Innovation or maintenance: The right choice to save your business

              Innovation and simplification have become the mantra of high-performing enterprises, yet maintenance and administration costs consume the bulk of most organizations’ IT budgets, hampering innovation and increasing risk. Here’s how IT leaders can get out of the maintenance-spending trap.

On average, a typical IT organization’s spending on maintenance and administration is likely to consume at least 70 percent of its annual budget, but higher percentages are increasingly common. While the percentage itself is not that important, the result is. According to a recent survey, only 34 percent of global CIOs think they have achieved anything close to their innovation potential.1 The root cause? It’s likely that, with flat or reduced budgets, IT leaders’ innovation projects have been forced to make do with the scraps left over after they’re done keeping the lights on.

If this sounds familiar, you’re not alone. In January 2011, InformationWeek’s Global CIO Top 10 CIO Issues for 2011 noted failure to address the 80/20 spending trap as No. 2 on CIOs’ priority list.
Total IT Budget as Percentage of Revenue loading

Fortunately, some companies have proven that it is possible to drive better innovation performance and “flip the mix” between maintenance and innovation. In 2006, the HP IT team sent shockwaves through the industry by announcing that HP would embark on an ambitious project to transform IT with the goal of delivering improved innovation while delivering increased quality and dramatically lower cost as a percentage of revenue.

HP has applied the experience gained as part of its own transformation to help others achieve similar performance, with the Flemish government and Italian Ministry of Education among the ranks of HP customers that have significantly reduced their maintenance costs while delivering game-changing innovation.

“Doing nothing” is not an option

HP realized that maintenance costs were growing but, to maintain competitiveness, IT’s budget could not. Without an IT transformation to address the maintenance imbalance, innovation would grind to a halt.

The drive to innovate is not limited to technology leaders like HP; it’s an imperative for any enterprise that needs to perform better, one that can translate to the top and bottom line. For example, if your only competitors are organizations with IT maintenance costs of 80 percent to 90 percent, then shifting your own ratio even a little can create significant competitive advantage. However you should also consider that startups or companies in emerging markets often jump immediately to modern IT solutions such as converged infrastructure, cloud and SaaS, bypassing ownership and systems-building altogether. What happens as these emerging players, with near-zero maintenance costs, become your competitors?

And it’s not just the private sector that’s under pressure to rethink IT delivery. The U.S. federal government also recognizes the imperative to cut maintenance costs. In a recent interview with Fortune magazine, departing U.S. CIO Vivek Kundra remarked that “you would get laughed out of the room” if you went to your board and asked for millions of dollars to build out systems like email, finance and a data center for web site hosting. And yet, he said, that’s essentially what the U.S. government, like many companies, is doing.

Running the business of IT

Making true shifts in spending requires a new mindset in IT.

William Dupley, chief solutions manager in HP Canada’s Office of the CTO, likens this moment in IT to the state of the auto industry in the 1980s, when Japanese management techniques shook up American manufacturing. Out of that painful episode came an improved approach to quality management that IT leaders would do well to adopt.

“The three key strategies that need to be applied to IT are Six Sigma, Lean and Theory of Constraints,” Dupley says. These eliminate defects or flaws, non-value-add work and bottlenecks, respectively.

HP accomplished its reduction in maintenance costs by building an integrated system management architecture and data warehouse. HP IT analyzed labor and eliminated root causes (many of them due to old systems), just as if IT were a manufacturing process. Over three years, HP IT eliminated 75 percent of its application portfolio and standardized much of the rest. The team modernized data centers, infrastructure and system management technologies, and made extensive use of automation. The result: HP was able to bring its IT spending from about 4 percent of revenue down to less than 2 percent.2 By 2008, 70 percent of HP IT employees’ time was being spent on new development, with just 30 percent going to IT support.3

Visibility first

Effectively leading such far-reaching changes requires visibility across all IT resources and assets. Without an understanding of how all the interconnected parts work on one another, it’s likely that you’ll end up pulling levers without knowing what the outcome will be, jeopardizing not just IT’s transformation, but the day-to-day operations of your enterprise.

The key to a successful change-acceleration program is understanding where you are currently—your maturity level, the business challenges ahead—and then using that holistic understanding to move toward your enterprise’ goals. (Start by taking HP’s CIO assessment.)

“The real issue,” says Piet Loubser, senior director responsible for HP’s IT Performance Suite, “is the ability of CIOs to understand all the influences and drivers on their entire organization.”

Instead of pursuing an arbitrary benchmark, Loubser counsels IT leaders to focus on understanding the interconnected nature of IT and the business they’re in. “The problem with chasing ‘best-in-class’ is that it may not be the right number for your company at this point in time,” Loubser says. “And without the tools to measure and test it, you don’t know if it’s working.”

The important thing is to understand where value is derived. Says Dupley, “If you’ve got old applications that are critical to your business, that took years to create and are difficult to duplicate, you may have no choice but to have higher maintenance costs.”
Finding your best-in-class spending mix

Visibility into the ramifications of change lets you start adjusting your spending mix. “Best-in-class” typically varies by industry, but HP’s research has found that average maintenance and administration spending is roughly twice that of best-in-class. So how do you move your spending closer to best-in-class?

Start measuring: Remembering that “you can’t manage what you can’t measure,” look for line of sight into everything that affects your business. Start looking at KPIs within four broad buckets: business value created by IT, customer satisfaction, operational excellence and future orientation. HP created the HP Executive Scorecard and Financial Planning and Analysis solutions to give IT leaders an integrated perspective on the overall performance and efficiency of their organizations. (Watch this video to see how it works.)

Set targets: Armed with fact-based actuals and benchmarks, identify bottlenecks or poor performing areas and set targets to drive improvements. Says Loubser, “HP is able to control maintenance spend because we’re continually monitoring our own performance against those of our peers and competitors.”

Compare to where you want to be: Work with strategic advisors to assess relevant best-in-class metrics for your market conditions and the steps you’ll take to get there. Discuss your efforts with a community of peers.

You get what you inspect, not what you expect

Once you have a holistic understanding of all the drivers within your organization, you can use scorecard metrics to effect change.

The most critical aspect, Dupley says, is that “IT must move to a model using metrics to influence the future.” He adds, “You want to build a metrics system to create behavior, not just to report.”

With reporting systems such as an executive scorecard in place, IT leaders can combine lagging metrics (the past) with leading metrics (the future) to build insight that helps them make informed decisions sooner. Dupley counsels senior execs (VP and above) to use leading metrics to manage a year out.

Unleashing innovation

Combine a quality management mindset with visibility and measurement tools and you unleash tremendous potential for innovation within your organization.

For instance, HP customer Delta reduced applications testing times by 52 percent and allowed its testers to devote 90 percent of their time to business innovation instead of verifying legacy applications. Seagate found it more cost-effective to transition its internal email system to a third-party cloud, protecting outsourcing ROI as well as enforcing cloud service SLAs by using an application performance management system from HP. Another of HP’s customers, a Canadian university, transitioned 32 legacy email systems to the cloud, freeing up related staff.

By significantly reducing maintenance and administration costs, these and other IT organizations make IT transformation more than just a technology initiative—it’s a business strategy.