT environment, but a business environment," says Andrew Belger, manager of enterprise systems management solutions with IBM Australia. "It's very easy to increase an investment, but very difficult to decrease it. If you buy on demand, you're trying to create a more flexible environment than you currently have. Once you've got an understanding of what you need to do, looking at the spend you're making, and its impact on the business, is far easier."
Hardware makers aren't the only ones revisiting their strategies to better meet customer requirements. Microsoft, which suffered a significant ideological blow with the introduction of its costly Licensing 6.0 program last year, recently announced it will offer its upcoming Exchange 2003 system with the option of a per-user license, rather than the per-device license that's been required in the past. This allows companies to pay for a certain number of users accessing corporate information systems from any number of devices, rather than forcing the company to pay for extra licenses to cover a large number of systems that might potentially be used for access.
Translation: license fees will mirror actual usage by real people, rather than forcing companies to buy licenses for computers that aren't being used. This type of rightsizing has spread across all sorts of software, particularly through the pay-per-month model offered by the small number of application service providers (ASPs) that continue to offer managed applications to businesses.
| “IT was a cost centre, and if they were short of resources it was a battle to [get them]. Now, everything has a specific direct cost associated with it.” |
"It's difficult, and there are vendors knocking on the door all the time," says Mark Wiblen, information technology manager with Singleton Council, which spans the Hunter Valley west of Newcastle. The council recently worked with Integ to install a new Voice over IP-capable PABX, but decided to hold off on actually implementing VoIP until the time is right.
Self-control is the key, Wiblen explains: "A lot of companies have been led astray by the vendors. But being a government body and not too affluent, we've had to try and do the most we could with the financial resources we've got. It's always in the back of our mind to put something in that serves our needs now but can also be easily upgraded to meet future demands."
Rightsizing the human factor
Rightsizing isn't only about technology; to be more accurate, it often drives a process in which technological enablement is balanced against human efficiency. In some cases, the technology may be thrown out in favour of the human touch: last month, Sydney taxi company Manly Warringah Cabs distanced itself from a voice-activated booking system that it felt had annoyed customers, many of them elderly. In its place, the company set up its own booking centre and relied on a sophisticated dispatch system that it believes will improve overall service.
In such cases, success comes from putting IT funding into the right places, not just into every place. Similar benefits greeted wood fibre company Carter Holt Harvey in 2001, when it introduced a $50,000 SAP-based accounts payable solution that has saved the company $12 million in staff reductions and improved efficiency (16 employees now work more efficiently than the 35 that previously spent two-thirds of their time chasing errors).
Of course, any sort of rightsizing that involves staff retrenchments isn't likely to be ushered straight past the board; the word "rightsizing" can easily be seen as a euphemism for "downsizing" (which is itself a polite term for "sacking staff"). Bottom-line savings may be possible, but political implications, retraining expenses, and other issues suggest that a more prudent approach is to redeploy workers who are no longer needed thanks to process efficiency improvements generated during rightsizing. This was the thinking at CHH, which not only improved its accounts payable system during 2001 but also divested itself of its entire in-house IT organisation.
That organisation became Oxygen, which now functions independently but handles all of CHH's IT requirements as well as servicing other outside customers. After a few teething pains, Pat O'Connell, CIO for CHH, says the separation has paid off handsomely by delivering structural discipline that was previously impossible to achieve.
"In the past, we weren't able to get a really good handle on our IT cross-business costs, and IT were not as responsive as they could have been," he explains. "IT was a cost centre, and if they were short of resources it was a battle to [get them]. Now, everything has a specific direct cost associated with it. We have managed to get quite a lot of costs out of IT in the past couple of years, and by having Oxygen look after our infrastructure, we've been able to embark on programs to save costs for the business in the long term."
As a player in the competitive services market, Oxygen sets its own staffing levels and is responsible to CHH like any other customer--even though the company is 100 percent owned by CHH, meaning that any money CHH pays Oxygen comes straight back to it. But separation has forced both companies to change for the better, with CHH focusing on business discipline and Oxygen learning what it takes to be a competitive IT supplier.
Those lessons are being echoed across the industry as rightsizing continues to refocus executive priorities and alter IT investment plans. And as the economy shows early signs of a slow recovery, there are indications that rightsized companies may well begin spending on IT again--albeit more carefully this time, and with more of a focus on ROI measures that continually reflect the current status of the project and the business.
"We're starting to see people slowly looking back to the future," says Oxygen's Dickinson. "Once companies have gotten the most value they possibly can out of the infrastructure they've got, then--and only then--are they in an informed position to make decisions for the future."
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