The cost saving ranges
provided here represent maximum potential savings, assuming that a high
degree of opportunity exists to optimize the function. These ranges assume
that an organization is moving from one end of a continuum to another
(highly distributed to highly consolidated, for instance). The actual
amount that organizations will save depends on how much opportunity they
have to improve in any area. In the case of shared services, for example,
organizations that have already done significant work (such that they have
little application redundancy and substantial economies of scale) should
not expect to see the estimated cost savings described here if they further
consolidate. Also, these cost reductions are not additive; depending on the
order of which initiatives are pursued, diminishing returns exist. For
example, a poorly managed IT environment might cost $10,000 per year per
desktop. A total cost of ownership (TCO) initiative could take 10% off
that, which would reduce it to $9,000. Another initiative might reduce that
$9,000 by 10%, which would bring it down to $8,100. These initiatives can
also take several years to implement. Therefore, look for 5% to 10% price
performance improvement annually, as opposed to a 30% immediate reduction
in cost. How much can we save
by eliminating redundancy and moving to shared IT services? Up to 40%, but probably
15% to 20% over the total costs for the particular functional area of IT. Organizations that move
to shared IT services (such as common infrastructure) experience improved
economies of scale, higher levels of standardization and more centralized
procurement and management of IT assets. They are also more likely to have
enterprisewide processes for prioritization of IT projects. IT
organizations that lack shared IT services, however, often have redundant
IT systems and a greater degree of heterogeneity in their environment. IT
organizations that have successfully moved to shared IT infrastructure
(and, in the process, consolidated and eliminated redundant systems) have
typically saved 20% to 30% of total infrastructure costs. On the applications
front, a higher degree of heterogeneity is often tolerated than would be in
the infrastructure arena. Still, many opportunities exist to share core
applications, such as ERP. Efforts around consolidation of applications
frequently yield cost savings of at least 25% over total application
development, support and maintenance costs. Taken together, consolidated IT
environments (those in which infrastructure and applications are highly
standardized and shared across the company) can result in IT costs that are
half that of an environment with a high degree of redundancy in the
infrastructure and application environment. Shared IT services are
not a panacea. There may be good business reasons for running a
technologically mixed environment — or even multiple applications
that provide similar functionality. IT leaders must balance the
cost-savings potential with the possible downsides of consolidating IT
assets (that is, the need to accept the "enterprise" standard
solution, instead of one that is appropriate for the needs of the business
unit). Interestingly, the move to shared services and a common IT
investment portfolio often requires additional costs in terms of service
management and project and portfolio management tools. These costs need to
be taken into account when determining the net benefits of the move. What type of savings
can we expect from server consolidation? Typically, 20% in terms
of asset cost, but not necessarily any savings in personnel costs that make
up the entire TCO picture. Cost savings from server
consolidation is not a given. Some 60% of respondents to a 2005 Gartner
survey said they saved money on server consolidation. However, only 25% of
respondents actually reduced head count. Although staffing levels can be
affected by server consolidation, people working in resource-constrained IT
organizations that are set free from one task are often shifted to
backlogged work or to new projects, resulting in no net staff reduction. It
is important to understand this trend when predicting hard-dollar savings
from consolidation. That is why a detailed TCO analysis is broken down into
discrete tasks to determine where costs are shifting. What type of savings
should we expect from implementing process models, such as IT Information
Library? Expect 20% to 30% of
overall operating costs over three years. Generally, organizations
at higher levels of process maturity are able to "do more with
less" due to the consistency and continual refinement of their
processes. Higher maturity organizations also tend to apply Six Sigma and
Lean techniques to aggressively pursue cost/waste reduction strategies, and
eventually evolve the culture of their organizations toward higher levels
of trust and empowerment of front-line workers — who are then able to
be more effective in taking actions that reduce costs. Gartner has found
that substantial reductions in overall operating costs of up to 28% can be
achieved over 12 quarters. How does a
technology-adoption profile impact IT costs? Gartner categorizes
enterprises based on IT adoption profiles, with Type A being the
most-aggressive adopters of IT, Type B being mainstream adopters and Type C
being slow to adopt new technology. The majority (57%) of companies
categorize themselves as Type B. Only 14% of organizations believe they are
Type A, and 29% describe themselves as Type C. It is not unusual to find
Type A organizations spending more than double what Type C organizations
spend, with Type B organizations spending roughly between the two extremes. Interestingly, although
the overall level of IT investment varies greatly by IT adoption profile,
the breakdown of IT spending within the organization (across categories
such as hardware, software and staff) is similar (regardless of IT adoption
profile). It is also true that divisions — or even departments— within one organization can exhibit different attitudes toward IT
investment. For this reason, many find it useful to use Gartner's
Enterprise Personality Profile (EPP) — which characterizes
organizations based on several attributes — in conjunction with an IT
adoption profile analysis. Ultimately, the goal should be to align IT
spending levels with the overall strategy of the organization. EPP can help
here. What other IT
initiatives have the potential to materially reduce IT costs? The following will also
have a significant impact on IT costs: - Degree
of reuse in application development—
Various flavors of reuse exist, with differing potentials to impact IT
cost. Early impact of any reuse program on the overall budget is
usually minimal. In Year 2 and after, service-oriented development of
applications will make an impact on an organization's overall budget.
Most likely, the overall improvement over five years will run in the
18% range.
- Extent
and age of the applications portfolio— Many organizations have undertaken application rationalization
exercises during the past few years. Reducing the number of
applications supported has the potential to significantly reduce
application maintenance costs. Unfortunately, most organizations are
so oversubscribed when it comes to software that they are more likely
to achieve a balance of supply (of IT resources) and demand (for
application changes) from such efforts than they are to see net
savings in the IT budget. Organizations with a disproportionate number
of older applications also face higher-than-average maintenance costs.
In such organizations, it is not uncommon to see application
maintenance costs accounting for 20% of the IT budget.
- Flexibility
of IT staff (for example, the ability among IT personnel to take on
various roles)— Siloed IT
organizations are inherently costly because skills gaps must be filled
by additional full-time employees or contractors. Organizations made
up of "versatilists" are more able to move talent around as
needed.
- Formality
and quality of asset management processes— Organizations that manage assets well will achieve a cost
savings of 8% to 10% per managed asset within a year.
Several key initiatives
can result in substantial cost savings for IT organizations. Having a
realistic expectation for the level of cost savings, as well as the time
frame in which these savings will be realized, is essential. © 2006 Gartner, Inc.
and/or its Affiliates. All Rights Reserved. Reproduction and distribution
of this publication in any form without prior written permission is
forbidden. The information contained herein has been obtained from sources
believed to be reliable. Gartner disclaims all warranties as to the
accuracy, completeness or adequacy of such information. Although Gartner's
research may discuss legal issues related to the information technology
business, Gartner does not provide legal advice or services and its
research should not be construed or used as such. Gartner shall have no
liability for errors, omissions or inadequacies in the information
contained herein or for interpretations thereof. The opinions expressed
herein are subject to change without notice. | 
