How to cut IT costs without hemorrhaging

IT cost management and chargeback technologies can help enterprise network executives eliminate wasted resources without hampering innovation

IT cost management and chargeback technologies can help enterprise network executives eliminate wasted resources without hampering innovation.

With no fat left to trim, how can IT managers keep cutting costs without damaging core services?

Many industry professionals say implementing processes around IT cost management or deploying chargeback technologies can provide the insight that IT and business teams need to better understand how to spend what's left of budgets. These systems can help identify what services IT offers, how much those services cost to deliver, which services are most in demand by the business, and how to intelligently reduce expenses without hampering innovation.

Read "What not to cut from IT budgets: Staff"

"Cost cutting is not over yet for 2009; 75% of companies right now are thinking about it, so cost management should be on many CIOs' minds," says Barbara Gomolski, managing vice president at research firm Gartner.

Cost management isn't solely about cutting expenses. It encompasses a set of processes designed to identify services and curb spending on unnecessary or less critical resources. Best practice frameworks such as ITIL have guidelines around cost management as well as IT chargeback, which is a different discipline that involves IT departments assigning a price to each service and billing departments for the services they consume. With such cost transparency, IT can prove its value to the business, and show those it serves what their application or service demands ultimately cost the business.

Pie chart showing how businesses are charged for IT expenditures

"Chargeback could be considered a kind of behavior-modification tool. We wanted people to know what the price of services were, because if they knew how much it could cost their department, they would be more cautious about requesting less critical services," says Jake Seitz, enterprise architect at The First American Corp. in Santa Ana, Calif.

Clarify IT costs

IT departments struggling with fewer resources might not be in a position to implement a full chargeback system, but many can begin the process of tracking costs and developing a service catalog, industry watchers say.

By putting existing asset and performance management tools to work -- add perhaps importing data into a spreadsheet or other document -- IT managers can begin to see what departments or end users require which services and start to calculate what IT resources are required to deliver the services.

"An intermediate stepping stone is reporting. That means providing periodic reports to their end users showing resource consumption and using this as a means to have discussions to address excesses," says Cameron Haight, research vice president at Gartner.

Finance teams should also be brought into cost-management discussions to better illustrate for end users how their demands directly impact the company's bottom line.

"Measuring costs helps us manage expenditures and gives us a baseline to compare alternative service-delivery options, including outsourcing," says James Kritcher, vice president of IT at White Electronic Designs in Phoenix. "With current economic conditions, senior management may suspect that the IT spend is not in line with the perceived value. The challenge for IT is to demonstrate the value lost if the IT budget is cut."

Depending on the IT department, the level of detail needed is discretionary, analysts say. Gartner's Gomolski explains that many IT groups make the mistake of assuming cost management and/or chargeback is a project too large to undertake, when in reality it doesn't have to be an intricate or sophisticated undertaking.

IT departments should work with business leaders to determine which details are pertinent. The information is readily available today, but what still needs to happen is an organized collection and rationalization of the data within each company. "The most popular cost management or chargeback tool is often Microsoft Excel, and that is OK. It's a start," Gomolski says. "And for many, beginning a chargeback project doesn't immediately result in charging for IT services. It's about controlling demand."

Doing nothing shouldn't be an option. "IT departments can't afford not to explore chargeback in this economy," Gomolski says. "They cannot continue to operate in an environment where people can basically get as much IT as they want, when they want, and expect to succeed."

Curb noncritical spending

For many in IT, responding to end-user requests for applications and services seems like the right thing to do, but with budgets shrinking IT will be called upon to pick and choose which requests best serve the business.

For instance, several IT managers are seeing an increase in demand for virtual server resources, the thinking being that virtual machines are easy to provision and don't require an investment in hardware. But that doesn't necessarily mean they can be rolled out at no cost to IT.

"There is constant financial pressure from every direction; gone are the days that IT can be a bottomless pit of resources to other departments," says Rick Vanover, systems administrator at Safelite Auto Glass in Columbus, Ohio. "Finance knowledge is an important part of being an administrator, and chargeback tools will help admins get a grip on what resource are being used or not used."

Vanover uses VKernel's Chargeback Virtual Appliance to manage resources and prevent over- or under-provisioning in his virtual environment. The product works exclusively with virtual resources. Vanover's department doesn't exchange money internally with other groups, but he says the product helps him establish a standard for cost allocation that quantifies resources and educates end users.

"You can put price tags on disk, CPU and memory for such resources, and the value of the information is clear. You get a good grasp of what is being used in the virtual footprint," he says.

Others say understanding costs and providing a clear picture of IT's expenses to the business presents both benefits and challenges for IT leaders. One benefit of tracking expenses is that IT could find areas in which it is needlessly spending too much. Then cutting costs wouldn't equate to cutting resources.

"What IT needs to do is optimize its costs. They could find areas in which they can lessen spend while increasing services," says Donna Scott, vice president and distinguished analyst at Gartner. "But without an intelligent and orderly inventory, IT can do nothing but cut blindly, and when doing that they might cut the innovation and ultimately the company's competitive advantage."

On the other hand, IT will also be held more accountable for its decisions.

"Knowing these costs encourages responsible use of service desk resources -- particularly if consumption detail is reported on a regular basis," Kritcher says. "Transparency also reinforces accountability on the part of IT to provide services as efficiently as possible."

Bring chargeback back

IT chargeback is an old concept that's getting new life as enterprise IT teams struggle to get more visibility into where their monies are being spent. And some are turning to tools from newcomers such as Apptio and VKernel to gain the much needed insight.

"As departments start to lose funding and lose their own dollars, they are coming back to lean on us more and more due in part to the economy," says Jeff Grigsby, systems administrator at Cleveland State University in Ohio. Historically, the university supported "mini-IT groups" across various departments, which now are turning to the centralized IT team for resources such as virtual servers.

"We can't give them the resources for free, we are not set up that way, but we couldn't just guesstimate either. We needed to get a solid idea of what is being used and what it costs us," Grigsby says.

Grigsby turned to VKernel's Chargeback product to better estimate the cost and assign a price tag to virtual resources. He says the tool has turned up resources that have been going unused and enabled IT to recover those costs. The exercise is managing virtual machine sprawl, and demand is changing how resources are allocated for the better, he says.

"The uptick in demand for virtual resources forced us to go through the process of defining what our services are and who our customers are, and how much hardware, software, CPU and more is used," he says. "It's enabled us to treat IT more like a utility."

For Ravi Balwada, vice president of on-demand operations at SumTotal Systems, a learning management systems provider in Bellevue, Wash., chargeback provides a way to accurately associate customers with the cost of services provided. He deployed Apptio's software-as-a-service offering, which provides modeling and simulation features to help companies determine what the cost of a service would be based on differing variables.

"We are not at the point yet of doing chargeback, but for budgeting and cost-analysis purposes, we could evolve our IT group into an internal service provider and better optimize resources," Balwada says. "There is an obvious need for this kind of tooling and technology that pulls data from finance, asset, IT and other systems and correlates it all to truly dissect and manage the costs."

First American's Seitz started the chargeback system at his company several years ago when designing and deploying a new data center. Aaron Andrews, director of distributed systems, Windows systems and virtualization at the company, helped devise models for units of consumption for the internally developed system. The team now offers other departments a catalog of 135 services that each has been assigned a definitive value. At first, the customers they served pushed back, but now Seitz and Andrews say the IT department benefitted overall.

"Whenever you provide services to people for free and then there is a bill for those services, it is inevitable that they will experience some type of initial sticker shock," Seitz says.

But with the chargeback system his team developed, Seitz says the IT group is able to show the money spent and services delivered -- and prove that billing departments isn't about generating profits. Additionally, the system enables his group to become an advocate for the business by cost-effectively providing needed applications and technologies.

"IT was always looked at as a bit of a black hole, but now we have the power of scale to our advantage as one IT organization speaking on behalf of roughly 200 business units," Seitz says. "By showing zero profit annually for the services provided, we prove the value of the cost of IT."

Learn more about this topic

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Four tactics to surviving doom and gloom

Unisys untangles chargeback mess in IT

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