As head of IT at Manchester United Football Club, Mark Hargreaves has his tactics all worked out.
‘We have a well-defined set of guidelines from the board of directors that spells out a five-year IT roadmap. Provided I don’t overspend and I follow the roadmap, I don’t have any problems.’
But what makes Hargreaves a successful IT leader is that he doesn’t just follow the roadmap. While he takes care to stick to budgets and support services, he also invests in innovation – most recently a new division of the club, set up to explore new media opportunities.
‘It is pretty cutting-edge and it is hard as there is no track record,’ says Hargreaves. ‘But we have a powerful brand and people expect fresh and up-to-date things from us.’
Being innovative can seem like a tough requirement if your IT budget has just been frozen or cut for the umpteenth year running – and that is the case for many chief information officers (CIOs), says AMR Research analyst Dennis Gaughan.
‘Controlling and reducing costs has morphed from being a one-off pressure to being a continuous demand in most organisations,’ he says. ‘I regularly speak to CIOs who tell me that senior management expects them to shave five to 10 per cent off the IT budget on an annual basis.’
Certainly, IT budgets in the UK are under pressure: according to Forrester Research, IT spending in the UK will increase by just five per cent in 2006, after several years of relatively slow growth.
Less optimistic figures from analyst Gartner predict UK growth in IT spending of just 1.3 per cent over the next three years.
So, how can CIOs balance the twin demands of saving money and investing in new projects? The secret is to squeeze money from existing services and applications, and reinvest that saving in new projects, says Marcus Blosch, vice-president and research director with Gartner.
‘That’s certainly a better approach than deciding you need to save £1m so just cancelling your entire modernisation programme. You shouldn’t really try to save money by just stopping doing things,’ he says.
Reducing the amount you spend on long-term IT costs is not always easy, but there are areas where cost savings of 10 to 20 per cent can usually be generated relatively quickly, says Blosch. These savings are easiest to generate in what Gartner calls the infrastructure and enterprise IT projects – networking, corporate applications, communications and infrastructure.
‘For example, it is often possible to consolidate communications systems or outsource your network management if you need to cut some money from the budget quickly,’ says Blosch.
To identify where you might make these kinds of savings in your organisation, Blosch says that CIOs should first step back and look at the IT infrastructure from a business point of view. ‘Ask yourself if there is anything that isn’t actively delivering value, that is just coasting along,’ he says. ‘Those are the areas where you can get creative and save some money.’
According to Gartner, an increasing number of CIOs are taking this approach to IT spending; reducing spend on infrastructure and ploughing the savings into strategic technology and information projects.
While 62 per cent of the average IT budget today is spent on existing infrastructure, by 2008, this will have fallen to 54 per cent, says Gartner. Over the same period, the analyst says that spending on information systems and new technologies will increase from 38 to 46 per cent.
This approach makes sense to AMR’s Gaughan. ‘If you want to cut costs fast, it makes sense to focus on where the lion’s share of the money is being spent – and that is on infrastructure and maintenance,’ he says. ‘If you can outsource, reduce or consolidate systems in this area, you’ll generate big savings relatively quickly.’
When international law firm Denton Wilde wanted to cut costs, one option was to consolidate staff from two buildings into one. But the cost of moving the technology to a single site would have severely reduced the benefits, says Neil Pamment, the company’s IT director. So it made sense for Denton Wilde to take the hardware from the second site and move it to an outsourced environment.
In Denton Wilde’s case, outsourcing to supplier Telstra generated quick capital savings because there was no need to invest in new premises. Over the mid-term, staff and maintenance costs are also reduced. ‘We get the benefit of 24/7 security, cooling and so on, but it’s still our hardware and we still manage it – just in someone else’s environment,’ says Pamment.
Other quick ways to cut costs include weeding out unused software licences and associated maintenance contracts; consolidating servers to improve utilisation and repurposing hardware to support new applications. ‘You have to basically get maximum value from your existing investments and always look for ways to do things more cost-effectively,’ says Pamment.
When implementing any technology investment, Pamment is always careful to break down costs into as many elements as possible. He then identifies the core requirements and which costs are optional extras that could be cut if necessary.
‘For me, it’s about getting rid of the go-faster stripes when I need to,’ he says. ‘Then I can present a menu to the board and say yes we can do that extra thing, but here’s what it costs us,’ he says.
Cutting costs in this way is more effective than simply canning whole projects. ‘The most important thing is that you do not just stop doing stuff,’ says Blosch.
‘Otherwise you end up with lots of budget and no foundation on which to run your fancy new technology.’
But be careful not to focus only on cost control. To be a truly successful CIO, you need to support and drive business innovation, and control costs, says Laurie Orlov, an analyst at Forrester Research.
Orlov argues that many CIOs focus 75 per cent of their time and resources on operations, overlooking the potential of technology to really drive business forward.
‘We don’t really see the level of innovation today that we have seen in the past,’ says Orlov. ‘I don’t think today we have many IT leaders who could come up with Dell’s supply chain model, or Schwab’s online trading business.’
One recent example of IT-driven innovation is part of the London Congestion Charging system, says Orlov. Under this scheme, drivers in the congested centre of the city pay to park by typing a text message on their mobile phones – triggering a deduction from a debit card they have pre-registered on a web site. The system is linked into a CCTV application that photographs some six million vehicles a day, and automatically issues fines to drivers that have not paid the required fee.
Forrester defines IT-enabled business innovation as anything that transforms a business process, market offering or business model to boost value and impact for the organisation, customers or partners.
Or, to quote Capgemini chief technology officer Andy Mulholland: ‘It is something that marries the art of the possible with the art of the valuable.’
To identify these opportunities, CIOs should begin by taking a step back and looking at the organisation as a whole, says Gartner’s Blosch. ‘It helps to sit down with business leaders, customers and partners and ask them about how the business works, where the bottlenecks are and what improvements they would like technology to deliver or enable,’ he says.
Gartner identifies four main areas where CIOs can be innovative. Technical innovation involves using new technologies to exploit new market or business opportunities. This does not necessarily mean signing a big cheque to an IT supplier. Sometimes, the most innovative technology projects are relatively inexpensive, says Gaughan. ‘Innovation can come from a small piece of technology that changes the way you deal with customers, or improves the quality of service,’ he says. ‘It could just come from something that gives your people more opportunity to be creative.’
For example, when Paul Kennedy joined online travel agency eBookers in 2003, the company had been on an acquisition spree, and ran more than 20 different human resources (HR) and payroll systems.
‘We knew that we had 2,000 employees, but we literally couldn’t tell you what all those people did, or what they were paid each month,’ says Kennedy.
Integrating all of these systems would have been a big, expensive job – but Kennedy and his team took a more inventive approach. ‘We found a web-based application that sits on top of everything and creates the illusion of a single application,’ he says.
The web software, developed by Vizual Tools, can pull HR and finance data from any underlying software, allowing eBookers to develop a single, pan-European payroll system. This has allowed eBookers to dramatically reduce administration costs, for example, the company has cut payroll costs by £1.1m a year by reducing the number of systems and personnel involved.
The second area of potential innovation is in organisational culture. Can you use IT to create a more flexible or customer-focused organisation? ‘We see a lot of innovation by using things such as Six Sigma and Total Quality Metrics,’ says Blosch.
Third, Gartner says some companies innovate by changing their organisational model, reorganising their entire business into different structures. ‘We see this a lot in financial services where they used to be structured on services, but are now divided into customer segments, such as high net worth individuals,’ says Blosch.
Finally, CIOs can innovate by changing processes. This means looking at core business opportunities and identifying ways to improve them, perhaps through consolidation, automation or delegation. ‘If one of your core business processes is logistics, and you have problems with inventory, how could technology improve that and reduce the capital cost?’ asks Blosch.
With each kind of innovation, consider whether you can deliver benefits from both an inside-out and outside-in perspective. ‘Looking from the inside-out means thinking about improving operations that you have in a business,’ says Blosch.
‘Outside-in means thinking about who your customer is and what they might find good and bad about working with you.’
Ultimately, CIOs must remember that cost-saving alone will only take you so far. And innovation does not require a blank cheque book. ‘I try to be innovative wherever possible, but I do not think that means buying new stuff in every case,’ says Denton Wilde’s Pamment.
‘It’s about using existing products in different ways and challenging the organisation to find better ways of doing things.’
Further reading:
Best Practice: what is innovation?
Case study: Gerry Pennell, Co-operative Group
Case study: Matthew Thorpe, Coal Authority
Case study: Kyle McGinn, Opodo.com
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