A combination of unnecessary customisation, redundant capacity, un-constrained consumption and restrictive contracts mean that CIOs are paying up to 40% more than they should be for IT services, according to a new review of large public and private sector organisations.
The study by Compass Management Consulting in the first half of 2011 says efforts to cut IT costs over the last two years have had some effect, achieving reductions of 8-15% on average but the firm estimates that savings of up to 40% are feasible if organisations make the transition to more standardised IT services.
According to Compass, despite these savings, overall IT costs have not returned to the levels they were before the years of expansion from 2002-2007 despite falling volumes and unit prices over the last two years.
“The trend line for IT spending continues to rise, despite falls in hardware, software and service costs. Although we have seen falls in storage unit costs of 83% over last five years, servers by 65% and network unit cost declines of 36%, these falls are far outweighed by the expense of over- configuration, under-utilisation and poor tensioning between supply and demand. As a result, the graph of total IT spend over the last ten years looks like the results from serial dieting. It shows declines in weight after a crash diet, but each time, the number achieved is a little higher than the result of the previous diet, with weight creeping slowly upwards,” said Steve Tuppen of Compass Management Consulting.
Compass observed that in many outsourcing agreements, service providers are constrained from making changes which would reduce costs by the terms of the contract. Rather than focus on the service outputs, clients are defining technical requirements such as specifications for desktop personal computers, the operating systems required for servers and other details. Imposition of these contracted constraints on suppliers adds significantly to costs and has minimum impact on service levels, according to Compass.
“Many buyers of IT services are consistently over estimating the unique level of their IT requirements. This leads to over-specified and over-configured IT infrastructures which cost 40% or more than the equivalent bundle of standard services. Moreover, clients are continually adding to the list of requirements with little consideration of cost and at the same time defining the technologies their service provider must use. The economics of these decisions are simple: Either the buyer of the services or the provider has to meet the costs of this level of provision,” said Steve Tuppen.
Compass claims that although every organisation has a different set of functional requirements, the majority have a 90% commonality of need from their IT services yet most organisations still consider themselves entirely unique in their IT requirements.
“The reason IT costs remain so stubbornly high after cost-cutting programmes against a background of falling hardware prices is because organisations are reluctant to change and allow their suppliers – or their in-house IT function – to take advantage of optimal management practices and the most efficient technologies. It is up to organisations to put in place transparent pricing mechanisms which incentivise organisations to make change and drive efficiencies through standardisation. With these types of pricing in place, customer-specific requirements can be priced in a way which allows managers to make value-based decisions on whether the customisation is worth the investment, which can have a dramatic effect on overall demand management. For those able to manage the transition to standard services, the prize is a step change reduction in costs of 40% or more,” said Steve Tuppen.
Further information on the savings which can be achieved through delivery of standard IT services is given in the Compass white paper, A Clean Slate: Standard Delivery of IT Services Drives Significant Benefits, by Nigel Hughes and Steve Tuppen, which is available for download at: www.compassmc.com.
Background on Compass Management Consulting
Compass is a company that specialises in Operational Excellence, covering both business and IT processes. Compass consultants analyse and optimise the operational practices of large organisations in relation to their core business objectives. All recommendations are fully auditable and are based on data, not opinion, that quickly enables organisations to close performance gaps, develop best practice and drive effective change.
Compass, an Information Services Group company (NASDAQ:III), is the premier independent global provider of business and information technology benchmarking, performance improvement, data and analytics services. Compass Benchmarking and Analytical Services and Compass Fact-Based Consulting® get to the root cause of cost efficiency, productivity and service quality gaps. This deep understanding of clients’ performance provides an unrivalled ability to evaluate the current state and quantify improvement opportunities, understand the market price of services and identify future options, and ensure rapid and sustainable performance improvement. Founded in 1980, Compass revolutionized the identification of the root causes of problems within businesses with its pioneering approach to performance improvement. For more information, visit www.compassmc.com.
TPI, an Information Services Group company (NASDAQ:III), is the founder and innovator of the sourcing advisory industry, and the largest sourcing data and advisory firm in the world. We are expert at a broad range of business support functions and related research methodologies. Utilizing deep functional domain expertise and extensive practical experience, our accomplished industry experts collaborate with organizations to help them advance their business operations through the best combination of business process improvement, shared services, outsourcing and offshoring. In 2010, the International Association of Outsourcing Professionals ranked TPI no. 1 in its Global Outsourcing 100: World’s Best Outsourcing Advisors. For additional information, visit www.tpi.net.
About Information Services Group
Information Services Group, Inc. (ISG) (NASDAQ:III) was founded in 2006 to build an industry-leading, high-growth, information-based services company by acquiring and growing businesses in advisory, data, business and media information services. In November 2007, the company acquired TPI, the leading independent sourcing advisory firm in the world, and in January 2011, it acquired Compass, the premier independent global provider of business and information technology benchmarking, performance improvement, data and analytics services. With the February 2011 acquisition of STA Consulting, a premier independent information technology advisor serving the public sector, ISG has nearly 700 employees and operates in 21 countries. Based in Stamford, Conn., ISG has a proven leadership team with global experience in information-based services and a track record of creating significant value for shareowners, clients and employees.
Gareth Thompson for Compass
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