Identifying Red Flags in Your IT Spend
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IT spend management is critical if an IT department or company wants to improve its return on information technology.
3. High-growth vendors. IT spend analysis will enable the management team to identify vendors that have benefited from significant spend growth in recent years. These vendors, in return for their larger footprint and customer loyalty, should be offering increased volume discounts to the IT organization either because they are contractually obligated to do so, or because they want to continue this growth trend, and they recognize that passing their own scale economies to the customer will foster deeper relationships. If no new discounts have been negotiated and unit costs remain constant despite significant spend growth, the IT organization should seriously consider renegotiating or re-competing these expenditures with selected high-growth vendors.
4. Silo departmental spend activity. This typically occurs with larger organizations where multiple departments are each empowered to purchase IT products and services. These organizations are often guilty of the “left hand not knowing what the right hand is doing,” which is exemplified by overlapping contracts with the same vendor for the same product or service, often at different price points. Vendors welcome the opportunity to become embedded with multiple business units, and the lack of coordination often works in their favor. Furthermore, since this spend is conducted in smaller bundles rather than larger consolidated blocks, this silo purchasing activity is obviously not strategic and is often very costly.
5. Unmanaged maintenance spend. Often described as “the gift that keeps on giving,” IT maintenance can be a source of wasteful IT spend. It is common practice for IT vendors to under-bid the cost of their base product in order to justify a higher maintenance rate, which typically results in a higher total cost of ownership. Furthermore, the more IT assets under maintenance, the greater the likelihood that some assets are under-utilized, and the IT organization is needlessly paying maintenance on unused assets. Without a proper understanding of the organization’s IT asset inventory and related maintenance costs, this can be a primary driver of IT inefficiency.
6. Excessive “temporary” resources. In the short term, consultants and contract resources can serve a valuable purpose, either because they provide specialized skill sets to support a short-term project need, or because they are filling resource gaps that will be eventually staffed by full-time employees. But in the long run, these “temporary” resources can be expensive; first, because their labor rates are typically higher than those of full-time employees; and second, because the longer the temporary resource remains in place, the more institutional knowledge they acquire, which becomes increasingly difficult to replace once the resource eventually leaves. Smart organizations continuously review their contractor spend to determine which resources they should maintain, phase-out or bring in-house.
Launching an IT spend management initiative requires an upfront investment of time and resources. This upfront cost can be reduced if the organization already has a robust spend management system in place. Regardless, the savings captured from identifying and addressing the aforementioned red flags should easily justify this investment, and improve the organization’s overall return on information technology.
About the Author
Mark Ball is the managing director of Emerging Sun LLC, a Washington, DC-based management consulting firm that offers an array of IT strategic services, enabling clients to reduce costs, improve performance, and make intelligent business and technology decisions.
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