Sarvesh Rana was befuddled. He had just stepped out of the third presentation on a foggy winter morning in Delhi. He had been looking for advice from consultants to help him enhance productivity at his Rs 150-crore auto ancillary company.

All the presentations that day suggested adding a new CRM application and tweaking the existing supply chain system with some additional hardware and more software. Most of these systems would pay back for themselves within a year or two, promised the guys in blue suits.

Somehow, Sarvesh felt this approach to enhancing productivity was counterintuitive. He desired simplicity. Unknown to Sarvesh, something similar, at a far larger scale, happened a few years ago.

Mark Hurd took over the reins of HP in early 2005. His single-minded focus to trim costs was as clear then, as it is now. Some of the ‘hard’ decisions he took then seem so simple and commonsensical, with the advantage of hindsight.

Hurd at HP
Hurd came in during good times and sliced off 15,200 jobs, or almost 10% of the company’s headcount. He then led the initiative to slash the company-wide use of applications from 6,000 to 1,500. Hurd also forced a consolidation of HP’s data centre, bringing down the number from 85 to six! And HP’s own IT department was slimmed down to 8,000 from the original 19,000 people. All this, Hurd made clear, was with the intent to hire more sales staff.

The results are clearly reflecting on HP’s balance sheet today. Hurd’s unwavering attention on trimming costs, both capital expenditure (capex) and operating expenditure (opex) have seen HP’s bottom line grow even in hard times. HP recently forecast that sales for 2009 would decline as much as 5%, but Hurd still is projecting a nearly 6% rise in profits.

Sarvesh decided that he would make no additional investments in IT. “Let’s get more juice out of the existing facilities,  and reduce operating costs,”   he thought.

Outsourcing the company’s IT organisation seemed like an intelligent and easy answer, but Sarvesh knew that the theory and practice of outsourcing were entirely different things. He knew that once he decided to outsource, it would expose his company to new forms of risk. An inferior supplier of outsourced services would only dent his relationship with his suppliers and customers, he thought. Sarvesh wanted to adopt a common pragmatic approach to reducing his operating expenses on IT without having to issue pink-slips.

The stepping stone
Taking the lawnmower approach to cutting costs may be faster and involve less effort but it runs the risk of endangering future business outcomes. Experts suggest that the first step in understanding what to cut is to find out where business has its costs. Business areas–or domains–that are consuming a lot of IT services (and thus cost) may be doing so in a strategic or tactical drive. That’s fine. But if it’s due to sloppy business processes or inefficient IT support, there is an opportunity to drive potential IT savings.

A recent study by Savvis, an outsourcing provider of managed computing and network infrastructure for IT applications, reveals that the drive to reduce operating costs is a concern among IT managers at a global level. The study shows that nearly two of the five IT managers surveyed felt that standardising IT infrastructure solutions could help cut costs.

Confirms Dhiren Savla, CIO at Kuoni India: “We have, in the last one year, saved a huge amount of money by just standardising applications and support for all the 44 countries we operate in.”

In the same study, more than half of the IT managers surveyed noted that the greatest cost savings would emanate from reducing infrastructure costs and introducing a virtualisation strategy. Basically, it is the magnified focus on reduction of operating expenses.

More practical steps
Fortune favours the brave and one area where IT managers must show bravado is to adopt virtualisation, which can help servers do more tasks than originally planned for. It can also help IT managers extract “more juice”. Smart thinking and configuration can enable virtualisation software to run eight machines off a single server.

“IT managers must proactively look for ways to improve or standardise procedures. Internal systems and processes must be tailored to reflect the realities of the outside world,” feels S K Mishra, Regional Manager (IT) at Raheja Builders. For example, the pace of technological change is slowing down. Most developments taking place are improvements in already established systems.  HP’s Hurd feels that most of the R&D investment is actually ‘maintenance spend’–expenditure that is needed to keep existing technology running. He is trying to cut that expense. Heavy IT users can adopt the same approach by revisiting all procedures that were developed when the pace of development was far more scorching.

“Software licenses can total millions of rupees depending on the size of your workforce. A first step towards costs rationalisation is to create an inventory of all applications,” suggests Sanjay Mittal, Manager (IT) at Indofarm Tractors & Motors.
According to him, while this will help provide clarity about the user and purpose of applications, it will also help the management ascertain which licenses and applications are underutilised.

The screws can then be tightened to make necessary adjustments. IT managers across the board must sit and work with vendors to re-examine maintenance contracts to make sure all critical needs are covered, expenditure is routed in the right direction and all wasteful spend is eliminated.

IT-finance wedlock
The final step is reassessment of service level agreements. Significant monies can be saved if the penalty clauses are removed, and service levels are rationalised. The whole data service market has seen a huge buildup in strength and delivery. Therefore, it is not a bad idea to consider what uptimes are being delivered at a commoditisation level of these services, and then fine-tune SLAs accordingly. For example, IT managers could reduce a 99% uptime requirement to 95%, and in lieu get a far more efficient pricing.

Cost containment options must move beyond adoption of new technologies or improved practices. It must constantly focus on exercising sound judgment and identifying opportunities to save as soon as they emerge. An enterprise can make this possible by involving IT managers in financial planning; one must not forget that IT managers are as concerned about the colour of the balance sheet as the finance people.

Also Read:

• Four steps to controlling IT opex

Four steps to controlling IT opex

• Understand the constitution of operating expenditure. Use this analysis to list the areas of opportunity, and potential risks associated with cost cuts.
• Assess the impact of each cut. Review each initiative strategically in the context of its impact on finance, operations, technology and interface with clients. For instance, sometimes a tactical efficiency move might increase the risk of complexity and resource utilisation.
• Implement cost efficiency measures in a controlled way to reap appropriate benefits, and ensure that these initiatives are correctly aligned to reduce opex.
• Monitor and report cost efficiencies. Once the process to build efficiencies into the system have been set, it is critical to supervise and measure them to create a self evolving system.