Rapid and sustainable IT cost reduction

Remove the fat, not the muscle

ROUNDTABLE REPORT FROM KUALA LUMPUR, MALAYSIA

The global economic recession is driving businesses to cut costs in the face of shrinking revenues and is preoccupying the minds of many IT chieftains. The biggest challenge CIOs face is how to deliver high IT performance in the midst of diminishing budgets and cost-conscious CEOs.  

Organised by CIO Asia magazine and sponsored by Accenture, the Kuala Lumpur roundtable discussion attracted 10 CIOs from a diversified range of industries meeting to discuss the issue of ‘Rapid and Sustainable IT Cost Reduction’, while networking for some great ideas to ride the dismal economic pain together.  

Introduction

In his introduction, Ross O. Storey, managing editor of Fairfax Business Media, said major enterprises are now seeking rapid and sustainable IT cost reductions.

Notwithstanding such higher optimism in this region, some corporations today are taking desperate steps via indiscriminate cost cutting and broad lay-offs. Storey warns that such misdirected cost-cutting can wreck a company’s core capability and cause far-reaching damage to its ability to perform in the future. The company he reckons may be severely hampered when the market stabilises and the company will then have to rebuild again—all at great expense and time.  Hence, the key challenge is to make sensible, targeted reductions in IT spending for sustainable, long term cost efficiency until the economy recovers.

Can CIOs sit back and wait for recovery to arrive?  If so, it might well be too late for the CIOs and the companies they work in. The view is that it is incumbent upon CIOs to substantially and effectively contribute towards the survival of their companies in today’s markets where things move at lightning speed. Storey echoed a point made by Financial Insights that the game will be won by enterprises that are agile and capable enough to execute strategies efficiently. Hence, IT cost reduction has to be both rapid and sustainable, he stressed.

Iswaraan Suppiah, head of CIMB’s group IT and operations says: “For most companies it is time to invest only where it will bring lots of value to the organisation but IT spend should not be curtailed.”  

He also thinks that the way business is done today needs to change, especially where super profit margins and high CEO salaries are concerned. He bemoans the high prices for software. “What can a small country do to change the SAP or Oracle pricing?” He believes a good vendor-client partnership is vital to achieve cost reductions in lean times.

Dr Tamizarasu Nandan, CIO of Hitachi Electronics Products sees IT playing a vital role in reducing manpower without an increase in money spent. “We have to look at the issue of cost management and we’ve got to change in ways never done before,” he said. “We will see IT vendors as a partner only if for the next five to 10 years they lower their charges,” he said.

Meanwhile, Sime Darby’s CIO, Tan Kah Chai believes investments in IT will continue despite the economic gloom. He feels that simplifying business infrastructure and IT architecture is the way forward. “The increased usage of tools like VoIP and videoconferencing can work towards better cost savings. For now it is hard to convince people to continue to invest with margins down and profits thin. At the end of day it’s all about profit & loss so if one can defer projects it might be best. I’m not saying building capability is not important but for now I’d say the ability to survive is more important than building just the capability aspect,” he shares.

Sin Chew Media Corp’s GM of IT Keu Tien Siong, says his newspaper firm recorded more than a million copies in print last year and  underwent a cost rationalisation exercise before the financial crisis hit, forcing the company to streamline its processes.  Like most companies we too had to cut costs and make tough decisions. However, now is probably the best time for companies to do some reengineering to their business processes and IT infrastructure.

Razali Awang, Tenaga Nasional’s CIO says his biggest challenge is finding a better way to manage his customers, cutting costs and retaining his best staff. He says TNB wants to be ready for the eventual economic pickup when it comes and it wants to streamline the processes for better customer service. With some 70 per cent of costs coming from IT alone, there seems to be no apparent value in paying for software maintenance. “So one way to cut costs would be to rely on local rather than foreign software,” he says.

Interpacific Securities’ IT chief Stanley Lum insists technology transfer will bring down costs. “Technology will have new enhancements but the newer and higher versions will incur higher costs. We want a reduction on maintenance and shared knowledge so we are no longer indebted to the vendors,” he said.

Gamuda’s GM of MIS department Wong Tsien Loong deplored some companies’ rush to cut costs and adopt a cash conserving mode of defence. He prefers to find ways to minimise costs while conserving core businesses as one survives the economic turmoil.

iPerintis chief executive director John Miller advocates a more responsible use of IT by evaluating what projects are strategic to the company’s progress first and then adopting a charge back model  because a large portion of the IT spend goes towards maintenance.

DKSH Holdings’ GM of IT Business Solutions, Han Siebert reckons the charge back model is the safest and most accurate way to go. “It helps to control spend, the users are more cost conscious and will try to minimise and spend less in the process,” he shares.

Scott Halstead, Accenture’s IT Strategy & Transformation Practice head for Asia, says the CIO should not be held responsible for all the discretionary expenses and there is a need to recognise what is IT’s responsibility. He suggests adopting a three-phased approach. The first he says is to identify and minimise areas of clear and immediate cost reduction opportunities.

“This is done by seeking out and tackling the ‘hidden’ IT costs that have seeped into the business over the years. A checklist would be helpful here. With it, the CIO can narrow down and know specifically what his company is spending on. It calls for a determination of costs that are discretionary (what can be dispensed away with) and non-discretionary (essential to the running of IT processes).”

Halstead says the CIO can zoom in and fix those high-impact defects while the remaining budget can be used for a more strategic focus. He can then defer upgrades and sweat out the assets, flatten the organisational structure, stop staff hiring, measure and cut power consumption, and renegotiate service level agreements (SLAs) possibly by five to 10 per cent.

The second phase is to optimise current operations and to have them running efficiently. This calls for redirecting some of the ongoing operational non-discretionary spending in order to deliver greater business value.

For this phase to work well, Scott stressed that its implementation demands top-level management involvement, cost transparency and chargeback. Vendor management and procurement can also be scrutinised so as to develop inhouse organisational capabilities and reduce further reliance on contractors.

The third phase entails a redesign of structural changes towards lower cost delivery models. The key, he says, is the ability to make these changes to dramatically improve working capital and labour costs.

Fellow Accenture partner and head of the Outsourcing Practice in Malaysia, Khoo Kok Yeow, highlighted the all-important subject of outsourcing as one way to institute cost reductions. Khoo advised that for outsourcing to really work, the company has to sift through item by item to see what can be outsourced. “It should not be simply a matter of passing over a job that the company finds difficulty in doing. The key here is to strive for a win-win situation for the company and the service provider,” he emphasised.

CIOs targeting cost reductions here should consider the issue of chargeback, Khoo advises. He reckons that it makes a whole lot of sense to ease one’s own operating budget for work done for related companies. However, there is no particular best method especially in apportionment of work done and various companies tend to adopt its own formula.

Khoo notes that vendors are now negotiating with clients and because many companies are affected by the economic slowdown, Accenture went through the service items, item by item from outsourcing through to accounts payable etc.

Lastly, Scott advised: “Organisations need the muscle, not the fat, and everyone needs to work hard to keep the costs down. However, to reduce, one has to make investments in IT and work at retaining those with capabilities while improving their skills. CIOs must also engage operationally with the CEO in a business sense and find ways to get a project moving faster so that those with capabilities can continue to generate greater revenues. The vital issue is how to make IT work and the cost involved because the value comes from getting solutions to business problems.”

ROUNDTABLE REPORT FROM SINGAPORE

CIO Asia, in collaboration with Accenture, held its Executive Roundtable with the focus on ‘Rapid and Sustainable IT Cost Reduction’. Moderated by Ross O. Storey, managing editor, Fairfax Business Media, a group of CIOs from a variety of industries to share their views, together with two executives from Accenture; Scott Halstead, IT strategy & transformation partner and Margaret Darby, senior executive for APAC application outsourcing delivery lead.

When Eugene Lau Yuk Mun, senior vice president, DBS Bank, was considering virtualisation as a possibility for reducing IT costs, he realised it was not feasible at all.

Firstly, his budget does not allow for additional investments. “You got to invest in the software, and SAN so that it can act as local storage, plus high-powered machines,” said Lau, who looks after the bank’s infrastructure management services. Then there is the existing mixed OS environment in the bank, which makes running virtual machines difficult and the challenge of protectionism from the various business silos.

The bigger difficulty for Lau is that there is already an outsourced contract in place, along with the monthly recurring charges. “Virtualisation is very attractive, but when it comes to implementation, you’ve got to face reality—that was our experience,” Lau said.

Jennifer Khow, director, regional infrastructure solution, AS/IT, BASF South East Asia agreed that working in an outsourced environment makes it tougher for IT management to implement virtualisation. “An outsourced environment is very challenging for two reasons. Will the vendor be able to pass the savings on to you? And the other is whether you can share hardware with another customer,” said Khow.

Adventures in outsourcing landscape

Then one approach for the CIO to take is to put the pressure on the outsourcing vendor, placing the CIO firmly on the driving seat in the client-vendor relationship.

With the poor business situation, vendors have generally become more flexible than ever in how they can work with current or prospecting clients. Many have indicated that they are now more than willing to listen and tailor their services to the demands of cost conscious CIOs.

For NOL group CIO Wu Choy Peng, her method is to work with her IT companies and commit them to split the cost savings from contracts. She also revealed that she works out deals where the cost of the upfront investment has been amortised, thus avoiding the need for a huge capital expense.

One instance of her working with the outsourcing vendor to get the best for both parties is when she moved a US-based regional office in California to Arizona. The outsourcing team from Infosys was just as happy to relocate as it was cheaper to pay staff in Arizona. “In fact, an outsourcing company has great capability in moving their people around than you yourself can because of your internal HR policies,” said Wu.

Better deal, better CIO

She added that her outsourcing contract includes an annual benchmarking exercise that provides a reality check on the level of services provided by the latter. The cost of running it is borne by both parties.

To get a better deal out of her contracts, she hires freelance consultants to look and compare the prices that vendors are offering to other organisations. “Even with contracts that we have already been signed, contracts can be corrected,” she said.

Charles Koh, director, IT & regional CIO, Trusted Source, compared the contract situation with outsourcing vendors, to that of a consumer renewing his mobile phone contract for better benefits. “There’s nothing wrong with going to the vendor and say we have to adjust the cost and then see what we can get out of this together,” he said.

Giving business units more visibility in terms of how much IT costs they have incurred is another way of maintaining a realistic expenditure, said Steve Rowe, head of IT, Asia Pacific, LANXESS. Through a concept called service management, his IT teams give the businesses the costs breakdown of every component out of each service provided. “So we try to give them visibility, then we work with them to make decisions about what the need is for that application” explained Rowe.

But one possible scenario is that the IT units might end up being pushed by the businesses to use alternate software or be questioned about costs, asked Noel Low, regional head of IS, Syngenta Asia Pacific.

Clear and present IT

To mitigate that, Rowe revealed that the IT units have controlling directives from the board of directors that do not allow businesses to procure software on their own.

“It allows us to tell them we’re working to get those costs down—here’s its entirety, if you don’t like the way the breakdown is, we’ll do it another way,” said Rowe. “But in terms of say, network, you don’t like its cost and start to get something cheaper off the Internet, but that’s a corporate system, step out of that and we’ll work to get things more manageable,” he added.

The visibility factor, which gives both IT and businesses a clear understanding in terms of spending, is vital to how NOL’s Wu does her work. In her organisation, IT expenditure is split into two brackets; the first group is for running the core business, while the second is on discretionary items such as projects.

The businesses are then given clarity and control about the costs of the projects; supporting elements, running costs, and enhancement details. And Wu only has to focus on the contracts and supply.

Most importantly, felt Syngenta’s Low, is that management of the projects is done from an overall business point of view. “And not just by specific business units, because some of the cost columns that you cut can be spread across multiple initiatives. And so having that visibility is so good,” he said.

Share the load

To combat cost, Rhodia adopted the concept of shared services, said Kenneth Goh. He is the director of information systems shared services of Rhodia Asia Pacific.

“This means the lines of business do not own any of the function costs, for example IT, and this has helped us to a large extent, to be able to move up and down to where our businesses are going. If business A says we want to increase our spend, the appropriate amount of resources will be allocated to these operating expenses of IT globally across the whole of Rhodia,” he said.

Going the route of shared services have helped streamlined the number of applications; the organisation has gone single-instance worldwide on SAP. The company has standardised its desktops and applications, while it is seeking to eliminate the hidden cost down to the level of individual desktop applications—it does not allow employees to install software.

“So that is the kind of control we are looking at and this brought down the cost of applications dramatically, and we can only do this through the concept of shared services, where one function owns the total cost of another at a global level,” said Goh. Subsequently, the process of governance helps keep things in control with a governance council that has representation from various business units.

Outsource it right

However, Accenture’s Halstead and Darby offered caution on how CIOs can go overboard with outsourcing.

Darby related her experience with a client where Accenture had to transition several roles back to the client. “What happened was that they lost their architectural capability and the service management was being done primarily by us. The way the roles have gotten structured was just totally dysfunctional,” said Darby.

Halstead recounted his experience with a banking client from Japan where its IT function did not enough capability left to manage its vendors. With US$450 million a year to spend on IT, the organisation only has 70, instead of the ideal 500, to manage some 3000 vendors.

“So they have let the pendulum swung so far that vendors drove the IT agenda. What we say is, you have got to bring that capability back inhouse to manage this situation,” said Halstead. “It is not going to work unless there’s the right sort of capability under service management, vendor management, as well as ownership of the vendor within the business.”

Contact: Jack Loo