Cutting the right way
Strategic cost-cutting is more about making investments than pinching pennies.
Saving costs is an imperative for most companies at the moment. But is there a right way to do it?
There seem to be plenty of wrong ways judging by the companies that manage to survive recessions only to return as shadows of their former selves.
IT still has enormous potential to reduce costs either by making business more efficient or by underpinning new ways to market, but the balance is not easy. How are local entities approaching cost savings at the moment? For Langa Dube, head of IT at Neotel, it’s a strategic approach rather than some kind of knee-jerk reaction.
“You always have to ask how to deploy certain capabilities and functionality across the business in the most cost-effective way,” he says. “Those companies that have not applied that kind of thinking before are suffering huge maintenance costs now. Cost-cutting is not a destination but rather a journey. There are no shortcuts.”
Jamie Harper, Enterprise and Partner Group lead at Microsoft SA, says the level and type of cost-cutting depends on the industry.
“If you look at mining and manufacturing, IT is a fixed cost that has to come down. They have no choice. They’re laying off tens of thousands of employees. It’s not a question of how much do they invest now; it’s how deep they cut now. Strategic cost savings must factor in the industry and the customer and the situation they’re in.”
Within IT, the approach is complicated by the fact that many investments are financed over a period of years and also that it’s tempting to switch to an alternative because it looks, at least on the surface, like it can save money.
Dawie Olivier, CEO at Sasfin Bank, says this is a false economy.
“When times are hard, that’s when CIOs need to start backing their decisions. When cost cuts come, it’s easy to switch technologies for the sake of it. The problem is the cost of switching is almost invariably higher. If you’ve been doing due diligence and making your decisions properly over the year, then stand by them. “If I do decide to do that, then the question I will have to go to my board with is, ‘How can I rip out a product that we’ve invested in over many years and replace it with this one just because it’s cheaper?’ What am I saying about my previous strategy?”
Mike Rogers, senior executive at Accenture Technology Consulting, says that there are a lot of short-term decisions being made but that the long term needs to be in view.
“Any decision that you make now as a result of the current downturn is a short-term one. It may work now and take some costs out of your bottom line, but if it’s an investment or a technology platform, then how appropriate will it be when things pick up again? “Would you want to change it again? Strategic changes now can put you at greater risk.”
The other problem is that there isn’t much room to manoeuvre left. Lee Naik, head of strategic IT effectiveness at Accenture, points out that the low-hanging fruit has already been plucked.
“When the pressure is on a business, they immediately go to IT with a mandate to cut costs. The one way is to kneejerk it but to some extent that’s happened already; the low fruit has come and gone. A long term cost reduction definitely needs a strategic approach upfront.”
Strategy and cutting
So what is strategic cutting? As Harper notes, some industries such as mining are cutting hard and deep because of pressure from external factors – they don’t have a crystal ball on the direction of the gold price. Sasfin’s Olivier says that a tight grip on the project portfolio, often swollen with cruft, can work wonders.
“There are a number of distinct parts to an IT budget. One of them is new capabilities – the stuff that IT doesn’t really care about but that business wants. Part two is the ‘lights on’ costs. Part three is the departmental costs: how much it costs me to have people sitting in chairs as opposed to running an IT business. And then there’s expanding capabilities: new servers and new storage.
What I’ve found is that the greatest savings are to be had by having a really high quality project portfolio. If you start putting new requirements through a robust process of what they want, why they want it and what benefit is expected to the business, then your portfolio becomes lean, mean and easier to manage, because ‘lights on’ costs are very hard to reduce.”
Government knows this only too well. But Sagren Pillay, group CIO at Sita, notes that it has had some success reusing and redeploying resources. “As well as cutting costs, we must still align ourselves with government’s strategy on service delivery. The balance we are trying to establish is to reuse and redeploy. That applies to both infrastructure and people. We began this 18 months ago with hardware, software and people, sometimes moving people geographically where they were needed. That, we found, dropped our cost a great deal. It’s well and good to use new technologies to save money but the saving you see is not immediate. That’s our problem.
Government has short-, medium- and long-term plans and savings won’t be seen in the short term. And by the time you do see savings, conditions may have improved again.” Rogers says he learnt a lesson from the mines.
“When I started in mining, I looked at IT cost reduction and they laughed at me. The amount I would have saved, they burned on tyres in a month. In an industry that is that capital intensive, IT cost reduction isn’t the focus - it’s more about how IT can drive business and capital cost reduction. IT should be an enabler so you can improve your supply chain, reduce your number of suppliers, or reduce the costs of procurement.”
One of the biggest technology hammers that CIOs have been using for cost nails is virtualisation. Why buy more hardware when you can keep what you have going for a little longer? Chris Norton, regional director for VMWare southern Africa, explains: “Companies today are not looking to invest in large green field infrastructure, they want a return on existing infrastructure. ROI becomes how to make assets last longer. People want to optimise what they have. We’ve been asked by many customers to keep as much of what they have going. If it ain’t broke, don’t fix it. How can CIOs steer this in the right direction? The light at the end of the tunnel shouldn’t be someone with a torch bringing you more work, it should be the way out.”
Olivier notes that virtualisation brings financial power to the CIO as well.
“CIOs are being called upon to have a financial mind. Virtualisation allows you to sweat an asset and defer a decision and that’s very important because the timing of the decision is often more important than the decision itself. Having the freedom to defer large capex just by adding a bit of memory or another process to a server makes a massive difference.
Every time I buy a big piece of hardware I pay for it over three years. After three years, does the computer disappear into a pool of molten sand? It doesn’t. By doing a bit of work, extending warranties and virtualising, you can defer an upgrade decision.”
Virtualisation does require some investment and it has a convincing payback model. But where else can money be found? Naik says a broader approach is to look at IT assets and governance as a whole.
“We have cost reduction projects for our clients where we look at how to optimise their assets. Another way is how to look at the IT capability model where we look at governance, alignment and service delivery down to workforce and resource management. What we’ve seen a lot happening recently is a consolidated business and IT organisation. So if you don’t have authorisation to spend on IT, then you’re going to have to defend the business value of an investment. A few companies have got it right and are kicking out the airy-fairy initiatives where CIOs invested in technology for technology’s sake.
Increasing efficiency “It’s a long-term journey but to allow us to get to that point, we have to get more efficient. There is money on the table to be found but the problem is it requires investment.
We’re in the phase where we have to make some short-term cuts, then look at questionable projects and push them aside and reinvest some of the funds to improve opex. Because opex won’t come down with just good will and intent,” Naik notes.
If you don’t, you risk falling horribly behind, warns Rogers. “It is possible to generate funds to pay for the slightly longer term projects that will only pay off in a year to two years’ time. And you need to have capacity when things pick up. Otherwise you come out of the downturn and you have five-year-old infrastructure across the board and your top people have left.
One of our clients was saying that in the early 2000s he was told to cut all budget and stop all projects and ride it out. When he came out two years later, his competitors were so far ahead that he is still struggling to catch up. He estimates he lost six to seven years on his competitors. He says this time he’s going to spend his way through it. It will be done carefully and in a considered way but it will be done on the right things, not just to batten down hatches.”
Faced with what could be a long period of tough conditions, can companies do what it takes to survive? Pillay sums up: “We have to be careful how to interpret cost savings and not be short-sighted. SAA for many years ran at a loss and then suddenly the one year, they made a R600m profit. But all they did was sell some aircraft. That was a short-sighted decision to reduce cost. Like or not it still costs money to run businesses. It’s how we manage them that counts.” |