Exploring the next wave of IT cost cutting
- By Kris van Riper, Audrey Mickahail
- Mar 09, 2015
Since 2010, the Defense Department has been pressured to cut costs. To preserve funding for military operations and training, officials have targeted other areas for cutbacks, including IT. DOD's IT team has responded by eliminating waste and identifying a wide range of quick fixes with the hope of increasing the value of its IT spending.
DOD's initial cost-cutting efforts, like most organizations', focused on reducing obvious waste (e.g., consolidating duplicative contracts) and physical consolidation. Since sequestration in 2013, DOD has also sought to reallocate nearly $2 billion of IT spending, largely through identifying and reducing unnecessary or uncoordinated spending. In 2014, DOD cut 2 percent from its IT budget and has reported that it will cut another 3 percent in 2015.
Although DOD's efforts have been important and necessary, enduring cost-saving initiatives yield greater returns when they are part of longer-term plans to increase portfolio efficiency. Without those plans, an organization can lose business value and flexibility, and ultimately create more cost and risk.
In the next wave of cost-saving initiatives, DOD officials must focus on the 74 percent of their IT budget that covers operations and maintenance of legacy assets to create long-term savings. That approach will also make it possible to reallocate funding to new development and innovation projects, such as mobile computing.
The next generation of cost-saving initiatives will take longer but, if executed effectively, will be more transformative. In our work with hundreds of IT departments, CEB has identified a set of tactics that are essential to effective IT portfolio optimization:
- Streamline existing assets. Leading organizations know that legacy portfolios can introduce unnecessary and costly complexity, so they regularly assess their assets by cost, value and risk to identify top candidates for retirement. Although attempts to retire technology are often met with resistance, progressive organizations anticipate and preempt pushback by including clear business cases that highlight the financial and user benefits of retirement and the risks associated with inaction.
- Minimize waste from new investment. IT teams should enhance the value of new investments throughout projects' life cycles. Leading organizations design frameworks that explain a project's cash flow impact and help sponsors make trade-offs on cost and delivery speed.
- Encourage a culture of reuse and shared-services delivery. Although many organizations aspire to share services, that activity falls under the category of transformative initiatives, which means cost-saving benefits will take time to accrue. In the meantime, all organizations can prepare for the changes shared services will produce by encouraging sharing and reuse at the system and asset levels.
By successfully implementing longer-term cost-saving initiatives, agencies can ensure widespread positive effects. First, cost savings will unlock an agency's potential to operate as a leaner, more flexible organization with the ability to invest more resources in innovation platforms. Second, the agency will be further equipped to drive innovation. In fact, CEB research has found that organizations are more likely and able to be innovative when their IT portfolios are operating efficiently and effectively to support mission delivery.
And finally, agencies can introduce new capabilities faster by effectively allocating resources and rationalizing and consolidating their existing IT portfolios to minimize integration and security complexity.
Facing increased budget constraints and financial pressures, DOD has achieved significant cost savings by identifying and eliminating waste and instituting better asset management. The next stage of efficiency initiatives has the potential to unlock even greater potential.
Kris van Riper is a managing director at CEB.
Audrey Mickahail is director of the IT practice at CEB.