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IT Cost Optimization Why Traditional Benchmarking Isn’t Enough

IT Cost Optimization: Why Traditional Benchmarking Isn’t Enough

Executive management often has the wrong idea about how to do cost optimization. It’s a misunderstanding that stems from the traditional benchmarking process, which may follow this common storyline:

Business leaders hire a generic management consulting firm, which typically lacks practical implementation experience with benchmarking. Unfortunately, even within specialist advisory firms, the benchmarking capability is almost always housed under the research function instead of advisory, eliminating the possibility of any meaningful context being applied to the benchmarks. They sign up with a traditional benchmarker that creates research and survey-based data. They pay for access to what is essentially a data catalog created by spreadsheet analysts that are far removed from the actual realities of a transaction.

The data includes averages of averages and is unlikely to represent unique IT environments. The organization does a shallow rate exercise that casts a tunnel view on rates, missing the broader elements that can impact the total cost reduction opportunity. Executive management continues to treat benchmarking as a quick and tactical procurement exercise, as opposed to a strategic undertaking that can guide critical decisions involving employee retention, outsourcing strategy, and contract renewals. This is why traditional benchmarking is a failed process.

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IT Cost Optimization: Why Traditional Benchmarking Isn’t Enough

Data is meaningless without proper analysis or context. Even if you see results, you have no idea what was originally bloated or inefficient in the organization. Worse, the committee may now believe that IT costs are too high and should be reduced when, in reality, the costs are appropriate for the type of environment, and the best approach is to get to a new environment (which requires investment). Doing nothing would have been better than doing anything at all. Moreover, traditional benchmarking providers are typically housed under research outfits that treat the process as a productized data catalog split up into a roster of roles, with the goal to circulate and upsell as many times as possible. And when there are more salespeople than actual IT advisors, there’s no strategy behind the data extrapolation. Researchers don’t have experience sitting at the negotiation table. They’ve never done a cost assessment, and the numbers they share are based on surveys, rather than hands-on research. At best, the data is funneled from

the advisory side of the business, and much can be lost in translation. Is the data archived and normalized? Is it an apples-to-apples comparison? Probably not—and there’s no chance an IT organization can achieve true optimization potential when rudimentary spreadsheet data is applied to chaos. Complicating things further is the sales buzz surrounding automation. The sheer volume of new-fangled technologies and services that claim to solve all your ills is overwhelming. Investments in global robotic automation are estimated to achieve a CAGR of 60% by 2020, totaling $6.5 billion. But how much of that will be wasted because no one has figured out how IT organizations are run in the first place? The path to proper cost reduction must begin with a more holistic benchmarking methodology. One that is based on data sourced from actual engagements and takes into account the bigger picture of the organization.

The following pages offer snapshots of recent benchmarking and contract health check advisory engagements that have yielded positive outcomes for our clients.

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Wavestone led an extensive benchmarking of the clients’ IT service desk operations to strengthen its next-gen service capability, optimize effort estimation, and improve productivity by ~20%, in addition to several other solutioning, pricing, and performance characteristics. We held comprehensive discussions around the service desk delivery model, resource structure, enterprise automation platform, to name a few. This exercise helped us simplify the service desk portfolio and provide the client with opportunities for better competitiveness and increased productivity, and to harness integration synergies. Engagement #1 Benchmarking of Next-Gen Service Desk for Tier 1 IT Service Provider

Observations

Solutions

Provider had limited capabilities on next- gen offerings, leading to minimal growth in service desk business

Comprehensive guidance on next-gen serviced portfolio with focus on user personification, automation, AI/ML and Cognitive to enhance business growth Clustering of service desk solutions according to client appetite and user-persona to ensure solution alignment to client business and objectives

Multiple siloed offerings led to ineffective solutions

Sub-optimal sizing in metrics like shrinkage, occupancy, and slack leading to high-effort estimation

Unraveled the areas of opportunity to reduce effort estimation by up to ~20%

Indicated areas of improvement across automation medium of communication, SLA, complexity, for enhanced productivity and reduced TCO

Disjointed delivery areas resulting in low productivity

Advised on best-in-class span of control, governance and offshore/near-shore leverage in provider delivery model

Potential inefficiencies in delivery model and team structure

Shared best-practices on inclusion of risk contingencies in the commercial construct

Higher than typical padding of risk contingencies in pricing

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48% Total Savings

11% 13%

9% 15%

Engagement #1 findings

Price Benchmarking

Pricing Model Optimization Ticket Baseline Cleanup Volume Reduction via NextGen Solution

Assessment of client environment and objectives, as well as pros and cons of “per User” and “per Contact” pricing model. Recommended optimizing the pricing model to “per Contract”.

Auditing the as-is ticket definitions (e.g., L0, L1 etc) and counts to remediate incorrect up- grading of tickets (e.g., L0 to L1) and re- baselining of volumes

In line with next-gen solution norms, setting of practical targets for the ticket glide path via L0 and L1 ticket automation, self-help, self-heal, etc.

Comparison of as-is “per User” rates to benchmarks, accounting for parameters such as hours of support, channels, automation, SLAs, offshore leverage and location.

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A recent ITO contract health check conducted for a global high-tech manufacturing company revealed an opportunity for up to 33% savings in total costs. The areas in which these opportunities were identified included adherence to contracted terms, solution optimization, asset financing, and offshore leverage enhancement. Driven by the comprehensiveness and accuracy of the contract health check, the client engaged Wavestone to execute the downstream phases as well: Optimizing an Application Outsourcing Advisory Engagement #2

SOLUTION / The incumbent’s automation solution failed to realize tangible reduction in TCO and FTE glide path / With automation at its core, the newly selected provider’s solution has a 44% fee reduction commitment from Year 1 to Year 5 / Incorporated best-in-class productivity and right-sizing tenets (FTEs reduced from 126 to 60) / Re-calibrated the existing provider-friendly SLAs to best-in-class SLAs with stringent Fee-at-Risk and Consecutive SLA Default penalties PERFORMANCE / Developed the roadmap for 33% cost opportunity as part of the Contract Health Check / Unlocked additional competitive synergies as part of the RFP to Contract phase to realize 41% TCO savings PRICING / Conducted final negotiations and reduced termination fees from $5 million to $1.75 million in Year 1, and 0 after Year 3 / Reduced Transition cost from $2 million to $1.1 million and ARC-RRC rates 35% / Collaborated with client Legal and external counsel or MSA and Schedules development / Turned 5 key "red" clauses on Governance, COLA, Benchmarking to "Green" in the new contract NEGOTIATIONS AND CONTRACTING / Facilitated development of a comprehensive Governance structure ensuring optimized cost, quality, risk mitigation and business alignment OVERALL GOVERNANCE

Engagement Elements

Here are the key highlights from the complete lifecycle of the engagement.

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Execution of RFP to Contract

Transition Support

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Wavestone’s practical and actionable benchmarks leverage real-life data from actual advisory deals and can help you make the right decision. platforms, or switching over to next-generation platforms that promise higher efficiencies and reduced labor count? An insurance firm is deciding between carrying on with legacy business transaction processing Engagement #3

Key Parameters assessed in a Recent Insurance Benchmarking Engagement

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Next-Gen Platforms

Legacy Platforms

Minimal additional capital expense

Greater Straight Through or Auto Processing

Minimal risks associated with migration or switchover Larger labor pool for support of mature platforms

Higher productivity for manual transactions

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Engagement #4 Benchmarking improves IT savings for one of the largest US energy companies Wavestone US led a comprehensive benchmarking of the client’s outsourced IT managed services contract (infrastructure and applications) with its strategic supplier to realign its IT spend and create a tangible annual cost opportunity roadmap of ~49%. Additionally, the benchmarking led to a 32.5% reduction in bill rates for T&M projects as well as realignment of target performance SLAs with best-in-class standards.

Savings Potential in an IT Services Contract

ADDITIONAL SAVINGS IN T&M PROJECTS

49% SAVINGS IN ANNUAL MANAGED SERVICES SPEND

18 %

9 %

3 %

19 %

32.5 %

Managed Infra Costs

Managed Apps Costs

COLA Savings

Machine-First Operations

Billable Rate Benchmarking

Spend optimization potential in IT infrastructure by aligning pricing with benchmarks

Spend optimization potential in application support by aligning pricing with benchmarks

Tangible cost reduction in TCO and FTE glidepath due to machine-first automation model

Comparison of contracted hourly billing rates to market benchmarks for T&M projects

Reduction in annual spend across categories by improvement of COLA clause

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Our cost optimization capabilities range from point solutions for quickly recalibrating retained and outsourced costs to comprehensive assessments and implementation for significant technical debt reduction. Summary of CY2019 Cost & Run Optimization Engagements

Cost Reduction Realized

Application Rationalization

Network Consolidation

60%

Renegotiate, Rescope, or Rebid Lifecycle

Redefine IT Landscape and Service Delivery Model

VMO / Governance

25-35%

Contract Health Checks

Sourcing Execution

Org. Structure

Cloud Migration

Benchmarking engagements including 4 retained benchmarking and business case

Cloud Readiness

Comprehensive Assessments

10-15%

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Contract Pricing Retained Costs Shared Services

Infrastructure Optimization

Portfolio rebalancing (Inhouse vs. Outsource)

Benchmarking

31

Comprehensive assessments

Infrastructure & Apps

Bids

Implementation Effort

12-18 months

16-20 weeks

3-4 weeks

6-8 weeks

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End-to-end Sourcing Transactions

/ Business case for renegotiating, rebidding, or rescoping supplier contracts / Optimizing retained and captive run costs / Technical debt reduction, infra, and apps

Client Objectives Served

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IT Restructuring

/ Portfolio rebalancing (inhouse versus outsourced) / Evaluating alternate delivery models and locations

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Sarthak Brahma Managing Director, Wavestone US Tel: +1 (917) 715-0239 Email: sarthak.brahma@wavestone.com

150 N. Radnor Chester Road Suite A230, Radnor, PA 19087 +1 (610) 854-2700 www.wavestone.us

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