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In the firing line

Tuesday November 3rd, 2009

By Steve Bannister, Director of ICT Consulting, Avail

ICT could be targeted first as central and local government strive to meet the Operational Efficiency Programme’s extra efficiency targets.

There is much debate within the media over which high-profile areas of public spending, such as health, education, defence or transport, will face the biggest budgetary squeeze. However, as both Government and Opposition focus on trying to maintain direct spending on frontline services, it is likely to be spending on back-office functions and ICT support that will be hit hardest and earliest. The Operational Efficiency Programme (OEP) report, published by the Treasury in May of this year, estimated that around 20 per cent of the approximately £16 billion spent annually on public sector ICT could be saved without compromising the quality of service delivery. ICT spending is clearly in the firing line.

Driven by this imperative, there has been a dramatic shift in public sector CIO priorities: away from managing complex ICT procurements and implementations towards a much narrower focus on ICT cost reduction and cost avoidance.

To best support this prudent shift in emphasis, we need a clear understanding of the most effective ways to deliver lasting reductions in ICT expenditure – steering well clear of indiscriminate ‘slash and burn’ policies. The OEP report is a good starting point, but for an ICT leadership team to be really successful, it will need to understand the organisation’s specific ICT cost levers both on the supply and the demand side.

The potential savings on the supply side will vary significantly across the different components – people, process, technology, procurement and facilities. For example, server virtualisation can lead to savings of 20-25 per cent of hardware, power and facility costs, although this area of cost is only a small proportion of overall ICT costs. Implementation of Information Technology Infrastructure Library (ITIL), which is the de facto best practice standard for IT service management, has been quoted as saving 10 per cent per user per annum. Even the straightforward reduction in unused end-user application licences can deliver quick wins. One government agency was able to save over £300,000 a year simply by eliminating duplicate applications and removing unused and under-used licences. 

However, organisations often focus excessively on the supply side and overlook the potential to control costs by influencing demand by customers.

With operational ICT, the two main demand-side cost reduction levers are reducing the scope of services delivered and smoothing out demand patterns. For example, there may currently be a demand for intensive hands-on support from particular application or desk-top experts, and this demand may peak at month- or year-ends, leading to excessive staffing levels throughout the year. With careful analysis of the operational demand across all business areas, reductions can be identified without compromising service quality. A blanket demand for out-of-hours ICT support for all parts of the organisation, for instance, could be reduced to standard-hours support for all but the most critical activities. 

However, while these areas may provide significant opportunities for ICT cost reduction, organisations must tread carefully to avoid jeopardising business operations. Each ICT initiative should be genuinely business-led and structured to deliver tangible business benefits. If an ICT initiative is not focused on business outcomes it should be stopped or at least rescoped. One approach could be to simply focus on organisational and process changes rather than introducing the latest state-of-the-art technology. If it is necessary to halt a large ICT programme, it usually makes sense to follow a formal disinvestment approach to avoid a rise in overall organisation costs. Crucially, each of these demand decisions must be driven by a solid business case. As with operational ICT, the smoothing out of demand for ICT projects can also contribute significantly to cost reduction or avoidance.

The case for disinvestment will be easier to make than additional ICT investment in the current economic climate; however, there are major opportunities for organisational efficiency improvements through increased investment in ICT. Best-in-class organisations have demonstrated that improvements of around 20 per cent of overall turnover can be achieved by implementing Enterprise Resource Planning effectively.

As well as being focused on tangible business benefits, ICT cost reduction initiatives must be carried out in the context of wider business activities to avoid lowering of performance or, even worse, cost increases in other parts of the organisation. It is therefore always prudent to take a holistic approach to performance improvement and cost reduction. For example, an organisation in the aerospace and defence sector used a holistic enterprise-architecture approach to significantly simplify its long-term ICT requirements and reduce its total cost of ownership from £300 million to below £100 million.  

So, how can we best make the case for and deliver these ICT cost reductions?

Organisations should always apply good business and governance disciplines, such as investment appraisals (business cases) for all initiatives, including quick wins, although these can be short and sharp ‘one pagers’ rather than weightier tomes.  The organisation should also look to implement other key governance disciplines including portfolio, programme and project management, and comply with appropriate technical, process and procurement standards. It is also important to follow a tried, tested and rigorous methodology, which is then tailored to each situation.

But this in itself will not be enough. There are other key success factors for achieving tangible, realistic goals. 

These are:

  • make sure you have clear objectives from the outset and the buy-in of your key stakeholders
  • take a top-down strategic approach, as well as focusing on the details
  • make sure you gather all the facts and build a cost model for your organisation, identifying all the demand- and supply-side levers and how they interact
  • assign specific targets by area, rather than set broad-brush percentages
  • focus on realisation – take practical steps to identify, quantify, deliver and measure real cost reductions
  • apply good business disciplines including investment appraisal, good governance and programme management throughout the process
  • recognise that to achieve significant cost reductions you will need to invest up-front in the right skills and experience – you will need to ‘invest to save’

 If you take the time to really understand your organisation’s cost levers, both demand-side and supply-side, and apply the correct combination of practical skills, experience and methodical approach, then you can deliver significant and sustainable cost reductions.   

Budgets across government are set to contract and ICT spending is clearly in the firing line – now is the time for public sector ICT leaders to prepare their organisations for the future.

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