IT Strategy

Reducing IT costs and complexity

August 27, 2009 by Raj Sheelvant

McKinsey Quarterly has published a very significant and timely article titled “IT architecture: Cutting costs and complexity”.  I was very impressed with the depth and breadth of article that challenges the companies to embrace IT as an asset to create and sustain competitive advantage.  Reducing complexity and creating an IT architecture in alignment with Business Strategy is paramount.  I recommend you read the entire article but below is the highlights of the article.  Since I agree with everything in the article, I have nothing to add on top of what the article recommends.

The articles defines IT architecture of a company is a formal description of its business operations (processes and functions), the business applications and databases that support them, and the equipment and services that run the applications.  Most companies have IT architecture, but few control it.  Instead, it grows organically, and the result is often duplicated systems, proliferating and inconsistent data, and makeshift integration. To make matters still more complicated, at most large companies, even within divisions, many IT initiatives are driven as much by short-term business wants and needs as by any long-term blueprint. Today’s global economic crisis has created a golden opportunity to make order-of-magnitude reductions in IT costs by modifying the corporate IT architecture. What’s needed is a clearly defined IT blueprint with organization-wide guidelines for the most appropriate and efficient systems, applications, and processes.

To create an efficient IT architecture, business leaders and the CIO must jointly evaluate the business requirements and processes that underlie the existing architecture and then explore more efficient alternatives. In the interest of minimizing disruption and maximizing benefits, the article suggest a three-phase approach (see the diagram below)

Phase 1: Immediate cleanup

In the first phase, the team’s task is to identify obvious targets and generate quick wins through cost reductions that help build momentum for larger initiatives by

• Rationalize software licenses
• Cancel noncompliant projects
• Decommission little- or never-used applications

Phase 2: Reducing Complexity

This more ambitious undertaking is essential to reverse the ad hoc expansion of customized systems, applications, and processes and to begin enforcing a more complete adherence to the desired architecture. The main objective now is to decide if different pieces of the existing IT setup are truly needed rather than trying to optimize them.  Use following methods to reduce complexity

• Enforce out-of-the-box solutions
• Encourage reuse
• Consolidate databases and develop an integrated data model
• Standardize technologies
• Reduce interface complexity.

In addressing each opportunity, the CIO and business leaders must look hard at trade-offs between short-term convenience for business units and short- and longer-term costs and complexity for the company as a whole.

Phase 3: Business Innovation

In times of crisis, companies must consider transforming or even completely reinventing themselves. IT can play a central role in implementing big changes in the way they operate and bring products or services to market. The third and most ambitious phase of architectural transformation is about making these bold changes. As companies look beyond the downturn, they should consider changing their IT in more radical ways that can drive or support strategic innovation and fundamentally new areas for growth.

• Assess alternate operating models
• Shape the future

The article suggests that business leaders should work closely with IT to explore investments in a wide range of emerging technologies that support new ways of working, such as using the Internet to cocreate products with customers and suppliers, online collaboration among employees, and data-driven management. New tools and processes can accelerate globalization in product development, find profitable niches in declining markets, and increase productivity.

Finally, the article concludes that bringing IT and business leaders together can also help IT create new ways to make the business grow. Greater flexibility, faster times to market, and more efficient and effective business processes will outlast the downturn. For companies that see the present troubles as a chance not only to control their costs but also to reposition them for faster growth once the turnaround begins, restructuring the IT architecture can be among the most valuable moves.

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