Cost Optimization Fuels the New IT Operating Model

The new IT operating model leverages on-prem and cloud-based technologies to generate insights, drive efficiency and maximize value, which creates funding for additional investments. But with this new model also come the risks of cloud bloat and shadow IT that lead to excessive costs and inefficient technology spend.

IT leaders often use IT cost optimization  (e.g., infrastructure consolidation, application rationalization, cloud adoption, vendor consolidation or offshoring) to rein in out-of-control costs, but these initiatives often over-promise and under-deliver due to a lack of hard data. In other cases, organizations lose sight of the fact that cost optimization is a systematic process, not an ad hoc activity.

Does this sound familiar?

By using four methods to optimize your IT portfolio – scrutinize, economize, rationalize and commercialize – you can maximize your savings potential. Some methods yield quick wins because they’re obvious and easy to act upon. Others require greater effort, multiple stakeholders and a sustained effort, but lead to more significant payoffs. Regardless of the scope or duration of your initiative, there are two key points to keep in mind:

• Start with the low-hanging fruit and move on to stages requiring multiple stakeholders. As you progress through the four cost optimization vectors, focus on each layer in the value chain:
  • Cost pools (e.g., labor, software licensing and telecom)
  • IT Resource Towers (e.g., IT management, security & compliance)
  • Applications & Services (e.g., relational database services in AWS or Azure)
• To sustain momentum, tailor conversations to the stakeholders in each layer, rather than randomizing them with irrelevant questions.

Scrutinize loose ends

Technology is at the heart of what drives a company, but nearly 40 percent of IT spend is managed, defined and controlled outside the IT organization. Spreadsheet-centric budgeting tools fall short of the task, leading to financial loopholes and inefficiencies such as miscategorized accounts, misaligned depreciation & amortization (D&A) schedules and IT expenses recorded as assets (and vice versa). In response, many business partners pad their budgets, which only compounds the problem.

Without a complete picture of your company’s IT spend, knowing how to tie-up loose ends and meet your goals can seem more like untangling a Gordian Knot. With the right approach, and tools to back it up, you can see a single source of truth that spans technology spend and provides complete budget transparency, without the need for manual spreadsheet wrangling.

Quick wins to tie-up loose ends include:

• Accelerating D&A schedules for underused assets
• Retiring assets at end-of-life
• Automating ITFM data entry
• Analyzing variance for over/ under-provisioned IT
• Turning off unused resources in the cloud

Maritz, a U.S.-based services provider, had been using a spreadsheet-based model that was difficult to modify and didn’t measure consumption of services. Since replacing it with Apptio, Maritz has reduced IT spending by 40 percent and self-funded $4M worth of new technology imperatives. 

Download: 6 Best Practices for Strategic IT Finance

Economize to eliminate waste

Part of your job is providing business partners with the technological capacity to drive growth and pursue their goals, while keeping excess capacity and associated IT spend in check to avoid blowing your budget. All too often there’s a disconnect between spend and use that leads to wasted resources.

Common examples of waste include:

Finance data reflects the actual spend in your organization — a “source of truth,” if you will — but it needs to be assigned to the various IT functions, technology stacks, applications and services, and business units that consume them.

By leveraging utilization data from IT management systems you can juxtapose resource usage against related costs and know how to proactively manage your IT spend variance.

Quick wins to eliminate waste include:

• Retiring over-provisioned IT assets
• Tailoring infrastructure to business need (e.g., using tier 0 storage for Production environments)
• Reevaluating disaster and recovery (D&R) footprint
• Reassigning unnecessary SaaS licenses
• Negotiating volume discounts with your cloud service provider

Caesar’s Entertainment needed greater transparency into its data center costs in order to increase its efficiency and lower costs. With a solution from Apptio the company cut variances and budget padding in half and discovered $800k worth of untracked software licenses.

Download: Hiding in Plain Sight: How to fund innovation with money you already have

Rationalize to avoid duplication

Having redundant items in your office supplies makes perfect sense. Your IT portfolio is a different story. Using more than one ERP or project management solution, for example, can lead to unjustifiable support costs and increased workload for the IT organization. Despite their best efforts to govern spend and require business cases for new investments, IT organizations often struggle to prevent duplicate apps and services, especially when cloud services can be spun up with no more than a personal credit card and expensed back to the business.

Common examples of duplication include:

Typically, this duplication happens when systems are inherited through mergers and acquisitions, incumbent tools and platforms are retained after new ones are purchased or when business units purchase a SaaS app or service without giving IT an opportunity to vet the decision.  This sort of duplication can be avoided by pairing one application to one business capability or sharing software licenses across accounts. Through continuous optimization you can trim run-the-business spend and repurpose the savings to fund innovation.

Quick wins to avoid duplication include:

• Showing BUs the TCO of duplicate capabilities
• Retiring legacy infrastructure
• Consolidating contracts with a single vendor
• Using larger cloud instances to reduce the # of software licenses needed

Global manufacturer and household name Unilever replaced a homegrown solution that only allocated 30 percent of IT costs with a solution from Apptio that helped rationalize the company’s service catalog by more than half – from 4,000 services down to 2,000. Unilever reduced its IT costs from 40 percent above industry peers to within 10 percent of the average benchmark.

Download: A Practical Guide to App Rationalization

Commercialize to curb demand

Everyday your business partners rely on staple items of the company’s operations and infrastructure, rarely giving a thought to the resources required to provide a seamless experience. Consequently, many business units have adopted IT usage and spend patterns that are excessive and inefficient.

Common examples of unrestrained demand include:

IT spend and budget frequently grow due to corollary increases in demand for or consumption of IT services. Historically, IT organizations struggled to prove and communicate the correlation between cost and demand. With the right data and tools, you can transform siloed decision making into collaborative accountability that accelerates decisions about your cloud and hybrid environment.

Quick wins to curb demand:

• Limiting VM size through self-service
• Enabling cloud adoption and cost management with a bill of IT
• Tying costs to consumption with show back
• Transferring IT budgets to business units based on consumption
• Using chargeback data to make business case for moving legacy apps to the cloud

The University of Pennsylvania needed to enforce accountability for every dollar budgeted and spent. Using Apptio, the school identified and turned off an app with only 8 users and costing $100K/year and redirected $1M in additional spend to projected cost savings to fund its cloud-first initiative.

Download: Showback & Chargeback: Optimize Technology Costs by Shaping Demand

The NEW operating model requires timeless optimization TACTICS—applied in cloud.  And optimizing across these four vectors isn’t a one-and-done activity – you need to make fast, credible, data-driven optimization decisions on an ongoing basis.