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When a company boasts of having reaped cost savings in the millions or even billions of dollars, observers, in an industry conscious of the need for belt-tightening, tend to sit up and take notice.

With its $19 billion acquisition of Compaq in May 2002, Hewlett-Packard calculated it could cut $1 billion from the combined company's costs by eliminating duplication and inefficiency. That required some tough decision-making on all sides of the company, but IT was one area where there was huge scope for cost reduction while enhancing its responsiveness to changing business needs.

"The IT environment had grown up over time, leading to a fragmented operational environment that was expensive to maintain," says Russell Jukes, from the Office of the CIO at HP. "It lacked the speed and agility that was needed to respond to the increasing demand in the changing market."

HP was overspending on IT on a massive scale. As well as boasting 300 data centres around the world, HP had over 7,000 different software applications running internally and, bafflingly, 215,000 desktop computers for 160,000 people.

And that bloated structure was preventing it from investing in new technologies as heavily as it would have liked. As the company's CIO Gilles Bouchard highlights: "Prior to 2002, just 28% of our IT budget was spent on innovation. Today we've increased that to 34%, and we're on track to increase that to 50% in the coming years."

"Making savings lets us shorten the back-log," adds Jukes, "and essentially, when you talk to CIOs that's what most are aiming to do." The restructuring also required a change of mindset. "[Historically], there was too much 'analysis paralysis'," he says. "Too often, those with responsibility are risk averse, they need to ask 500 people before they make any decision, but that just creates delay. If you go in boldly and say exactly what you plan to do, people won't challenge you."

Jukes set up a system where each divisional IT manager set a target for how many applications they intended to get rid of. "The good thing from our point of view was that we publish the targets and their progress. Their competitiveness meant that no one wanted to be left behind, and no one wanted to make too low a promise because it would make them look inadequate," he says. Indeed, the reductions in many parts of the IT infrastructure are impressive: there are now 83 rather than 300 data centres; there has been a 43% drop in the number of applications used; and a 24% decrease in overall IT costs.

HP's path to such large cost-savings was not without potholes. "We had two false starts," says Jukes. "I was simply unable to give a finite number of applications, because, ironically, we had too many application inventories, and the numbers were not adding up."

Now it has just one and within that there is further metadata about each application, for example highlighting those that have relevance for the Sarbanes-Oxley Act. "It masters the relationship between the application and the infrastructure it sits on," he says.

Savings continue to be made. With a better grasp of its own assets, there is no need to pay Ernst & Young to audit what HP knows it is going to dispose of.

"My colleague working to reduce the number of data centres asked me to build a profile of each data centre, to tell him what apps were running where, and so on," says Jukes. "I couldn't do that before; now, the applications inventory means I can."