Managing the 80% problem


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Lean IT... here's how we use activity based costing, total quality and process re engineering to drive quality up, cost down and redirect IT spend from support to strategic investments

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Managing the 80% problem

  1. 1. Managing the 80% Problem<br />Combating the ‘ongoing support’ issue cannibalizing IT budgets<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />
  2. 2. The 80% problem what is it?<br />Why talk about it?<br />Where are these costs hiding (show me the coffin and a stake …)?<br />What are the common approaches – do they work?<br />A different approach – Alphabet soup: ABC, TQC, Re<br />Getting started<br />Institutionalizing continuous improvement<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />2<br />Contents<br />
  3. 3. Conventional wisdom and some accounting point to IT budgets being cannibalized by ongoing support issues<br /><ul><li>Legacy costs consume 70 – 80+% of total budgets
  4. 4. Hardware budgets still consume > 50% of total costs
  5. 5. Even though Moore’s law continues we can’t beat the total cost burden
  6. 6. Infrastructure support costs are 30 – 40 + % of Hardware costs</li></ul>We increase the burden every time we implement a new application<br /><ul><li>The expanding footprint of applications overwhelms productivity gains
  7. 7. The expanding infrastructure footprint increases the support / patch / maintenance burden in the data center
  8. 8. Ongoing environmental support for old data centers takes people and capital to keep up with new infrastructure demands</li></ul>At the end of the day, it’s the ‘Golden Apple’, where everything good we do today, inhibits our ability to do more in the future<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />3<br />The 80% problem what is it?<br />
  9. 9. It was second among InfoWeek’s survey of CIO’s for 2010<br />The Cloud Imperative. <br />The 80/20 Spending Trap. <br />CIO-Led Revenue Growth And Customer Engagement. <br />Mastering End-to-End Business Processes. <br />Business Analytics and Predictive Analytics. <br />External Information vs. Internal Information. <br />CIO Priorities, CIO Compensation, CIO Evaluation. <br />Vendor Consolidation, With Radical Exceptions <br />The Mobile Enterprise and The Mobile Mindset. <br />The Transformation Quotient. <br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />4<br />Why talk about it?<br />As has been the case for the last 20 years - "the new normal" for CIOs in 2010 will be to accomplish a whole lot more with a whole lot less<br />
  10. 10. IT budget, even if developed bottom up is almost always capped by G&A and expense ratios at budget time:<br /><ul><li>Benchmarks of % of revenue, free cash flow, PBT / EBITDA, etc. make budgets for SG&A a ‘solved for’ number.
  11. 11. Sandbagged revenue estimates and escalating uncontrollable expense costs (raw matl. , energy …) subtract from available cash.
  12. 12. Additionally head count caps, caps on consulting and variable resources constrain any flexibility that the CIO has.</li></ul>Even the AICPA ‘dodge’ of the last 10 years is falling short:<br /><ul><li>Software and new development capitalization has resulted in a tidal wave of depreciation washing over the budget ‘shores’.
  13. 13. Free cash flow and debt covenants further constrain our ability to ‘grow the pie’ from creative accounting.
  14. 14. Conservative auditors and CFO’s seek to stop capitalization at the earliest point in the implementation cycle.</li></ul>We are left in ‘the do more with less environment’ just when competitive pressures and IT’s value proposition are increasing<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />5<br />Why talk about it (continued)?<br />
  15. 15. 4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />6<br />Where are these costs hiding?<br />We all know where the costs are – Legacy, Legacy, Legacy<br />
  16. 16. 4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />7<br />Where are these costs hiding?<br />
  17. 17. Embrace a ‘religion’ – e.g. ITIL<br />While service level control may manage demand, overall costs rarely go down and often go up when formalisms are installed.<br />However, the good news is that the discipline of formal processes and databases provide the basis to measure work and potentially to manage it better.<br />Give the problem to someone else – outsource<br />Overall, the outsourcing equation may transfer responsibility to more efficient organizations.<br />However, it is still true that over 50% fail outright and more than that go ‘upside down’ on costs in less than three years.<br />Benchmark – see who might be doing it better<br />Comparisons in this area are risky, however, at a high level they do provide a view into areas where there are opportunities to improve practice.<br />The bad news is that they don’t help in ‘root cause’ analysis. They only identify areas of opportunity<br />What are the common approaches – do they work?<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />8<br />
  18. 18. A different approach<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />9<br />
  19. 19. Activity Based Costing to baseline work and standard costs<br />Identify core deliverables and activities for each group<br />Identify work at a low enough level to be actionable – activities that can be eliminated, automated, restructured, or reorganized<br />Understand the cross functional (IT group) costs<br />Total Quality Methods for priorities and root cause<br />Pareto (Frequency) charting of incidents and activity volume <br />Ishikawa (Fishbone) to outline drivers and root cause<br />Plan-do-check-act cycle for change implementation<br />Use Reengineering principles to drive performance and efficiency<br />Eliminate unnecessary work / Restructure processes /Apply automation only after optimization<br />Alphabet soup- Drive change through ABC, AVA, TQC and Reengineering<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />10<br />
  20. 20. Break down high level costs into standard work units<br />At enough granularity to be able to establish standards<br />Unix password reset…<br />Identify cross functional (IT group) involvement in activities<br />Identify who the participants are, their place in the workflow and their estimate for their tasks<br />Estimate standard work effort estimates for each activity <br />Focus both on labor / effort as well as “$” costs<br />Develop workload model summarizing standard activity costs into major accounting groups<br />Break Fix<br />Support / upgrade<br />Enhancement <br />New development etc.<br />Use Activity Based Cost to develop standard costs and linkage <br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />11<br />
  21. 21. Develop Pareto charts from tickets, service requests or other estimating techniques to analyze frequency of activities<br />May have to break ticket categories down to match with ABC<br />Ultimately workload categorization standards must synchronize across all accounting and work management systems<br />Combine with the data from the ABC analysis to understand the total cost impact of the activity<br />Model the total costs by matching the frequency of activities to the standard cost for the work<br />Reconcile the cost with budget and headcount and redo standards and volumes until budget, headcount and total cost are close<br />In first pass the model should be within 5-10% of explaining all work and budget<br />Use TQC to prioritize and analyze activities<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />12<br />
  22. 22. Understand Impact and Set Change Agenda<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />13<br />ABC analysis<br />Analyze and <br />Reconcile<br />Pareto Analysis<br />Prioritize and <br />Focus<br />$<br />Activity Cost<br />This effort will identify and prioritize a portfolio of improvement initiatives<br />Activity Volume<br />
  23. 23. Each targeted initiative should work on both reducing its frequency and cost <br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />14<br />Drive down activity frequency with TQC and root cause analysis<br />$<br />Activity Cost<br />Drive down activity cost with process redesign<br />Activity Volume<br />
  24. 24. Use Root cause analysis to find drivers of activities<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />15<br />Pareto Analysis<br />Evaluating the root cause or drivers of efforts identifies changes to reduce frequency of support efforts<br />Improvement efforts<br />Training<br />Technology<br />Policy<br />Procedure<br />
  25. 25. Reengineer process to drive efficiency and cost reduction<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />16<br />Eliminate<br />Reengineer workflow and process<br /><ul><li>Identifying activities that add no value to the product or service,
  26. 26. Identifying activities that add no value for the customer,
  27. 27. Organize around outcomes, not tasks
  28. 28. Have those who use the output of the process do the process
  29. 29. Subsume Information work into the real work that produces the information
  30. 30. Treat geographically dispersed operations as if they were centralized
  31. 31. Link parallel activities instead of integrating their results
  32. 32. Put the decision point where the work is performed
  33. 33. Capture data once at its source</li></ul>Apply automation judiciously<br /><ul><li>Automate after a working model has been piloted and implemented
  34. 34. Don’t pave over the cow path – restructure, redesign then automate</li></li></ul><li>It is necessary to establish or rework key IT management systems to monitor and manage this effort<br />The ABC and initial quality initiatives can identify quick hit and key process overhaul candidates<br />Over time, experience has shown that performance degrades and sometimes costs are as high or higher than before the reengineering effort<br />It is critical to establish a solid set of KPI’s around the continued performance of these cost driving initiatives<br />Work tracking and labor management systems need to be tied together to provide management visibility into ongoing operations<br />A standard work breakdown structure is the critical link between the work request (problem / request management) system and the labor tracking system<br />Management reports should tie both the volume of work and the cost of work into a coherent management dashboard <br />KPI’s and performance management systems need to support continued improvement efforts<br />Sustaining change and continuous improvement<br />4/29/2010<br />Copyright: Crocus Hill Associates, All rights reserved<br />17<br />