Rationalising IT expenditure through re-evaluation

The government is looking to implement a £81bn package of cuts across the public sector over the next four years, including an estimated £1.6bn a year reduction in IT spending alone. This means the number of cost-reduction and IT consolidation projects in central and local government bodies has increased markedly in the past six months and is set to accelerate further in 2011.

Some local councils and individual NHS trusts are taking a closer look at their IT estate to see where modest investment in new hardware or software can help them reduce operational expenditure, sometimes by using automated processes, standardisation and rationalisation programmes, and more often than not with the long-term aim of reducing staff.

Others are examining whether sharing ICT services can help: three London councils, for example – Westminster, Kensington & Chelsea and Hammersmith & Fulham – recently announced plans to save £400,000 a year by implementing a shared services strategy for ICT, which includes shutting extraneous datacentres and eliminating duplicate job roles.

The time of reckoning
Shared services were highlighted as crucial to the future of IT in public sector organisations by 52 of the 100 local government and social housing service directors and managers attending an annual conference polled by systems integrator Civica in January. Though as an important caveat, 38 believed that only certain aspects, such as senior executive roles or technology infrastructure, could be successfully divided between multiple bodies.

Process redesign was cited as the favoured cost-saving strategy by 63 per cent of respondents, while many believed that introducing more mobile working into the organisation would also help them reduce ICT expenditure.

“This is crunch year for councils and their partners. The growing acceptance of new service channels, shared resources and managed services – plus a willingness to use existing technology platforms to re-invent service options [and get more out of previous technology investments] – shows a clear drive for innovation within very tightly constrained budgets in the public sector,” says Bill Loughrey, managing director of the local government division at Civica.

However, only one in four of those polled in the Civica survey felt that making better use of ICT systems was key to making efficiency savings, indicating that the majority remain sceptical that it is possible to continue providing either increased, or the same, levels of service with the infrastructure already at their disposal.

The latest IT Trends Survey for 2010/11 published by ICT association Socitm tells a similar story. Socitm has been polling the heads of ICT at UK local authorities and other public sector providers every year for 24 years, gathering important insight into the scale and nature of IT resources in use – including expenditure, staffing levels and specific technologies – across central and local government departments.

Socitm predicts a four per cent reduction in staff numbers for this year, accompanied by an eight per cent fall in capital spending and 14 per cent in departmental spending. It also found that joint work and joint funding of shared IT infrastructure appears to be of growing interest as sources of external funding dry up and efficiency savings from ICT schemes decline.

HMRC opts for soft chargeback
So is there a better way to economise rather than axing skilled IT professionals, or getting rid of existing hardware, software and other IT resources on which so many government workers rely?

One approach could be to gain more insight into where and how money is being spent, and then altering the way that IT is funded on a departmental basis.

A good example of this is the implementation of a large-scale soft chargeback scheme for IT services at HM Revenue & Customs (HMRC) last year, which could provide a model for other government departments to reorganise their technology purchasing and maintenance policies to save money.

According to research company Gartner, the fiscal year 2009 saw HMRC restricted to spending £688m on IT, with CIO Phil Pavitt and director of finance performance and control, information management systems (IMS), Louise McCarthy focused on identifying areas of potential cost savings. What followed was the creation of a consumption unit pricing (CUP) model based on soft chargeback principles that make individual IT departments accountable for their expenditure.

Soft chargeback involves creating a central pool of funds that provides a budget that departments or individuals request to use to bring in additional resources or buy extra equipment, as opposed to the hard chargeback model that asks departments to pay for each resource they use upfront.

“This level of IT cost transparency is something very new to the UK government and this is what makes the efforts of the HMRC inspiring for other IT organisations,” wrote Gartner.

“CUP has been extremely successful in identifying areas for cost cutting and providing a communication platform with business stakeholders and IT vendors to discuss IT consumption and drive cost-conscious behaviour.”

Implementing CUP
The HMRC project began in the second half of 2009, having been piloted several times with negative results, meaning Pavitt and McCarthy had to work hard to persuade managers who were unconvinced that chargeback could be made to work in a department so large and complex.

The core team consisted of an IT developer who had implemented a similar model at Transport for London and a new employee who had created a customer profitability tool in the private sector.

HMRC was keen to keep the CUP management software development in-house, although several commercial software vendors offer chargeback options within wider asset and performance management tools. IBM, BMC and CA all provide suitable software, as do specialist application vendors such as Digital Fuel, Apptio and Comsci.

“We did not consider using a chargeback tool vendor; in fact, we are thinking of marketing the CUP model to the outside market. It does what they want and it is transportable to other government departments – we have already had enquiries about it,” says McCarthy.

The software uses a Microsoft SQL Server database with a customised front end developed using Microsoft Excel/Visual Basic Applications, which meant it could be developed using existing HMRC IMS resources while users could view CUP consumption statements detailing prices and usage via SharePoint, with updates published once a month via the web.

The majority of the CUP is based on per-user/per-device subscription fees, or measures usage methods that define a key aspect of IT spending. These are strictly defined into set categories: desktops, laptops and BlackBerrys; fixed and mobile phones; end users (including datacentre resource usage and application licence and maintenance fees); pages, images or microfiches; helpdesk calls; videoconference calls; manual input keystrokes; electronic and physical security data transfers; wide area network circuits and external call centre seats.

Even in the relatively early stages of the implementation, HMRC’s cost savings have been high, but it is the additional benefits of greater IT cost transparency and improved management that have perhaps been more significant.

“We saw £5m savings in the first three months of CUP operations and we are only just getting started,” McCarthy says. “We have never had that level of detail before CUP where we could identify equipment owners or track equipment when staff leave the organisation. CUP enables better licence management and usage, identification of shelfware and better accounting of desktop hardware assignments.”

HMRC has started to incorporate green IT metrics – electricity consumption and carbon emissions for individual IT services – into the CUP to help meet sustainability targets. The data is also used to compare unit prices against both other government organisations and external providers to see where outsourcing or shared services might prove more cost-effective options.

Cost transparency and asset management
Kurt Potter, research vice-president for IT finance and metrics in the Gartner CIO Research group, says that while HMRC could justify its relatively sizeable investment in chargeback on anticipated cost savings alone, the same is not true for other organisations looking for wider cost transparency combined with tighter asset management.

“When I talk to people about chargeback, chargeback alone is not enough to sell it – it is about performance management and benchmarking as well, and helping them figure out return on investment once they know what the maintenance charges are,” he says.

“Sometimes it starts with a bigger cost transparency programme for everything they buy, which moves on to charting accounts more accurately, then analysing what they are buying. After that they tend to move to asset management, service catalogue and performance management.”

The trouble with taking the broader view, however, is the sheer scope and complexity involved – something which often puts off CIOs in large organisations from taking any steps towards implementing formal schemes at all.

As an antidote to this trepidation, Gartner recommends that organisations should go about things in a more gradual way, spreading any single implementation over a number of years and not tackling advanced practices, such as the configuration management database or IT service catalogues too early. They should also get to grips with IT benchmarking straight away in order to provide a proven method of measuring success.

“In the first phase, what they did was account for all assets – the number of servers, desktops, printers and so on – then they reconciled that as best they could on the available information,” says Potter.

“In the future they could build on that asset management success by implementing tools that find assets automatically over the internet, for instance – how many users are using software licences, what is the level of quality of data – so they can reach a point where the data they have is 98 per cent accurate, and the final two per cent is cost prohibitive, then it is time to do the budgets.”

Perhaps the pinnacle of the potential success that chargeback and improved IT cost transparency can ultimately deliver is to change public sector end user behaviour by alerting them for the first time to the cost of the IT services they use.

“With the motivation of CUP, customers [HMRC employees] to IMS now have a reason to discuss irregularities with assigned software and hardware assets, and this has created a self-governing and self-cleansing benefit,” says McCarthy. “Clients don’t want a CUP statement where they are paying for equipment they don’t have in their department and CUP has really opened their eyes.”

“Once we implement chargeback we create a healthy tension that balances demand against price, and whereas IT traditionally focused on quality and speed, now the shift within the industry is towards cost and the value of IT to the citizen,” adds Potter. “These are very different imperatives, but we needed a recession to change things.”