Six years ago, Johnson & Johnson was among the world's oldest and most profitable heathcare companies. In 2001, profits hit nearly $5.7 billion on sales of $33 billion, and the far-flung enterprise surpassed 100,000 employees at 197 operating companies in 54 countries. But despite strong, double-digit growth in both sales and earningsup nearly 16 percent that yearthe New Brunswick, N.J.-based healthcare giant had a serious problem.
IT infrastructure costs were also growing at double-digit rates, while demand for servicesservers, storage, applications, hardware and particularly end-user supportwas growing just as rapidly. In 1996, the 120-year-old company had embarked on a wrenching shift to consolidate IT infrastructure under a single, centralized division, defying its heritage as a confederation of fiercely independent operating companies. The purpose was to corral uncounted millions in IT spending. (See Case Study: "Johnson & Johnson and Managing IT," December 2001.)
After federalizing its IT infrastructure, J&J could finally track technology costs across its globally dispersed and diverse operations. But the numbers still weren't pretty: With a global IT budget of $1.2 billion in 2001, double-digit growth in spending was not acceptable. In response, the company turned to its Networking and Computing Services division to provide IT services across J&J's global enterprise, and installed Michael Shea as president.
Among the key tools that Shea and his management team at NCS tapped to help control technology spending was a decades-old set of best-practice guidelines for IT service management called the IT Infrastructure Library, or ITIL. Originally developed by the U.K. government as a model for its outsourced service providers, ITIL is widely used by European companies as a framework for IT service management, and in recent years it has begun to gain momentum in the U.S. Its proponents often cite ITIL as a method of "running IT like a business."
Today, J&J's NCS manages nearly 97 percent of J&J's global IT infrastructure, according to NCS president Shea, and its budget is flat, even as demand for IT services from the operating companies continues to grow. IT costs that were growing at double-digit rates until 2003 have been trimmed over the past four years to a compound annual growth rate of minus 1 percent, in part thanks to ITIL, says Sylvia Weaver, vice president of process and compliance excellence at NCS. As a percentage of J&J's worldwide revenue, IT infrastructure costs dropped from 1.56 percent in 2001 to 1.2 percent in 2005, and Shea says he intends to trim that to 1.1 percent by 2009.
Like other IT governance or service management frameworksincluding the Capability Maturity Model (CMM) and Control Objectives for Information and Related Technology (COBIT)ITIL defines the terminology and outlines the key steps in the process of delivering, supporting and managing IT operations. When done right, ITIL helps an IT department improve its quality of service. How? By (among other things) providing faster problem resolution, thus increasing system uptime and security as the root causes of problems are discovered and corrected faster than the patchwork of ad hoc methods many IT departments use.
For instance, ITIL breaks down the response to a condition, such as a server outage, into separate tasks in fielding and recording the incident (incident management) and diagnosing and fixing the problem (problem management). In ITIL-speak there's an important distinction between an "incident," which is the event of the server failure, and the "problem," which is the cause of the failure. ITIL specifies steps that a help desk should take in fielding, recording and responding to incidents. Proponents say the big cost savings and increased uptime come from the subsequent steps in analyzing the underlying problem and eliminating it.
By applying its "Process Excellence" methodology, of which ITIL is a central component, J&J saw "cost savings and avoidance" of more than $30 million in 2005 alone. Among the Process Excellence projects highlighted in the most recent NCS Annual Report was the application of ITIL processes to the NCS China help desk, which over an eight-month period shaved one-third off the average time between incident report and resolution, from 27 minutes down to 18 minutes. The process improvement freed up more than two hours per day that help-desk personnel could dedicate to other activities, the report says.
In 2005, applying the ITIL framework to hardware acquisition at J&J Commercial in Latin America achieved more than a tenfold improvement in the time it takes to install new hardware. The previously undocumented approval-and-delivery process made users wait an average of 60 days from the time new hardware was requested. According to the NCS Annual Report, the project to document and streamline hardware standards, approval mechanisms, development of hardware scripts and physical delivery has cut the average wait down to five days.
Adopting the ITIL framework back in 2001 made J&J a pioneer among U.S. companies. But a growing cadre of mammoth U.S. organizations, such as Procter & Gamble Co., General Motors Corp., Nationwide Mutual Insurance Co. and the U.S. Navy, are also using the principles of ITIL to shave hundreds of millions in IT costs by delivering services faster, more consistently and more reliably.
"It's only a matter of time" until U.S. companies catch up to their European counterparts in adopting ITIL, says Forrester Research Inc. analyst Chip Gliedman. "About another 20 percent of large U.S. organizations are adopting ITIL each year. But J&J was extremely ahead of the curve," in adopting ITIL in 2001, he adds. "And since they've actually done a fair amount of it, they're still ahead of the curve."
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