On the money

Going by a number of measures, UK businesses can reasonably expect to be better off in 2011 than they were in the two previous years, even if it is only by a margin.

As Ian McVicar, managing director of Lombard Technology Services, explained at Information Age’s recent Managing IT Cost Effectively 2011 seminar, economists are “cautiously optimistic” about the coming year.

“Most analysts believe we have avoided the dreaded double-dip recession,” he said. “The Office for Budget Responsibility has raised its estimate for growth this year from 1.2 per cent to 1.8 per cent.”

This, he commented, means IT investment is on the increase. Industry analyst predictions that spending will at least grow in 2011 are corroborated by the IT asset financing company’s own experience.

“We have seen an increase in deals, both in the SME market and among FTSE 100 companies,” McVicar said. “We expect this trend to continue as businesses realise they need to equip themselves for improved business opportunities.”

Be that as it may, there are still a number of factors that mean IT leaders still need to keep an eagle eye on spending. The first is that while business might be improving, such was the severity of the spending cuts that followed the recession, that even if they grow, IT budgets are still likely to be smaller in the coming year than they were in 2007
or 2008.

Secondly, in many cases the recession exposed the lack of visibility that organisations have into their IT spending. Even if 2011 proves to be a bumper year for every business, that is a situation to which companies cannot return.
A number of approaches to managing IT cost were discussed at the seminar, but one message united them – that the more information an IT department has about its expenditure, the more able to it is to optimise it.

Licences to kill

Software licences are a significant component of any organisation’s IT cost burden. As Patrick Gunn, vice president for sales at Flexera Software, explained at the seminar, many organisations struggled to get a handle on their licensing during the recession.

This was made an even more pressing issue by the fact that many vendors responded to the downturn by issuing licence audits on their customers, Gunn explained.

Typically, businesses assess whether they are fully compliant – i.e. that they are paying for no more or no fewer software licences than they need – by simply comparing their usage figures with their software invoices. “We see companies do this in a number of ways; sometimes it’s with a spreadsheet, sometimes with a dedicated application,” Gunn explained. “Sometimes they don’t do anything and just cross their fingers.”

The problem with this simple comparison is that it does not take the complexity of many software licences into account, he said. “Software licences sometimes include multiple-use rights, or secondary-use rights. These are things that most people don’t know exist.”

A company might therefore think it is under-licensed, and so acquire the necessary licences to remain compliant, unaware that its existing licences already cover its usage requirements, Gunn said. With enterprise software licences and virtualised environments, the complexity of licensing is only increasing, he added.

But by pulling more detailed licence information and usage data into a single system, companies can achieve significant savings. One multinational brewery managed to save almost $750,000 on software licences with Flexera’s licence optimisation tool, Gunn claimed.

Next>> The more you know

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Improved information also meant cost savings for Dave Hartis, head of IT services at the University of Sunderland.
As Hartis explained to delegates, Sunderland derives demonstrably more value from its IT budget than other comparable universities. Part of the reason for this is simply its ability to negotiate with suppliers.

“Negotiating is something of a lost art,” he said, especially in the public sector where established relationships can lead to an assumption by an IT reseller that they will win the business no matter what. “And when they think they’ve secured the work, the reseller starts pushing up its margins,” he added.

Some of the University of Sunderland’s advantage comes from long-established best practice, Hartis commented. “We never take the first price on anything, and we always talk to other suppliers about what they can offer,” he said. “And we bundle procurement across the organisation into large deals.”

But the university’s ability to negotiate is also aided by Mercato Solutions’s market intelligence tool, ITelligence, Hartis said. The tool allows it to find out how much resellers are paying for the equipment, and therefore what their mark-up is, as well as supplementary information such as how long a particular product has been on the market.

“We apply the tool for every procurement decision we make,” Hartis explained, from USB sticks to networking equipment to software. “It gives us complete transparency into our reseller’s margins, and empowers us to negotiate, because we know how much everything costs.”

Armed with that knowledge, the university now buys equipment from its reseller at an average margin of about 2%. Looking back over its historical data, it has found that it used to pay premiums of up to 33%.

Indeed, by using ITelligence Hartis has found that many suppliers were, frankly, ripping them off. “It wasn’t an uncommon experience,” he remarked.    

The language of cost

Gunn and Hartis both demonstrated that by having more information about their IT costs – be it licence details or supplier margins – organisations are in a better position to reduce them.

Mark Robinson, solutions consultant director at Digital Fuel, took the argument further, proposing that having improved visibility into IT costs allows an organisation to manage IT in a fundamentally more strategic fashion.

“IT, finance and the business all speak different languages,” he observed, and that gets in the way of clear thinking on IT investments. “But the cost of IT is the common language that allows everyone to talk about the same things. Understanding costs allows us to rationalise IT investment to the business,” he said.

Robinson argued, however, that understanding IT cost is not simply a matter of adding up the receipts. A worthwhile understanding of IT cost is one that satisfies the needs of the business, he said. “Why does the business want to know about IT costs?” he asked. “It’s not necessarily because they want it cheaper, but they want more predictability and crucially they want more control over those costs.”

That requires more detailed information than a simple list of invoices can provide, Robinson claimed.

“Only when we understand the total cost of IT – the unit costs, the consumption level – can we make informed business decisions,” he said. “And we need to understand how costs relate to one another – if you cut one cost, will it just increase cost somewhere else?”

The solution, he argued, is a cost-focused variant of IT service management: understanding precisely what the IT costs associated with a business service are. “The costs that really matter are the costs of the services that the business consumes.”

To illustrate the point, Robinson described the example of US insurance giant Nationwide. “They wanted to deliver more from their $300 million IT budget,” he explained.

Nationwide “already had a very robust IT cost optimisation process, which they’d built themselves,” Robinson recounted. “What they were missing was the ability to focus on the things that mattered.”

Using Digital Fuel’s IT Cost Management solution, Nationwide was able to develop a more granular method of allocating IT costs to business unit. “They could show the business exactly what they were spending,” said Robinson, “and give them some alternative options.”

This system helped inform the company’s ongoing virtualisation project, allowing them to decide which IT systems to virtualise and in which order. “The cost analysis enabled them to make the key decisions, and to put some justification behind them.”

In all, Robinson reported, Nationwide has achieved around 5% reduction in its IT budget and, more importantly, has seen a tighter alignment of IT spending to business strategy.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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