Reducing IT costs: Efficiency vs. Effectiveness

In many organisations, business units and stakeholders are concerned about costs and performance of their IT department, not only in times of crisis. This is partly due to a lack of insight into the services provided and the effort required to deliver them, as well as an outdated model for the IT organisation that has become entrenched over time. The current economic situation is exacerbating this problem by forcing many companies to scrutinise their IT spending more closely. Consequently, necessary investments in strategic initiatives or modernisation are being postponed in favour of short-term savings.

Costs and efficiency

Although organisations are currently under significant cost pressure, we have repeatedly observed in consulting projects that IT departments of large organisations already operate very efficiently in terms of infrastructure. In contrast, IT in medium-sized companies is often still perceived as a mere 'workbench', assigned the traditional role of service provider. It focuses on efficient provision of technical IT services, without coordinating closely with business units on business processes.

Cost Benchmarks in medium-size companies

Our cost benchmarks show that IT services of SMEs are generally provided cost-effectively. Medium-size companies often achieve a competitive total cost, even when cost transparency is limited at the outset of projects. One reason for this is the informal 'ad hoc support', which keeps things running smoothly with a great deal of commitment.

Incorrect cost-cutting measures do not improve the situation.

This is due to considerable cost pressure from management and business Units, as well as strict cost-cutting measures such as across-the-board IT budget reductions. Over a longer period of time, this can lead to IT being reduced to the bare essentials – with the primary goal of maintaining operations. This strategy leaves no room for the forward-looking development of the IT organisation.

Benefits and effectiveness

Many organisations focus purely on providing IT services in a cost-efficient manner (‘doing things right’), often at the expense of IT effectiveness (‘doing the right things’). This highlights the need for action, particularly with regard to organisational and strategic positioning. A key challenge is the silo mentality stemming from historical and outdated organisational structures.

Catching up in small and medium-sized enterprises

In particular, we observe that basic services such as essential infrastructure and network services (e.g. workplace services) are not yet provided uniformly and centrally. Additionally, modern roles and responsibilities, such as those of the business partner, are either not established or arise only through individual, historically grown personal relationships rather than standardised structures. Furthermore, some SMEs are still in the early stages of developing a targeted IT strategy and associated governance structures.

 

Challenges for IT organisations

Due to the outdated supplier model, IT organisations face the dilemma that the transition from a service provider to a business ecosystem is not widely accepted or supported by business units. This considerably complicates the necessary IT transformation into a modern, business-oriented partner. Furthermore, the fundamental building blocks of modern IT operations are struggling to emerge and establish themselves. These include a consistent service portfolio that clearly defines services and responsibilities, and effective project portfolio management to prioritise initiatives. Sourcing strategies and consolidated application landscapes also fall short of their potential.

IT departments in firefighting mode

Without clear structures and guidelines, however, IT services are often provided ad hoc and ineffectively. At the same time, many IT departments are understaffed and overwhelmed with reactive tasks, such as responding to individual requests from specialist departments. Analyses of past IT benchmark projects have shown that some customers have 20 per cent fewer staff than the market average. This permanent 'firefighting mode' prevents IT from acting proactively, providing strategic support to the business, and preparing for future requirements. Consequently, the advantages of modern IT, such as better service quality, time-to-market, user satisfaction, optimised supplier relationships and economies of scale, remain untapped.

Strike a balance between efficiency and effectiveness.

To strike this balance, some organisations urgently need to redefine the role of IT. As well as considering costs (efficiency), the focus should be on creating forward-looking processes and structures (effectiveness) within the IT department. Even under strong cost pressure, management must ensure they tighten the screws in the right places with a sense of proportion, so as not to jeopardise the functionality and innovative power of IT.

 

If you are interested in an IT health check, please contact me. This quick assessment gives IT management an up-to-date, comprehensive overview of the efficiency and effectiveness of their IT organisation.

This project report details an IT health check carried out by Metrics at bardusch.