Smarter IT Management Can Lower Costs
Helen Mallovy Hicks
Robert Scott, an Advisory Services partner at PricewaterhouseCoopers, and national leader of the firm's IT Effectiveness practice, talks about how information technology investments and management practices can help companies run more efficiently and reduce overall operating costs.
Dean: Welcome to Strategy Talks with Dean and Helen, part of the PricewaterhouseCoopers Managing in a Downturn podcast series. I'm Dean Mullett, co-head of our Restructuring and Distress Strategy Group, and a member of our Credit Crisis Task Force.
Helen: And I'm Helen Mallovy Hicks, a Partner in the Advisory Practice of PricewaterhouseCoopers in the Dispute Analysis & Valuations group.
Dean The current state of the economy is understandably of great concern for most Canadian businesses. This series of audio podcast discussions with a variety of subject matter and industry guests are designed to help your business weather the storm by exploring some of today's hottest issues related to the economic crisis.
Dean:: In today's episode, we are joined by Rob Scott, PwC's Global Technology Leader. He has more than 20 years experience in the IT industry helping companies gain value from their investments and information technology. Welcome, Rob.
Rob: Thank you.
Dean: One of the things we often try to focus on here in a downturn is taking advantage of opportunity that present itself and so a strong company, good balance sheet, good prospects for the business going forward, is this a time for them to look at new investment in IT and perhaps driving a better deal for them, better support, whatever the case may be that can help them take that step forward when we come out of the downturn?
Rob: Absolutely. We see, especially on the services, technology services that support large projects. The consulting community is not seeing as many new large projects coming forward, therefore there's more flexibility to be able to negotiate rates. In the Canadian market over the last few years, we saw the arrival of very low-cost, very aggressive Indian firms offering technology services at discounted rates. Now as the market has slowed, they need to fill their pipeline and keep their delivery teams busy, they become very aggressive on price and so if you're going to entertain a project, you can negotiate a good rate these days, and you can more importantly I think you can get a good team, because they've got teams of strong people whether it be an offshore Indian firm, or a domestic firm, often their A team is more readily available that would be now than versus peak.
Dean: So are you seeing many companies actually coming to that realization, saying 'we should go out and take advantage of this' to our advantage obviously.
Rob: There are some. I think really in many cases what's happened over the last little while is companies are still trying to get a handle on how this downturn is going to affect them, and so I think the first reaction that we're seeing is the tightening of the wallet. And as organizations start to get more comfortable on how they think they're going to be affected, we do see them starting to become more strategic.
Dean: It seems to be a common theme that Helen and I are seeing through all of these various podcasts. People seeing an opportunity but they're just not sure whether they're comfortable of acting on it because they don't know what tomorrow will bring, although we're seeing more people starting to get a little bit more active just as I think they're starting to see that there is going to be a tomorrow. It may not be the tomorrow that was there a couple of years ago, but it's not the end of the road.
Rob: I think two things that we are seeing where companies seem more comfortable ready to take on and capture those opportunities. They need to have two things in place. They, from a technology perspective, they need to have a technology strategy. They need to have a plan that says 'here's how we're going to build out the technology to support our business going forward'. And secondly, they need something called an architecture.
And if you think of an architecture in the concept of building a house, an architecture for a business is a blueprint that says here's the information and the systems that I need to help support my business. And if I have a clear picture of where I'm trying to take my business, my strategy and my blueprint or my architecture, then as these opportunities come along, I have more confidence that I can take action because it fits my strategy and I know how it works within my architecture.
Dean: Do you find, I guess I've seen in other incidences where a company or an environment is in crisis and it's a good time to affect change because peoples' minds are much wider open to change. In the IT field, is that something that plays out better as well, where you may bring in new technology that may change the whole way you do a certain function within your organization?
Rob: I think it does force people to take decisions or to look at options that they wouldn't have looked at previously. In many cases technology is a bit of a black box in that the business people identify what they're requirements are and they pass them on to IT and IT answers the question and in this environment today I think it forces technology to get closer to the business to understand what the real issues are and then ideally if they've established those relationships then to get creative together about how you can bring technology forward.
Dean: That's actually an interesting comment: get closer to the business because you often hear about that the finance function gets closer to the business and I never really thought of the idea of IT doing the same thing but to be effective you kind of have to, don't you, right?
Helen: And Rob, in your 'Managing IT Through the Downturn' whitepaper you talk about different measures to use in valuing technology and looking at different projects. Are those measures different in the downturn than they would normally be?
Rob: I think as many other aspects of trying to take cost out cash is going to be more important today than it ever was. And so we do see situations where you're really looking at are there alternate ways to get to the same end game but maybe spreading the cash differently. So looking at financing options, looking at going back to the vendor community to see if there's alternate ways that the vendor can help you finance your arrangement.
There can also be ways to free up capital that you're maybe not using anymore, so getting rid of some old equipment. I think often what we find our clients who are spending current cash on maintaining systems that they're not using anymore. So one of the first things that we do is we help them look at your existing IT landscape and see if there are systems that you don't use anymore, or you could do without, and even if there's not an opportunity to monetize that asset, just by acknowledging it and stopping the outflow of maintenance dollars on that hardware and software you've put some money back into the bank.
Helen: That's amazing. Clients or companies are maintaining systems that they're not using?
Dean: Wow, I guess it's time for a pause and a little spring cleaning, right? That's really what it comes down to. You get momentum carries you and you don't think about it.
Rob: Absolutely. I think what often happens is that when people buy equipment it's for an immediate need and when that need goes away, there isn't a project or a responsibility to go back and re-visit whether that need is still being served. So we do see clients who do not have an inventory of their existing equipment or if they do it's not in such a way that would allow them to quickly identify all of the assets. People these days in many organizations treat, at least technology like laptops and computers, as office supplies.
You wouldn't necessarily think of keeping track of all of your office supplies and how much paper do I have and how many staplers and what not do I have. Well, because technology has become more readily available, easier to buy, in many cases much, much cheaper, we don't think of putting the same level management or asset management over it and then later on when you are looking for ways to cut the cost you don't have the information that you need ready at hand for you to do that.
Helen: So any other ideas on e cost cutting or easy actions, quick fixes?
Rob: Well there's one that's got a lot of attention recently because often its triggered by software companies trying to come forward and say that they are concerned that you may not be paying for all of the software that you're using and so they'll invoke a software license audit. But we found that while in many of these cases companies are responsible to pay the vendors for software that they're using. In quite a number of cases, they are paying for software that they are not using. And I think a good example of that would be, you may have licensed your company for a certain number of employees and had at the time expectations of growth.
But over the last couple of years, especially with this downturn, the growth didn't happen. Maybe your number of employees is down but you may still be paying for software for those employees that aren't with you anymore. So in fact, a software vendor triggering a software audit may in fact be an opportunity to save some money. But I also want to caution, you don't have to wait until they trigger the audit. If you are paying for more than you have, then it's time to call up those software vendors and get those contracts redone.
Helen: Yeah, good advice. Are you seeing many examples of arrangements, contracts being re-negotiated?
Rob: I think a lot of vendors today are looking for continuity of their revenue, meaning that they would rather have an extension of a contract and know that they've locked in that revenue stream rather than it being a risk. And so we do see vendors who may not like it but are giving back reductions, additional savings in exchange for a new term or a longer term. We're seeing that particularly in outsourcing agreements where clients have expressed a concern they may not be getting full value for the contract and the vendors have come forward, willing to open the contract, renegotiate it in exchange for getting a longer term.
Helen: Rob, you've given us some great examples of quick fixes and right things that companies can do to reduce costs and manage their IT better in a downturn, what about the flipside? Have you seen some actions on the part of companies maybe going too far on the cost cutting side, or other things that they have done that do not make good sense over the longer term?
Rob: I think that's a very good point. We've seen a number of situations recently where IT is given a number as part of an enterprise-wide or a corporate cost reduction and IT may have been told take ten percent out of your budget or take twenty percent out of your budget without an awful lot of analysis or thought the impact that's going to have. And if that IT department was very well run and was already running efficiently, by taking ten or twenty percent out further, I may in fact be hurting some of my longer term prospects. I may be deferring projects that are going to help me be a lower cost organization. I may be taking projects out that are going to help me reach new customers.
And so I think I do want to be very careful if I'm accepting that ten or twenty percent cost reduction that I'm able to articulate back to the business and its owners, what's the impact going to be. And I guess the flipside of that is, if I'm asked to take a ten or twenty percent cost reduction and it doesn't hurt the business, then maybe I'm in a high cost shop for a while and it's quite a sensible thing to do. But we are seeing situations where IT departments, in order to comply with those corporate directives are really cutting to the bone.
Helen: What about are there innovative ways to finance a project if the cash isn't there now? Are there other things that companies are doing to finance projects?
Rob: I think there are really two ways that we would encourage clients to look at alternate ways of financing. The first is the vendor community that wants to sell products and services will often arrange financing for you and the rates that we're seeing for that financing can be quite attractive. For the large vendors that financing is often from within a captive finance organization so they're using their own low cost to capital to help move their products and continue to have their flow of revenue that they need to see. The other aspect is in the services side, you're seeing a willingness by service providers to take on more risk.
And taking on more risk may be providing fees at risk that deal with paying cash flow that ties to when the benefits are realized by the project or willingness to provide longer term warranties for software that's been developed. And even in some cases people getting quite creative in saying that they will co-develop solutions with clients and share the revenues that come out of that project. So the call to action there is to engage your preferred vendors in a meaningful discussion and be open with them about your challenges in financing the project.
Dean: So a lot more collaboration really is what we're talking about on those alternative solutions.
Rob: Collaboration is a really good word for it. We're definitely seeing vendors who are trying to get more creative in how they work with their client base. But collaboration is also an interesting word because a lot of the newest technology that is available in the marketplace is technology that will help you collaborate. Collaborate with your employees, collaborate with your customers and maybe collaborate with your supply chain partners. And if everybody is in this downturn together, the willingness for your suppliers to collaborate with you and your clients to collaborate with you to kind of reduce all of the cost is actually a good time. So we see a lot of opportunity there.
Dean: So where would IT rank in the broader population of CEOs and the importance to an organization?
Rob: I think on that question, IT is in many cases really done itself a disservice. Seven or eight years ago IT was on the agendas, on the corporate agenda. It was considered a key enabler of the new business. We went through a bit of a trough, the dot com bubble burst, the value from all of the investment in enterprise resource planning or ERP systems really didn't deliver on their promise and so we went into a quieter period where technology was often kind of downgraded on the corporate agenda and its gone somewhat quiet.
There are leading organizations who have recognized that by applying technology in an innovative way they can differentiate themselves versus their competitor. But what they are, what we've all come to realize is just the basic running of IT is by itself not a differentiator. Having IT is just a requirement for business these days. There's an interesting quotation that I've used several times that says that 'in today's environment, every business issue or transaction has an IT implication'. And I think if you follow through every business decision that's made in the boardroom, somewhere it's going to impact the IT that's required to help deliver on that.
Dean: But people just don't think that way, do they, right?
Rob: Often they don't. And again I would say that sometimes my colleagues in IT have brought that on themselves by putting a black box around what we do and making it mysterious, we don't make it easy for the business to understand and appreciate what we do.
Dean: Yeah I guess that black box is really the term, and speaking personally, I almost look at it that way because I don't understand it well enough to be an expert on it, yet if you took my technology away on any given day I'd probably stop functioning.
Helen: So Rob, as a valuator I'm interested how do you measure the value associated with the IT? And that could be the IT in place right now, or certain projects that you're looking at.
Rob: Valuing the contribution of IT is a bit of a holy grail in the technology space. We've done a much better job of understanding first of all the true cost side and so from a valuation perspective I think it starts with real basics. How much we actually spending on technology because for many clients, the line item that they have in their P&L around IT is only a small part of what they're actually spending on IT. We have shadow IT throughout the whole organization, we have spending that's maybe classified as something else. So the first step is understanding truly what you actually are spending on technology.
We would contend that the real value or the real way to determine the business value back has to be measured by the people that are served by the technology. So if the business is sponsoring a project that's going to help them increase sales, then the value IT brings is measured in did it deliver sales or not, and what was its contribution helping it deliver that. As an overall industry, coming up with consistent and recognized metrics on the value of IT is something that we're going to continue to have to work on.
Dean: Do you think there's a lot of rigor in companies today looking at the return on investment in IT and is that something that really comes out in a downturn. People are looking at everything and what's our return on our investment, and is that rigor there today or are people just kind of building it in now as they are valuating some of those decisions that they're making.
Rob: I think we've improved significantly in the IT industry around measuring and calculating return on investment. I think that's been coming into place for the last three or four years. I think that there are more consistent approaches and tools that organizations can use to do so in a consistent way and I think that how rigorously people apply them, it wouldn't be any different for IT then it would for other capital projects or other operating units within the organization.
Some customers have very deep knowledge around their operating metrics and they use those metrics to truly run the business. And others do a very good job of planning and other than the planning period we kind of lose track of operating metrics so I don't think IT is different than other business functions that help serve the broader business that way.
Helen: Rob, you've given us lots of good advice, lots of dos and don'ts. Any other advice that you have for companies that are managing their IT in this downturn?
Rob: I think they key message that we like to give them is that you need to take a systematic approach. We encourage clients to look at managing IT in a downturn really through three lenses. What can I do today to free up cash to return back to the business. What can I do in the midterm, maybe in the six month term to take some cost out of my business without significant negative impact on the business and we have strategies to do that.
And third is what can I be doing more strategically in the twelve to eighteen months to fundamentally change how I provide IT services to the business. And when you start to look at managing IT in a downturn through those three lenses, we find that you can identify very unique cost savings opportunities in all three and when you get to that third one, the IT transformation, there are very significant cost reduction benefits that come out of that.
But more importantly, you're creating an IT environment that's going to help support the business as it grows, maybe as it takes advantage of opportunities to acquire other companies and integrate them and to expand internationally. So it's very important that you have that long term plan and the architecture that I mentioned previously so that you know really how to capitalize in the downturn.
Dean: If we just maybe turn the conversation a bit to supplier risk for a second. IT being a critical function and some organizations understand and have the resources internally. Some outsource a lot of those skill sets. In a downturn, is that something that people should really take a look at? Their service providers, their system, all the providers that really give them that backbone around their organization, and should they really be worried about how a business failure with one of these key suppliers can impact them?
Rob: Supplier risk has probably been accentuated as an issue over the last little while, particularly if you are dependant on software firms that are not well capitalized in this particular marketplace. If you've been on the leading edge on the smaller firms maybe who have niche solutions, I think it would be very important to understand where those firms are now as far as their ability to serve you going forward.
Over the last few years we've seen huge consolidation in the software industry and consolidation in the hardware side of technology as well. So for the mainstream systems, a lot of that consolidation has already taken place and the technology firms have actually ridden out this downturn quite well. Some of them have continued to grow, and they've continued to acquire. And so I think that vendor due diligence has served you very well if you became if you chose the vendors who were the consolidators and if you chose vendors who have been consolidated, it is important to understand what the road maps are for those products that you are currently running your business on. So definitely get in touch with your vendors and understand where they're taking their products.
Dean: So IT companies that have done the consolidating may look at their product portfolio and say you know we have this bandwidth of products we don't have to support all those for the long-term and so I think that's what you're referring to?
Rob: Absolutely. And most of them will have roadmaps to say how do we take our clients or our customers who are on various products and how do we move them forward to keep them within the family. Now those transitions can be costly for you even if they make the software licensing easy, they're still an impact on your business so don't get caught by surprise when you have to be forced into a transition because you've lost support from a vendor. And especially in this kind of timeframe when you're spending a lot of time and attention to account for every dollar you don't want to be surprised by a bill from a vendor for something that's not in your plan.
Dean: Well I think we're almost out of time here and with the few moments that we have left, just wondering if there's one piece of advice you'd like to leave our listeners with that if they listen to just one thing that you had to say here today with us, what would that be?
Rob: I think if you're on the business side and looking into the IT black box from the outside, I would say go forward with some confidence that it's not magic inside that black box. When you open it up, there are products; there are services that are provided. Many of them have names that you won't be familiar with, but at the end of the day it's important that you understand what your technology is doing to support your business and that you understand what you're spending on that technology so you can make informed decisions about where you want to invest and where you want to cut.
Helen: Thank you Rob, and for more information please download the whitepaper, 'Managing IT Through the Downturn', from our Managing in a Downturn webpage at pwc.com/ca/managinginadownturn.
Dean: This concludes this episode of Strategy Talks, part of the PricewaterhouseCoopers Managing in a Downturn podcast series. I'm Dean Mullett, thank you for listening.
Helen: And I'm Helen Mallovy Hicks. We hope you'll join us again soon for another episode. To download or to subscribe to this podcast series or to find more information on this topic, please visit our Managing in a Downturn website at pwc.com/ca/managinginadownturn.
The information in this podcast is provided with the understanding that the authors and publishes are not herein engaged in rendering legal accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation. Copyright 2009, PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or as the context requires, the PricewaterhouseCoopers global network or other member firms of the network. Each of which is a separate and independent legal entity.