A glance through the past decade’s headlines in the IT press should be enough to convince anyone that getting value for money out of new IT is an rare and arcane skill. Year after year, public and private sector organisations contrive to waste boatloads of cash while ostensibly setting out to acquire the means to make their organisations more efficient.
Recently, KPMG ran its eye over UK plc’s track record on buying, monitoring and measuring the return on value of IT spend. Its astounding conclusion, after assigning some numbers to the responses of 200 finance directors and other senior management in UK companies, was that UK plc is wasting at least £11bn a year – and more likely £17bn.
Paul Diamond, director of information risk management at KPMG, and the man responsible for the 2001 KPMG IS/IT Asset Management Survey, points out that the study took as its starting point similar research in the US by Meta Group and Gartner Group. KPMG’s work focused on the asset management side of IT procurement, rather than on the minutiae of project specification and testing, so it has nothing to say about badly designed, badly thought-out or poorly tested projects. One can only speculate what the headline figure would have been if it had decided to add the cash sunk in these money pits into the equation.
The central finding of the survey is that UK companies – and the UK is not unique or alone in this – do not manage their IT hardware and software with anything like sufficient care. The errors are many and various. Diamond points out that one huge missed trick concerns the control of smaller items, such as off-the-shelf software packages, handheld devices, desktop printers and so on. “People buy gadgets, stick them on the shelf and forget them, but it is still a cost to the organisation. You need systems that can capture the management information you need on these items so you can see what they are costing you,” he says.
IT’S A STEAL
Companies would not readily allow an ex-employee to leave the premises with £300 of company cash in their pocket. All too often, however, managements fail to put the resources in place that enable them to stop departing employees walking off to a competitor with a handheld device containing many megabytes of key product, customer and prospect information. The true cost of mismanagement, in other words, is not limited to the purchase price of the neglected asset.
Similarly, Diamond argues that unless companies have a clear record of how many printers and servers they have, they can’t begin to take advantage of cost-saving and efficiency-generating measures such as outsourcing, or server or printer consolidation. In fact, as Ian Leask, executive consultant with Compass Management notes, trying to initiate an outsourcing contract without knowing what you are handing over to the outsourcer is “begging to get ripped off by your new supplier”.
Another area causing concern is what is now called “maverick buying” by departments or even individuals. A classic example is Microsoft Project.
“Very often we find that software such as Microsoft Project is not bought as part of Microsoft Office, but is added in by individuals and work groups. When you audit the usage, you find that the organisation is probably only using 20 or 30 copies of Microsoft Project, but it has paid licence fees for hundreds of idle copies,” says Diamond.
Proper management of software licensing can bring huge savings, KPMG claims. The report gives examples of corporates which have saved a million or so simply by consolidating software purchases through a single supplier.
The path to savings, KPMG claims, is relatively simple. Firstly, companies should appoint a senior manager with responsibility for IT assets and reward them according to the savings they generate. Secondly, they should institute clear procurement policies and automate collection of management data.
Had the report payed attention to another KPMG effort it might have laid more stress on the savings that can be gained by using professional purchasing skills in IT. KPMG is currently in the midst of an initiative called I-SAVE, which it is pursuing jointly with Oracle, the Chartered Institute of Purchasing and Supply (CIPS) and Bristol Business School at the University of the West of England.
I-SAVE has implications for companies interested in controlling IT procurement. After a few years of chasing big corporates with the standard e-procurement sales line (“We’ll save you 20% of your total spend”) Oracle decided it might be a good idea to recruit a senior purchasing manager. Accordingly, it went out and head hunted Andrew Douglas, formerly European procurement head for Honeywell, a man responsible for spending billions of Honeywell’s money across Europe.
Douglas says that when he listened to Oracle e-procurement sales people giving their pitch he fell about laughing. “The idea that you can walk in to a senior procurement professional’s office, a person responsible for a $2bn spend, and tell them you are going to save them 20% is nonsense,” he says. The first thing the procurement specialist will say is: “Great, hold still while I draw up a contract that says you are going to deliver me $400m in savings this year, with penalty clauses if you don’t.” The next act would be the sound of the IT sales person’s feet thundering away down the corridor.
Clearly there is scope for e-procurement to add efficiencies to purchasing in general, and to IT spend in particular, since this is one of the largest areas of corporate spending, but it needs a more subtle approach. To help define that approach Douglas set up I-SAVE. Working with the university, he set out to identify the best practice purchasing that can be applied to different commodities and industries. Research was then carried out to verify the savings that 700 purchasing professionals thought could be achieved across 80 kinds of commodity. The result – welded into a free, downloadable tool from the Oracle web site – is I-SAVE.
“We identified two types of spend. One is the spend that the procurement professional controls and one is the spend that he or she doesn’t. You can find the latter by going to your purchase ledger and identifying all the substantial suppliers that you and your purchasing colleagues don’t personally deal with. What we found was that typically an organisation’s spend splits 50-50 into these two types,” says Douglas. “Common sense tells you that the primary savings opportunities will come from the uncontrolled spend, so then we set out to canvass the views of purchasing professionals on the savings they could expect if that spend could be brought within their control.”
What I-SAVE came up with was an average figure of a 7.81% saving, with a range from near zero opportunity for savings, to around 20% savings on some items, with IT commodity spending emerging as the largest opportunity for savings. (The lowest opportunity, zero, came in the precious metals category. It doesn’t matter what you do, you won’t get gold at much under market price.)
In other words, what Oracle and its partners created with I-SAVE is a toolset that will enable a purchasing professional to generate a reasonable target saving, tailored to their organisation. The variation on savings opportunities will be clearly shown across the various categories of commodity spend, and the purchasing professional then has the basis to go to their board with a case to deploy e-procurement in the areas where the largest savings are to be found. What Oracle has also succeeded in doing is to create a credible message it can take to purchasing professionals – 7.81% savings is a believable target.
Ken Woodhouse, executive director at Cap Gemini Ernst & Young is rather doubtful of the realities of KPMG’s $17bn waste claim. In his view, while there may well be inefficiencies of the order of 10% to 30% of total budget in the average in-house IT shop, they won’t be found solely in procurement.
However, he notes that investment in IT has now been curtailed by the Global 1000 across the board, so the time is ripe for finding headline savings in IT costs.
“IT is forever seeking new investments and chasing new technologies, but the industry does not have a very good record at cleaning up after itself,” says Woodhouse. “The current climate is putting focus on getting value for money from every pound, so, irrespective of whether the headline figure quoted by KPMG is right or wrong, the message is good.”