The IT Cost Optimization Playbook

THE IT COST OPTIMIZATION PLAYBOOK

MAXIMIZE COST SAVINGS AND FUND DIGITAL TRANSFORMATION

OPT IMI ZE TODAY TO TRANSFORM TOMORROW

When it comes to innovation and speed, a huge gap exists between where IT and business leaders want their organizations to be, and what is actually possible given available resources and practical constraints. Legacy-centric IT shops and business functions are often dragged down by technical debt and inefficient processes that can result in up to 80% of the budget being used to maintain the status quo. The cost on “run”-oriented activities needs to be reduced, so that more investment can be made available to fund digital programs. To do so, IT and business leaders need a new paradigm—one that includes a comprehensive benchmarking and cost optimization exercise at every stage of the sourcing journey. What are the right sourcing models and scope segments between retained and outsourced? What are the truly premium versus generic technologies and skills? Are you overpaying? Have you maximized automation and AI from a solution and business case standpoint? What should be the recalibrated SLAs and KPIs for the new paradigm? Whether you are embarking on a new sourcing initiation strategy, looking to calibrate its contracts in the midterm, or rethinking a contract at the end-of-term, benchmarking advisory support can be extremely helpful in objective decision-making. And by combining it with a cost optimization process, traditionally competing agendas become complementary: IT and business leaders can both optimize operations today and fund the innovations that will transform their organizations in the future.

2

THE IT COST OPTIMIZATION PLAYBOOK I 2020 © WAVESTONE

OPT IMI ZE TODAY TO TRANSFORM TOMORROW

Within this framework, even small-scale cost optimization projects can make a significant impact. On average, advisory-led engagements result in cost savings, primarily driven by bloat and shadow cost reduction, of 15–20%. And it gets better: evaluating and optimizing “as-is” IT operations before comparing against benchmarking data can move the needle to 40%. And finally, by incorporating digitization—this is where machine learning and automation workflows come into play—60% improvement is possible. Net impact and savings opportunities will vary depending on factors like the maturity of the organization, the number and age of assets, the strategic importance of the issues, and speed to implementation. However, a true cost benchmarking advisory evaluates both the cost of work (think labor costs, fair market rates and discounts) as well as the drivers of work, which include factors such as process efficiency, redundant IT from M&As, and productivity metrics related to employees and technology. The bottom line is that it would be almost impossible for IT and business leaders to drive true transformation in the enterprise if operations and costs are not first optimized. Without taking a 360-degree approach, any efforts to reduce costs and improve efficiency are bound to fall short of their full potential. IT and business leaders must optimize today to transform tomorrow.

3

ASSESS ING THE THREE MAJOR DIMENS IONS OF COST OPT IMI ZAT ION Every organization is impacted by cost optimization across three dimensions: strategy, execution—which encompasses everything from infrastructure to governance—and financials, the bedrock that cuts across everything.

PART 1: HOW TO OPTIMIZE AND TRANSFORM YOUR ORGANIZATION’S CURRENT STATE

Strategy

The first area to evaluate is strategic alignment, or how aligned an organization is with business goals. This includes:

/ The maturity of the organization’s capabilities / Methods for prioritizing the project portfolio and consolidating technology across locations / Approaches to engaging business leadership in decision-making / Mechanisms for allowing oversight of progress and performance / Opportunities to use automation and advanced analytics to improve the efficiency of operations and processes

4

THE IT COST OPTIMIZATION PLAYBOOK I 2020 © WAVESTONE

Execution

PART 1: HOW TO OPTIMIZE AND TRANSFORM YOUR ORGANIZATION’S CURRENT STATE

The next dimension to review and benchmark is the organization’s run state, which encompasses four categories:

/ Service delivery processes How effective operations processes and governance are in terms of maturity, comprehensiveness, and efficiency. Applications and infrastructure How close the core infrastructure and business applications ecosystem are to industry best practices in terms of suitability, scalability, age, and security. People and organization How well employee skills and capabilities—and the organization itself—are meeting business needs. Sourcing and contracts How the organization utilizes outsourcing and global service delivery, and how contracts compare with industry-standard terms and conditions, service levels, and pricing models. / Cost analyses by function and activity, as well as spending audits / Existing contracts and how they compare to market rates / Financial improvements that can be made by modernizing and rationalizing current applications and infrastructure / Ways cloud computing allows for cost savings and improved ROI / Alternative organizational models that improve cost effectiveness / A tangible view of automation-linked cost reduction and the associated cost improvement trajectory, along with non-financial KPIs (error reduction, increased throughput, business KPIs, etc.) And of course, all of these areas should be assessed with two questions in mind: 1. How do we compare to industry standards and rates? 2. What work drivers can be optimized and automated for speed and cost? / / / Financials The final step is financial management, which requires analyzing the accuracy of budgeting in light of overall spend. This includes:

5

2020 © WAVESTONE I THE IT COST OPTIMIZATION PLAYBOOK

PART 1: HOW TO OPTIMIZE AND TRANSFORM YOUR ORGANIZATION’S CURRENT STATE

TOO GOOD TO BE TRUE? ACHI EVING TRANSFORMAT ION THROUGH DIGI T I ZAT ION

At the end of the day, optimizing your organization’s current state will only get you so far (up to 20% cost savings potential). However, using the optimized state as a baseline for digitization enables organizations to achieve up to 60% total improvement potential—in other words, a real transformation. Plenty of big numbers are being paraded around for automation-led benefits, but for IT and business leaders trying to grapple with the new landscape, it’s important to make sure the optimization and digitization agendas aren’t overlapping or redundant. Service providers can’t prove if a technology or product is truly additive in relation to cost savings, or merely helping to reduce current bloat. For example, if the claim is 40% in automation-led benefits, 15% of that could easily be bloat from overstaffing and shadow costs. Until an organization is truly optimized, it’s difficult to measure the incremental value of digitization and prove the business case. Similarly, while it’s common to compare bids from multiple service providers, this is problematic because cost-saving comparisons are often made with the legacy state. In fact, the industry is so overwhelming that even a real solution can come across as too good to be true. An automation solution can have true merit and the service provider can promise cost savings, but it may be overlooked because it sounds like a pipe dream. The best way to prove the digital transformation business case is by first assessing and optimizing your organization’s current state.

6

THE IT COST OPTIMIZATION PLAYBOOK I 2020 © WAVESTONE

THE ROADMAP TO MAXIMUM COST SAVINGS POTENT IAL

PART 1: HOW TO OPTIMIZE AND TRANSFORM YOUR ORGANIZATION’S CURRENT STATE

Combining both optimization and transformation agendas is the only way to achieve 60% improvement potential.

40-60% improvement potential optimization and transformation initiatives

30-40%

15-20%

CURRENT STATE

OPTIMIZED OPERATIONS

MODERN DIGITAL BUSINESS

OPTIMIZATION

DIGITIZATION

7

2020 © WAVESTONE I THE IT COST OPTIMIZATION PLAYBOOK

WHY TRADI T IONAL BENCHMARKING I SN’ 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: The company signs 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 environments. Or, they hire a generic management consulting firm that treats IT, business process optimization, and transformation agendas as subsets of enterprise cost strategies. These firms often lack practical sourcing or benchmarking advisory experience to contextualize market solutions and investment realities. Unfortunately, even in specialist advisory firms benchmarking is housed under research back-offices that lack hands-on experience and context necessary for decisive benchmarks. The organization does a shallow rate exercise that casts a tunnel view on rates, missing the broader elements that can impact the total cost optimization opportunity.

PART 2: WHAT EXECUTIVE MANAGEMENT GETS WRONG ABOUT COST OPTIMIZATION (AND HOW TO MAKE IT WORK ANYWAY)

01

02

03

04

8

THE IT COST OPTIMIZATION PLAYBOOK I 2020 © WAVESTONE

PART 2: WHAT EXECUTIVE MANAGEMENT GETS WRONG ABOUT COST OPTIMIZATION (AND HOW TO MAKE IT WORK ANYWAY)

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. 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 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 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 funnelled 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 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 newfangled technologies and services that claim to solve all your ills is overwhelming. Investments in global robotic automation are estimated to grow at 60% CAGR to reach $6.5 billion by 2020. 1 But how much of that will be wasted due to inadequately proofed solutions and business cases?

1 “Zinnov Zones for Robotic Automation Services.” Zinnov Zones. http://zinnovzones.com/ Robotic-Automation-Services

9

2020 © WAVESTONE I THE IT COST OPTIMIZATION PLAYBOOK

MAXIMI Z ING BUS INESS IMPACT WI TH HOL I ST I C BENCHMARKING The real path to cost optimization is through holistic benchmarking, an experience-driven, hands-on approach that leverages data sourced from actual engagements. In this advisory-driven scenario, cost optimization is achieved in two stages: a comprehensive assessment of your organization, followed by a benchmark that does more than just cut costs. The process helps you discover if your organization is delivering maximum business value, and identifies places where cost optimization will have the greatest impact. A comprehensive assessment reveals where benchmarking will make the most impact. So much can be done to smooth out as-is operations and processes before you start comparing yourself with competitors. Only after you’ve established a true understanding of where your organization is can you work toward being best-in- class. Review assets, operations, and workforce skills. Take a look at technical debt and infrastructure. Understand your organization’s nuances, tendencies, and the specifics of your current environment to reveal the scope of actions you need to take to achieve your optimization goals. The assessment overlaps with the holistic benchmarking process. Once you’ve cleaned up your standard operating procedures, you can begin mapping best-practice KPIs to them. This is also where you calibrate metrics, pricing, performance, effort ratios, productivity, staffing structure, and even contractual tenets. Establish a baseline, and from that optimized state, benchmark against the industry and draw up a shortlist of technologies that are likely to get you to the next level of savings. Stage 1: “As-Is” Assessment Stage 2: Holistic Benchmarking

PART 2: WHAT EXECUTIVE MANAGEMENT GETS WRONG ABOUT COST OPTIMIZATION (AND HOW TO MAKE IT WORK ANYWAY)

10

THE IT COST OPTIMIZATION PLAYBOOK I 2020 © WAVESTONE

THREE FACTORS TO CONS IDER IN HOL I ST I C BENCHMARKING

PART 2: WHAT EXECUTIVE MANAGEMENT GETS WRONG ABOUT COST OPTIMIZATION (AND HOW TO MAKE IT WORK ANYWAY)

A holistic benchmarking exercise, overlaid with a cost assessment, can take anywhere from two to six months. Not all companies have the capacity or bandwidth to undertake a comprehensive months-long exercise. But even with a simple calibration or a purely diagnostic engagement that takes a few weeks, there is a tremendous advantage to doing more than picking up a benchmarking product, doing a shallow rate exercise, and taking it to the negotiations table. After all, the opposite party can easily negate the validity of the benchmarks by stating the difference in their unique environment. What’s more, even a seemingly straightforward benchmark for a developer needs to be contextualized beyond the standard cost for the particular skill set. Rates must be set against your operating costs and work volume, and you need to ensure you aren’t hiring a senior developer when all you need is a junior one.

Don’t overlook these factors in any benchmarking analysis:

Delivery location

Nomenclature There are no standardized nomenclatures for skills, assets, and service configurations across buyers and providers. Therefore, it is crucial to map and standardize nomenclatures before benchmarking (e.g., for skills mapping based on years of experience).

Technology Having categorizations such as generic (Java, C/C++), premium (Apache, Hyperion), or niche (Pega, HANA, MDG) helps create an actionable pricing spectrum instead of a sweeping benchmark that doesn’t indicate if the data should be industry agnostic or specific.

Delivery locations should ideally govern rate discussions because of significant variations in labor and cost profiles. Offshore (Philippines, India) vs. nearshore (Mexico, Brazil) vs. domestic will have varying costs and rates.

11

2020 © WAVESTONE I THE IT COST OPTIMIZATION PLAYBOOK

KEY BENCHMARKING CONS IDERAT IONS Has your benchmarker:

01 Adjusted for volume and quality?

Normalize comparisons to compensate for differences in service quality, responsiveness, and consumption levels.

02 Included financial parameters?

Consider cost of capital, depreciation, lease vs. buy, volume purchase agreements, timing of acquisitions, life cycles of equipment, and technology. 04 Accounted for total service cost with the workforce? Conduct a broader total- cost-for-service analysis that includes management, governance, and uniqueness of individuals and teams. 06 Provided action-oriented findings? Identify source of cost irregularities and include recommended action- oriented strategies. Too often, benchmarks only provide indication of high or low costs.

03 Identified peripheral agreements and promises? Note financial engineering, balance of trade agreements, bundling, and other forms of value exchange.

05 Validated data by experience?

Supplement data with interviews and note if benchmarking is delegated to the least experienced consultants who may not have the background to challenge the validity or

completeness of data received from a client.

12

THE IT COST OPTIMIZATION PLAYBOOK I 2020 © WAVESTONE

NEED A ROADMAP FOR COST OPT IMI ZAT ION?

Wavestone US has provided assessment and benchmarking services to many clients, leveraging the expertise and many years’ experience of our strategy and transformation advisors.

Learn more about how we can help you cross the digital transformation chasm with cost

optimization by visiting wavestone.us or giving us a call at (610) 854-2700.

About Wavestone US

Wavestone US is the North American arm of global management and IT consulting firm Wavestone. We have supported the transformations of more than 200 Fortune 1000 companies across a wide range of industries, leveraging a strong peer-to-peer culture, offering a practitioner’s perspective on IT strategy, cost optimization, operational improvements, cybersecurity, and business management. It is our mission to help business and IT leaders successfully deliver their most critical transformations and achieve positive outcomes. We drive change for growth, lower cost, and risk, and create the trust that gives people the desire to act.

www.wavestone.com

In a world where knowing how to drive transformation is the key to success, Wavestone’s mission is to guide large companies and organizations in their most critical transformation projects, with the ambition of a positive outcome for all stakeholders. That’s what we call “ The Positive Way ”.

Wavestone brings together 3,000 employees across 8 countries. It is a leading independent player in the European consulting market. Wavestone is listed on Euronext Paris, and recognized as a Great Place To Work®.

2020 I © WAVESTONE

Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14

www.wavestone.us

Made with FlippingBook HTML5