Spend to save

The way for companies to save money in the long run is to invest now and get rid of legacy systems.

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By  Todd McGregor Published  November 4, 2007

Todd McGregor suggests that the way for companies to save money in the long run is to make large investments now and rid themselves of under-used legacy systems.

The average IT organisation is being squeezed in the vice-like grip of maintenance and support of ongoing operations. As much as 80% of the IT budget is consumed by these activities, leaving only 20% for strategic initiatives and innovation.

This is an untenable situation, yet there is no easy way out. A small number of organisations are taking an innovative and bold approach to their IT budgets by investing capital expense to offset high operating expenses. The result is bigger upfront cash outflows with a long-term favourable impact on operating expenses and positive contributions to the income statement, albeit with a higher level of risk.

The issue that most organisations will face is how to pay for such a massive effort. The answer is that this must be viewed as a long-term investment in the future of the enterprise. The objective is to invest capital in new infrastructure and applications, and eliminating the cost of difficult-to-maintain legacy systems, redundancies, under-utilisation, and staffing inefficiencies. The target result is that the depreciation and amortisation expense for the investment that flows through the income statement is significantly less than the expense of maintaining and supporting all of the old stuff - leaving a healthy return on investment (RoI). The keys areas of focus should be on:

Datacentre consolidation

With the availability of high bandwidth global networks, there are no real advantages to having multiple datacentres beyond those required for disaster recovery and business continuity reasons.

Server consolidation and virtualisation

The twin technologies of blade servers and virtualisation now make it possible to run multiple applications/functions on a single large server in virtual partitions. This accomplishes the two-fold benefit of economies of scale and higher utilisation rates, significantly reducing the unit costs of providing server-based services.

Applications portfolio rationalisation

Using techniques like applications scoring, CIOs and business executives can objectively evaluate the applications portfolio to identify where to best apply focus and resources and where to freeze maintenance, replace, or even eliminate applications completely.

Automated operations

The ultimate goal is "lights out" datacentres - completely automated operations requiring limited local human involvement - but this is still a few years away. However, there are automated operations and systems management tools available today that can significantly increase efficiencies and reduce the labour component. While the average server to admin ratio is around 20:1, best-in-class IT operations have achieved 200:1 ratios through a combination of automation and improved processes and increased availability, which has the direct benefit of reducing costs of outages and eliminating labour costs.

It takes money to make money

Moving forward with a major restructuring across a broad front will require a significant upfront investment. This will require access to reasonably priced capital and may be out of reach of some organisations. However, when viewed as a long-term investment with recurring annual benefits in the form of reduced operating expenses, the ROI can be significant.

There is a school of thought that suggests that you can either be a low-cost provider of IT services or you can invest in IT to make it a strategic partner and source of business value, but you can't do both. Nothing could be farther from the truth. Best-in-class IT organisations provide both low-cost IT services and enable innovative and strategic business capabilities.

Todd McGregor is managing director of Forrester Middle East.

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