Identifying Red Flags in Your IT Spend
IT spend management is critical if an IT department or company wants to improve its return on information technology.
By Mark Ball
How much money did your organization spend on IT products and services last year? What were the largest IT spend categories? Who were the top IT vendors in each category? These should be relatively easy and reasonable questions, but many IT executives do not have a firm grasp of the answers. There are three fundamental reasons behind this challenge: 1) the IT organization often does not have complete control over the entire IT spend, as some hardware, software and IT services are procured by other departments without IT’s blessing or knowledge; 2) spend data, pricing details and contract information often exists on multiple data platforms (or in desk drawers), making aggregation and analysis even more complex; and 3) IT spend analysis can be a time-consuming endeavor, particularly upfront, without a robust spend management tool or system in place to ease the burden. Despite these challenges, IT spend management is a critical exercise in the overall effort to improve an agency’s return on information technology.
The value of a comprehensive IT spend management initiative cannot be understated. The increased spend visibility will enable the IT organization to:
· Organize IT spend data into distinct sub-categories (e.g., database software, server hardware and systems integration services) so IT executives may understand the detailed allocation of costs and resources.
· Categorize IT spend by vendor, allowing the organization to understand its degree of vendor fragmentation, identify which vendors dominate specific categories, and determine whether the vendor mix is appropriate.
· Analyze IT spend history, trends and pricing variability, and determine what factors are driving these changes.
· Identify savings opportunities, which may be achieved by consolidating vendors, rationalizing the product or service mix, eliminating waste, negotiating deeper discounts and/or achieving greater economies of scale. The savings opportunities may then be prioritized based on their size and complexity.
Successful organizations periodically assign resources to conduct an analysis of their IT spend. From this effort, organizations are better prepared to identify the “red flags” in their IT spend and take corrective actions to address them. Examples of common red flags include:
1. Supplier fragmentation. Organizations often leverage too many suppliers within a spend category, which prevents them from achieving volume discounts that may be available if they were to consolidate their spend into fewer suppliers. IT executives need to carefully consider the ideal number of vendors for each category, and determine which categories may be ripe for vendor rationalization. The 80/20 rule is typically a good guideline to measure fragmentation: If 80 percent of the category spend is split among more than 20 percent of the number of suppliers in the category, then there may be excessive supplier fragmentation.
2. Single source monopolies. The opposite of excessive fragmentation–an abundance of categories where the entire category spend is dedicated to one supplier–can also be sub-optimal. While occasionally it is necessary or unavoidable to source an IT category from only one vendor (e.g., email or ERP systems), it is generally ideal to carry at least 2-3 suppliers in each category to ensure competitive pricing and to keep vendors motivated to deliver high-quality service.
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