Archive for the ‘Cost Reduction’ Tag

Overcoming the pain of Technical Debt

Many businesses are hamstrung by expensive and inflexible information technology. To wit: The average firm’s spend on IT has swelled to the equivalent of between 4 percent and 6 percent of revenue, thanks in part to neglect, poorly executed integrations and the breakneck speed of technological change.

While the exact toll of lost productivity and hampered innovation for any given firm is difficult to quantify, it’s safe to say that the true cost IT is greater than what appears on a company’s ledger. Research firm Gartner estimates the total cost of poor systems architecture, design and development will reach US$1 trillion in 2015. Put another way, that’s an average of US$1 million per organization, according to analytics firm Cast Software, and US$3.61 per line of code.

This hidden expense is referred to as “technical debt.” Reining in technical debt is an ongoing challenge for IT leaders because the cost of lost opportunities is tricky to peg while the cost of modernizing legacy systems is immediately tangible and often significant. But understanding technical debt is vital for organizations angling to improve performance through new technologies, improved agility and tighter cost controls.

I first encountered the dangers of technical debt when I did consultant work for a medium-sized manufacturer. In our search for savings, we found that maintaining one legacy system was consuming nearly 85 percent of the firm’s IT maintenance budget while rendering the integration of new applications difficult and risky. Worse, support activities were diverting scarce resources away from growth-enabling automation initiatives.

In that instance the firm was able to successfully phase out the old system while phasing in a new, more effective and cost-efficient replacement. But the question remains: Why did the firm’s IT leaders run up so much technical debt in the first place?

“The challenge is twofold,” explains Mike Grossman, founder IDI Systems, an automation development firm that regularly confronts technical debt in the course of infrastructure projects. “First, how can you economically and practically support current processes and business capabilities with existing — and potentially deteriorating — code, tools and processes? And second, how and when are you going to transition these old systems to support your new business objectives?”

Think of a legacy IT system as an old clunker. The driver understands that buying a new car is cheaper and easier in the long run, but either doesn’t have the down payment on hand or can’t spare a day without wheels. So instead of efficiently getting where they need to go, they’re stuck trying to keep an old car running by repairing old parts and adding new ones.

Where the metaphor falls flat, however, is in underscoring the value proposition of abandoning the old. The difference between a messy legacy IT system and a modern, fully integrated and efficient one is greater than the difference between an old car and a new one. While either vehicle will get you where you want to go, a world-class IT system can take your firm places that your current infrastructure would never allow. This is due to the opportunities for innovation that arise from a top-notch system.

That’s not to say that eliminating technical debt is as simple as hiring a team of developers to rebuild your infrastructure from the ground up. Before any such decision is made, consider the following steps:

  • Calculate your existing technical debt. To do this, compare the capabilities of your current software and hardware to industry-leading versions.
  • Determine your firm’s goals. Consider both the extent to which your current activities depend on your legacy system and what new functionality you will require for future, growth-generating activities.
  • Identify and align around the priority areas for remediation.
  • Find and deploy talent to replace or redesign legacy systems.
  • Measure and track progress at a senior level along the way.

And remember: Even after you’ve successfully upgraded your IT systems, the threat of running up technical debt remains. This is due both to the changing nature of technology and of business. While senior leaders ought not to obsess over technical debt, keeping a vigilant eye on the efficiency and capabilities of IT operations can be the difference between running in place and forging forward.

For more information on our work and service, please visit the Quanta Consulting Inc. web site.

Advertisements

Cutting the cost of IT

In most organizations today, IT is firmly planted near the top of the strategic agenda.  Businesses continue to require new software and hardware to interact with customers, manage supply chains, and process transactions. However, the bygone days of CIOs getting a blank check for the latest IT application is long gone.  Infrastructure and operating (I&O) cost reduction is now an important priority. Even after multiple rounds of cost cutting over the past few years, many CEOs and CFOs continue to look hungrily at IT budgets that could now approach 15-20% of total spending in many companies. Fortunately, opportunities abound. A proactive and systematic cost reduction initiative could reduce IT expenditures in the short term by 10%, and 25% over the following 3 years.

According to Gartner Research, I&O costs make up 60% of the typical enterprise IT budget.  These costs encompass all the activities that deliver IT to the organization, including: facilities, hardware, software, services, labour and network costs.  Up to 80% of these costs fall into 3 omnibus areas:  data center operations, network fees and supporting the lines of business.    Shaving these expenditures is a major opportunity area in most firms.  In a 2011 survey of IT executives, Gartner found that only a minority of companies were more than halfway down their IT cost savings path.

There is no magic bullet to reducing IT expenditures while ensuring ‘always on’ computing remains responsive to dynamics business needs. Our work with savvy CIOs has identified many cost reduction best practices, some of which include:

Consolidate IT

Significant savings of 15-20% can be garnered by consolidating IT through server rationalization, moving to standardized software platforms, negotiating better IT provider terms and by optimizing the data center.   For example, many IT managers out of habit or risk aversion put all their computing needs in the most robust and secure data centers.  This not need be the case.  Lower tier requirements (e.g., development, testing environments) and applications (e.g., training, HR) can be placed in lower-tier facilities with minimal business impact. Furthermore, lower-tier facilities can still be used for hosting production environments and critical applications if they use virtualized failover— where redundant capacity kicks in automatically— and the loss of session data is acceptable (as it is for internal e-mail platforms for example).

First virtualize, then buy

Most IT infrastructures operate at less than 15% capacity on average due to uneven demand, decentralized purchasing and “siloed” resourcing.  Driving up utilization through grid or virtualized computing is a cheaper and easier option than buying expensive hardware & software and building new data center to handle the new assets. “Dedicated infrastructure will usually be an order of magnitude lower in utilization than an intelligently shared infrastructure,” said Gary Tyreman CEO Univa Corporation. “Using grid computing to share infrastructure across multiple applications is more efficient, saves money and simplifies capacity planning and governance.” We have seen many companies use server virtualization and grid computing to boost IT utilization rates in excess of 75% while reducing energy, facilities and operating costs.

Target power and cooling efficiencies

Power and cooling are significant cost centres and barriers to higher IT utilization.  Many companies can cut 5-20% in operating costs by deploying energy-efficient power and HVAC equipment and making simple infrastructure upgrades. Furthermore, augmenting cooling can also boost scalability.  In many cases, older data centers have dated air-conditioning systems that limit the amount of server, storage, and network equipment that can be placed in these sites.  Capacity can often be inexpensively and quickly improved by upgrading infrastructure cooling efficiency, using free cooling and installing energy management systems.

Troubleshoot better

Adding hardware, software and facilities isn’t always the most direct or effective way of making applications more available. The vast majority of IT downtime is the result of architecture, application or system design flaws not hardware or software problems. Instead of looking first to upgrade the infrastructure, smart firms are adopting integrated problem management capabilities that gets to the root cause of problems, significantly reducing infrastructure costs and maximizing application up-time.  Additionally, major cost savings can be gained by pushing IT support down from expensive tiers to lower, less expensive tiers that are able to satisfactorily resolve the user’s issues.  Right-sizing IT support should include the deployment of low cost, self-service portals to handle issues like password resets and ‘how-to’ queries.

These days, the cost of IT is too big to be ignored.  CIOs can quickly increase IT’s returns on assets and operational performance without increasing business risk by: thoroughly understanding their cost base (and how it compares to their peers); diligently pursuing ‘low hanging’ cost reduction opportunities and; deploying new architectural and virtualization schemes that deliver more IT for less money.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Strategic cost reduction

In times of declining profitability or strategic inertia, many managers will hastily launch cost reduction programs. Unfortunately, many of these one-off efforts will fail to hit their financial targets while producing collateral damage to the firm’s morale and capabilities.  Companies who approach cost reduction strategically with an eye towards ensuring long term growth and competitiveness will improve the odds of achieving their objectives while minimizing long terms risks.

Cost savings initiatives are not pre-ordained to deliver sub-optimal results.  Failure shares many causes, ranging from timid managers and sloppy implementations to employee resistance and a poor understanding of the firm’s cost structure.  What they all have in common is a tactical, short term approach.  My firm has devised a better way to deliver real and long term cost reduction. Our Strategic Cost Reduction approach considers cost savings activities not as a one-time event but within the context of driving strategic priorities, capabilities and organizational alignment.  We have battle-tested this methodology in over a dozen enterprise-wide, cost reduction initiatives.  Below is a simplified overview of our 3-step approach:

1.         Align on priorities

Common sense dictates that you aim cost savings efforts against non-core, low priority corporate activities. However, in a complicated organization or in the absence of a comprehensive strategic plan these priorities will not always be apparent.  Asking 2 fundamental questions will help shed light on your true cost picture.  i) What are the major short to medium term product priorities and capabilities that guide your capital and resourcing decisions?  To be focused and ensure proper execution, managers should have a list of 4-6 product and capability priorities needed for profitable growth.  And, ii) do the majority of your costs and resources line up against these priorities and capabilities?   

Asking these questions can illuminate a harsh reality. In many companies – particularly large, matrixed and decentralized ones – there is a poor connection between key business building priorities and spending.  This leads to inefficiencies and waste as well as under-investment in vital parts of the enterprise. When capital and management attention are finite, leaders must effectively and efficiently allocate capital to their key priorities. 

2.         Focus your cuts

Once a spend-priority misalignment is identified, the key challenge becomes where, what and how to cut – and where to reinvest for growth.  We have witnessed hasty executives radically cut costs at the same time carelessly damaging key competencies and hurting morale.  On the other hand, we have seen hesitant managers aim only for easy, superficial cost savings, ignoring the considerable amount of fat lurking just below the surface.

This is where SCR comes into play:  managers need to cut spending in areas that do not support growth-focused product initiatives and differentiating capabilities.  At the same time they should reinvest some of the savings in high potential, business-building programs. To find the waste and inefficiency, managers should take the costs that were not directly tied to identified priorities in step 1 (e.g., cross business/functional costs and expenses associated with non-priority activities) and then reallocate them against the same priorities and core capabilities to get a true read on costs. This can be accomplished by classifying spending into one of 3 strategic buckets. Of course, each firm will bucket their costs differently depending on their competitive position and strategic choices

1) Differentiating products and capabilities that drive support their unique value proposition and growth. Priorities like product innovation, analytics and brand development could make up 50% of a firm’s total cost structure.  These will often require more, not less, capital and resources than is currently deployed;   

2) Table stakes operations and competencies. Examples of these market ‘cost of entry’ activities include logistics, customer service and manufacturing.  They can often yield savings of 3-10% by area through operational enhancements such as Lean or strategic procurement.

3)  ‘Keep the lights on’ spending that is used to maintain operations. These cost centers (e.g., HR, facilities management, professional services) frequently have the ability to deliver up to 25% reduction in savings through far-reaching cost reduction strategies like outsourcing or performance cutbacks. 

This analysis can yield telling results.  We have seen organizations allocate 50% of their available capital to ‘keep the lights on’ activities yet spend only spending 20% of their capital against strategic and growth-focused initiatives.  On the other hand, we have seen careless firms expend 55% of their capital on multiple growth priorities (still under spending on each of them!) yet spend only 15% on competitive matching functions that support client retention and basic marketing.

To cut strategically, managers should focus cost reduction efforts against Bucket 3 areas that do not directly support growth, ensure customer retention or build market-beating capabilities. If more pruning is needed, the emphasis would move to non customer-facing Bucket 2 activities.  Leaders should be cautious not to mortgage the future by crudely cutting (optimizing is fine) Bucket 1 expenditures.  

3.         Consider business enablers

In many cases, firms with complex organizational structures, processes and policies will be challenged to cut costs, even with SCR and proven cost savings methodologies.  In these environments, leaders should consider more sophisticated cost reduction strategies such as complexity reduction, supply chain re-engineering or in-sourcing expensive outsourced functions.  Not only can these methods produce compelling cost savings, but they also can help accelerate program execution and further develop core capabilities.

For more information on our goods and service, please visit the Quanta Consulting Inc. web site.

Social media powers retail banking

Despite a late start, retail banking is beginning to dip its toe into social media.  The promise of higher revenues, lower costs and better risk management are too compelling for managers to remain overly cautious.  How banks connect, serve and organize around their ‘connected customers’ on sites like Facebook, Twitter and YouTube will have important strategic and organizational implications.

Social media is having a major influence on many industries and firms.   And for good reason.  These new models of collaboration, community and communication are transformational in terms of impact and reach.  For perspective, Facebook boasts over 350M members worldwide.  And, over 21M people use Twitter to communicate and source news. 

Connected customers have different expectations around their banking experience.  In general, they want their online accounts to be more user-friendly, providing increased transparency and a single point of contact for all products and information.  Furthermore, these customers look for powerful recommendation engines to aid product selection as well as to provide real-time service.  Finally, they want the access and flexibility to bank when and how they want to without being tethered by technological or organizational limitations. 

Despite the potential, bankers have been hesitant to fully embrace these new opportunities due to valid concerns around customer privacy, reputational risk and security.  In addition, organizational barriers such as data silos, competing internal priorities and low IT flexibility continue to bedevil planning. Importantly, banks remain challenged to effectively convey key brand values like trust, appreciation and approachability within a digital environment, particularly one powered by social media.

How can managers use social media to better serve customers and improve business performance?

Deepen relationships

According to our research, up to 40% of connected customers go beyond the confines of their primary bank to visit external blogs, video channels and online forums.  Yet, most banks continue to utilize their web sites for simple transactions and one-way information distribution.  Connected customers want the physical branch experience mated to social media-delivered tools and collaboration.  This deeper, trust-based relationship would include richer, one-to-one or many-to-many interactions (generating rich market insights as well), customer referral engines, product comparisons and 3rd party financial information.

 
Some banks are already leveraging social media to deepen relationships.  Wells Fargo provides a variety of blogs on relevant topics such as personal finance and environmental sustainability as well as a specially designed blog for students.  WF also maintains corporate pages on Facebook and videos on YouTube, while allowing customers to contact them through Twitter.  

Interestingly, the Spanish bank BBVA has built a personal finance management tool that aggregates all account information and transactions in one easily accessible place.  Within the tool is a powerful analytics engine that proactively sends out customized promotional offers driven off a customer’s banking behavior and needs.

Reduce costs, risks

Through leveraging social media, marketers can significantly reduce expenses and uncertainties associated with customer acquisition, retention, customer service and new product launches.  By it’s very nature and ubiquity, social media is a highly efficient marketing and service channel that can lower communication costs, improve segment targeting and deliver customized offers.  For example, banks can use moderated blogs and internet forums to test market new products or inexpensively cross-sell other products.  At the same time, collaboration tools in Twitter and Facebook can be used to deliver faster, more expert customer support. Currently, Deutsche Bank and BBVA use video chat to connect financial advisers and customers without the need for a physical bank infrastructure. 

Even the right strategy and technology is insufficient to ensuring a winning social media plan.  Banks will need to make certain their marketing programs are consistent and integrated across all channels.  As well, powerful customer analytics are required to ensure effective segment targeting and program effectiveness.  Finally, like any new initiative all the key elements – product design, pricing and messaging – will have to be optimized for maximum customer appeal.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Seven ways to making cost reduction stick

One of management’s dirty little secrets is that most cost reduction initiatives fail to produce significant long-term savings.  According to recent McKinsey research, many executives expect some proportion of the costs cut during the recent recession to return within 12 -18 months.  Earlier research found that only 10 percent of cost reduction programs show sustained results three years later

To be fair, some savings have been easier to achieve than others.  For example, total cost of goods sold have fallen by more than2.5% over the last 10 years due to manufacturing relocation, outsourcing of non-core operations and exploiting lower input costs & IT innovations.  However, selling, general & administrative costs (including R&D) have actually remained flat over the same period reflecting higher labour costs and increased system complexity.   

In the short-term, most companies are successful at generating cost savings of up to 10% through a variety of proven strategies like improving purchasing efficiencies, outsourcing and tactical headcount reductions. Soon afterwards, however, these savings are lost as firms and individuals lose their cost cutting zeal and regain the bad spending habits that got them into trouble in the first place.

Cutting deeper and then making those savings stick requires managers to tackle the root causes of cost and inefficiency.  To do this, firms need to address messy and difficult product, structural, cultural and management challenges:

Product

Many consumer and industrial goods companies as well as service firms market too many underperforming stock keeping units (SKUs) which generates system complexity, increases error rates and prevents the firm from maximizing scale economies.  

Structure

Structural challenges prevent companies from cutting more aggressively.  These barriers include: supply chain resistance, poorly designed & administered purchase controls and siloed & overly-hierarchial organizational structures that minimize scale economies and data flows.  In addition, a lack of circulating information on internal costs and peer performance prevents managers from identifying and quantifying larger reduction opportunities. 

Culture

Many organizations have a growth-focused culture – with enabling performance-measurement systems – which is out-of-sync with an aggressive cost cutting mandate.  In these firms, serious cost cutting programs will dictate people changing attitudes, practices and priorities, something that is not easily done without change management methodologies and patience.  

Management

Generating meaningful cost reduction usually takes more time, communicating and management commitment than is usually bargained for. Furthermore, instituting major headcount reductions and role changes is not something that many EQ-focused managers would willingly embrace.

Increasing competitive and shareholder demands are dictating firms target deeper cuts.  To do this, they will need to go beyond traditional cost reduction strategies towards a more systematic and holistic approach.  There are a number of ways that managers can approach this:

Link cost reduction plans to overall corporate strategy to avoid the wrong kind of cuts that will reduce key capabilities, penalize high performing business units or starve new initiatives.   

Look at cost reduction as a change management issue in addition to a financial one.  As well, consider changing the reward system to incentivize individuals and departments towards driving and sustaining savings.

Clarify roles, decision rights, and information access so that the right individuals at the right level have the right information and empowerment to drive cost reduction.

Pursue SKU rationalization and input harmonization initiatives in order to reduce complexity and achieve scale economies.

Consider vertically integrating some key cost centers like production and logistics in order to capture greater operating leverage.

Explore ‘out of the box’ innovations like crowdsourcing whereby your customers undertake key operations like support, product testing and word-of-mouth marketing.

Treat cost reduction as an ongoing management priority that is measurable and where best practices are shared internally.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Using Operational Innovation to Beat Competion

In today’s business environment, it is difficult to out build, out market, or out price your competition over the long term.  One reason is that all firms are bedeviled by the same situational factors including:  market maturity, overcapacity, tight credit,  globalization and rapid technology diffusion.

One area that can still help firms leapfrog competition is operational innovation (OI).  OI is the secret sauce that enables a company to out-operate its peers over the long term.  OI takes many forms but it is essentially a creative retooling of a firm’s operating model.  For example, how companies buy & use inputs, deliver & service products and enable & motivate operational staff.  On a going basis, a strong operating model minimizes costs, improves service levels and enhances customer satisfaction. Organizations with OI as a core competency have typically generated superior financial returns, created industry barriers to entry, and built leading market share positions.  (One caveat:  business success often has many fathers so it would be irresponsible to attribute all gains solely to operational improvements.)

OI is not limited to certain markets or types of firms.  It is found in both high growth, dynamic markets like IT and Life Sciences as well as mature, traditional industries like Manufacturing and Financial Services.  In my experience and research, OI occurs in 2 fundamental ways  i) through the launch of a disruptive and compelling new business model (think Dell, Nucor, Cisco) or ii) through continuous and impactful operational improvements that over time dramatically enhances capabilities and cuts costs (think Progressive Insurance, Walmart).   For more perspective on what some organizations have achieved with OI, check out this Harvard Business Review article on how OI is driving business results.

Given its proven, transformational track record, why don’t more firms prioritize OI?  For one thing, there are powerful strategic and cultural barriers.  Often, the operations group does not get the same prestige or resources as other departments like finance, sales & marketing and R&D.  In addition, many senior executives adopt a passive attitude around operations like “if it ain’t (really) broken, don’t fix it,” especially if client retention is a key metric.  As well, revamping an operating model requires considerable multi-functional collaboration, change management expertise and perseverance, all scarce qualities when coping with day-to-day business exigencies.  Finally, game-changing OI is especially difficult when there are major internal constraints like union resistance, management bias (CEOs in many companies rarely have strong operational backgrounds) and cultural challenges.

Despite the issues, every company can take some important steps to catalyze OI thinking.  For example,

  1. Learn from others – Following and exploiting emerging technologies (e.g., Cloud Computing) and best practices from outside your industry is one of the best approaches to capturing potential innovations   
  2. It’s the system stupid – All too often, timid and siloed executives default to improving specific elements of the operating model (e.g., manufacturing) versus taking a holistic, breakthrough-focused approach  
  3. Create a fertile environment – OI germinates with the right internal conditions.  For example, successful innovators like 3M and Google cultivate a risk taking, innovation-centric culture, which includes a top-down mandate, sufficient resources and formalized incentives
  4. Target the Medium Term – Many OI initiatives fail because the time horizon is unrealistic for total quality planning and execution.  Specifically, short term deployment goals rarely feature enough time for proper study and implementation.  Furthermore, long term goals often flounder due to a lack of business momentum, management changeover or insufficient resources.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Is Busy Work Choking your Organization?

Why are people working harder and longer than ever before but accomplishing less?  One hypothesis is that they are victims of a syndrome known as Busy Work (BW).  Simply put, BW is non-essential yet chronic organizational activity that does not link to value creation.    BW is pervasive among individuals and groups regardless of level and department;  it is often visible to casual observers as well as managers. For the individual, examples of BW include regular meeting attendance on an observer-basis only; spending an inordinate amount of time on analytical activities and; producing reports that are not reviewed or acted on.  Worryingly, employees often don’t even realize they are wasting their time and others, instead viewing their efforts as plain (and often frustrating) hard work.  In most cases, their managers are part of the problem.  They encourage and reinforce BW by rewarding its behaviors through political support and positive performance appraisals. 

BW exacts a large cost on organizations.    BW complicates resource allocation, slows down execution speed and generates higher labour costs through reduced productivity.  BW’s more subtle impact includes decreased employee satisfaction, poor strategic alignment and reduced focus on critical tasks.  In my experience, up to 60% of a firm’s junior and senior staff directly undertake BW activities, wasting anywhere from 20-50% of their time on an ongoing basis.

BW is often found in large organizations with high degrees of complexity (product, supply chain, process), geographic dispersion, and an inward-looking or dysfunctional culture.  Typically, these enterprises compete in mature markets with low long planning cycles and low levels of dynamism.  Industries prone to BW include Banking, Healthcare, Communications and Insurance.

How do you know if your organization suffers from BW?  The following are some tell-tale signs:

  • An employee’s work is not consistent with their job descriptions;
  • There are misalignments between corporate strategies & goals and what people do;
  • Email in-boxes are regularly filled at the beginning and end of each day;
  • Widely-attended, unstructured meetings take up a majority of an employee’s time;  
  • People regularly produce reports or memos that are ignored.

The only way to minimize BW is to address the root cause of the problem: namely, work habits, corporate values and measurement systems.  Senior leaders need to take a top-down approach to organizational performance by triaging attention and resources on core activities, streamlining processes and empowering the right employees to make decisions.   Some strategies to accomplish this include:

  1. Drive down decision making and empowerment to the right individual and team;
  2. Utilize standardized communication templates;
  3. Deploy knowledge management tools to foster a free circulation of information;
  4. Mandate individuals who propose change to implement their work;
  5. Reduce the amount of staff activities (read: administration) on key line functions;
  6. Articulate succinct strategies with goals, and cascade them down &  across the organization;

Reducing BW is not easy as any effort would likely would bump up against vested interests, management indifference and overlapping responsibilities.  Yet, in a cost-conscious and competitive economy, can companies afford not to tackle BW’s pernicious waste of time and effort?

For more information on services and work please visit us at Quanta Consulting Inc.