Spend wisely

Information technology managers everywhere are facing the same paradox: hardware and software prices keep dropping, yet the cost of managing a corporate IT infrastructure continues to rise. How is this possible? Analysts link it to contemporary business dynamics such as the frequency of corporate mergers, and a general reluctance to invest in new technology.

"Companies that grow by acquisition typically end up with a collection of disparate, disjointed systems," notes Bill Swanton, a VP with Boston-based AMR Research. These systems can be connected with various programming interfaces or middleware, but maintaining those connections drives up overall IT costs.

Nima Bakthiary, who directs the Microsoft Business Solutions practice for Unisys, says delaying new technology purchases under the premise of saving money—which has become a common business strategy—also boosts IT infrastructure costs because "older systems cost more to maintain and enhance."

Canadian General-Tower, a Unisys client that clung to a VAX-based ERP system for more than 20 years, found this to be true. "We were spending astronomical sums maintaining our IT infrastructure," laments Tim Armstrong, VP of corporate systems for the Ontario-based manufacturer of pool liners, decking, and related products.

The annual tab included more than $100,000 to maintain a warehouse management system, $120,000 for a software-support contract, $250,000 in hardware support contracts, and $800,000 in unbudgeted IT expenses. Armstrong says that last item was comprised primarily of costs to keep the aging VAX system running around the clock—including the expense of maintaining interfaces between the VAX and newer systems that had been installed over time.

Bakthiary says the cost of maintaining these older systems actually rises each year—particularly when vendors or outside consultants are supporting them—because the number of people with the skills to work on these systems is constantly shrinking.

"Over the years, the vendor that supported the VAX system increased its prices in hopes we'd get the message" that it was time to adopt newer technology, Armstrong says.

Finally, in September 2005, Canadian General-Tower replaced the VAX-based system with the Axapta ERP package from Microsoft Business Solutions. The new system runs on Intel-based servers, dispersing data across an IP-based network that includes a virtual private network connection for remote users.

For a time, the new infrastructure ran in parallel with the old, "which raised a few issues about data security and performance," says Armstrong.

"We're changing business processes as we go," he says—for example, sending sales and shipping data to a remote warehouse over the network, instead of faxing the orders and paying someone to rekey the data into a separate application. In total, Armstrong expects to reduce the IT workforce through attrition, terminate the VAX support contract, and dramatically cut network maintenance costs—all for a hardware investment of less than $120,000.

Analysts say the number of companies joining Canadian General-Tower in questioning the amount they spend on IT infrastructure is growing, and with good reason. Gartner, the Stamford, Conn.-based IT research firm, estimates that companies spent $130 billion on IT infrastructure services in 2004. It expects that figure to reach $152 billion this year, with software-support services alone accounting for 39 percent of that total.

The discontent over these numbers is exacerbated by what many corporate executives perceive as "the unfulfilled promises of IT implementations," according to David Dobrin, president of B2B Analysts, Cambridge, Mass. "Businesses are asking, 'Where's the payoff?'"

To truly lower infrastructure costs, experts recommend first taking stock of what your business needs for IT actually are. For instance, this assessment can help determine whether you really need an entire new ERP system, or if you can add a few modules to deliver missing functionality.

"Ask yourself what new applications are critical to your business," says Craig Johnson, an IBM product manager. "Will those applications run on your existing server's operating system? If so, you can acquire the new functionality—which should improve the efficiency of your processes—without making your infrastructure more complex," and thus more costly to manage.

Dobrin says slow-performing systems often respond well to an "IT angioplasty." This can entail getting rid of data bottlenecks like old or underused servers, or installing application-acceleration appliances on the network to improve response times.

Many manufacturers are in the same position as Canadian General-Tower before it switched to Axapta—relying on an aging mainframe for a few key processes. If that system has a high maintenance cost and only a few users, it's a prime candidate for replacement.

Before installing a new system, however, it's a good idea to make some fundamental decisions about the configuration of your IT infrastructure. Tim Andreae, VP of business development at IT consulting firm MCA Solutions, has seen poor upfront planning cause companies to spend more than five times the purchase price to implement IT systems.

AMR's Swanton says housing all applications and supporting servers in a single data center is "an easy step that can deliver big savings, even if you don't change anything else."

Replacing large numbers of servers with fewer, larger server "farms" can both boost performance and save money. Virtualization is a growing trend that also fits into an IT consolidation strategy. Virtualization can force users to standardize business processes across the enterprise, further boosting efficiency.

Swanton says most of the traditional fears associated with centralized IT operations are not valid.

"A lot of the issues that people used to worry about—overloading the networks with data traffic—have gone away," he says. "Someone in India can get the same responsiveness as someone in the U.S. or Europe, and today's servers can handle thousands of desktops. And as for special requirements of regions or particular industries or sectors, systems are flexible enough to handle any number of exceptions."

Swanton further recommends using standard hardware and software as much as possible, not only to make maintenance easier, but to reap benefits such as lower prices for buying in bulk from the same vendor.

The same concept applies to personnel. "If you're a global company, think about having a global IT operation," says Swanton. Instead of having IT specialists for each application or need in each location, allow one person to support operations virtually across all operations.

These days it also makes sense for companies to analyze the rent-versus-buy question when it comes to acquiring new technology. Smaller or midsize enterprises can get economies of scale by hosting processes on a vendor's system, while a large company's more sophisticated needs—larger databases, collaboration across regions, greater connectivity—can justify investment in its own robust infrastructure.

MPC Products, a Skokie, Ill.-based manufacturer of flight-control systems, manages to keep IT costs under control while enjoying annual revenue growth of 10 percent to 15 percent.

"Every new employee means another desktop computer, another network node, and more support," says Dale Gordon, VP of quality. "We don't want our IT spending to grow as fast as our business because that would lead to a huge spend on IT."

MPC buys all desktop computers from Dell and replaces them only at the end of their useful lives. It also carefully monitors the use of all software to ensure that the company isn't paying for more licenses than necessary. For instance, Gordon knows the ERP system purchased from Cincom gets constant, widespread use. But a supplier evaluation application from Open Ratings is only used occasionally; thus, MPC decided to employ a hosted version of that application rather than buy site licenses.

"We're cautious about signing long-term maintenance contracts," Gordon says. "And we're always looking to negotiate better terms with our IT suppliers. As you grow, you need more support, but you don't want to spend more than you have to."