managing the 80% problem
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Lean IT... here's how we use activity based costing, total quality and process re engineering to drive quality up, cost down and redirect IT spend from support to strategic investmentsTRANSCRIPT
Managing the 80% Problem
Combating the ‘ongoing support’ issue cannibalizing IT budgets
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved
The 80% problem what is it? Why talk about it? Where are these costs hiding (show me the coffin and a
stake …)? What are the common approaches – do they work? A different approach – Alphabet soup: ABC, TQC, Re Getting started Institutionalizing continuous improvement
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved2
Contents
Conventional wisdom and some accounting point to IT budgets being cannibalized by ongoing support issues– Legacy costs consume 70 – 80+% of total budgets– Hardware budgets still consume > 50% of total costs
• Even though Moore’s law continues we can’t beat the total cost burden• Infrastructure support costs are 30 – 40 + % of Hardware costs
We increase the burden every time we implement a new application– The expanding footprint of applications overwhelms productivity gains– The expanding infrastructure footprint increases the support / patch /
maintenance burden in the data center– Ongoing environmental support for old data centers takes people and
capital to keep up with new infrastructure demands
At the end of the day, it’s the ‘Golden Apple’, where everything good we do today, inhibits our ability to do more in the future
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved3
The 80% problem what is it?
It was second among InfoWeek’s survey of CIO’s for 20101. The Cloud Imperative. 2. The 80/20 Spending Trap. 3. CIO-Led Revenue Growth And Customer Engagement. 4. Mastering End-to-End Business Processes. 5. Business Analytics and Predictive Analytics. 6. External Information vs. Internal Information. 7. CIO Priorities, CIO Compensation, CIO Evaluation. 8. Vendor Consolidation, With Radical Exceptions 9. The Mobile Enterprise and The Mobile Mindset. 10. The Transformation Quotient.
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved4
Why talk about it?
As has been the case for the last 20 years - "the new normal" for CIOs in 2010 will be to accomplish a whole lot more with a whole lot less
IT budget, even if developed bottom up is almost always capped by G&A and expense ratios at budget time:– Benchmarks of % of revenue, free cash flow, PBT / EBITDA, etc. make budgets
for SG&A a ‘solved for’ number.– Sandbagged revenue estimates and escalating uncontrollable expense costs
(raw matl. , energy …) subtract from available cash.– Additionally head count caps, caps on consulting and variable resources
constrain any flexibility that the CIO has. Even the AICPA ‘dodge’ of the last 10 years is falling short:
– Software and new development capitalization has resulted in a tidal wave of depreciation washing over the budget ‘shores’.
– Free cash flow and debt covenants further constrain our ability to ‘grow the pie’ from creative accounting.
– Conservative auditors and CFO’s seek to stop capitalization at the earliest point in the implementation cycle.
We are left in ‘the do more with less environment’ just when competitive pressures and IT’s value proposition are increasing04/13/2023 Copyright: Crocus Hill Associates, All rights reserved5
Why talk about it (continued)?
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Where are these costs hiding?
Infrastructure - hardware etc.
Infrastructure Labor - support
Infrastructure Labor - new
Application Labor - support
Application Labor - new
We all know where the costs are – Legacy, Legacy, Legacy
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved7
Where are these costs hiding?
Audit0%
Break - Fix (problem Mgmt)36%
Core Activities4%
Data Base Support2%
Operations Support2%
Project - Internal0%
Support - Main-tenance
44%
Work Request - Special Project12%
Break Fix and Support are the Killers
Embrace a ‘religion’ – e.g. ITIL– While service level control may manage demand, overall costs
rarely go down and often go up when formalisms are installed.– However, the good news is that the discipline of formal processes
and databases provide the basis to measure work and potentially to manage it better.
Give the problem to someone else – outsource– Overall, the outsourcing equation may transfer responsibility to
more efficient organizations.– However, it is still true that over 50% fail outright and more than
that go ‘upside down’ on costs in less than three years. Benchmark – see who might be doing it better
– Comparisons in this area are risky, however, at a high level they do provide a view into areas where there are opportunities to improve practice.
– The bad news is that they don’t help in ‘root cause’ analysis. They only identify areas of opportunity
What are the common approaches – do they work?
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved8
A different approach
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved9
Evaluate key work activities
Understand Cost / quality
drivers
Prioritize ‘Hit List’
Re Engineer service delivery
Pilot evaluate and expand
Work request
Labor trackingKPI’s
Activity Based Costing to baseline work and standard costs– Identify core deliverables and activities for each group– Identify work at a low enough level to be actionable – activities that
can be eliminated, automated, restructured, or reorganized– Understand the cross functional (IT group) costs
Total Quality Methods for priorities and root cause– Pareto (Frequency) charting of incidents and activity volume – Ishikawa (Fishbone) to outline drivers and root cause– Plan-do-check-act cycle for change implementation
Use Reengineering principles to drive performance and efficiency– Eliminate unnecessary work / Restructure processes /Apply
automation only after optimization
Alphabet soup- Drive change through ABC, AVA, TQC and Reengineering
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Break down high level costs into standard work units– At enough granularity to be able to establish standards
• Unix password reset…– Identify cross functional (IT group) involvement in activities
• Identify who the participants are, their place in the workflow and their estimate for their tasks
– Estimate standard work effort estimates for each activity • Focus both on labor / effort as well as “$” costs
Develop workload model summarizing standard activity costs into major accounting groups– Break Fix– Support / upgrade– Enhancement – New development etc.
Use Activity Based Cost to develop standard costs and linkage
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Develop Pareto charts from tickets, service requests or other estimating techniques to analyze frequency of activities– May have to break ticket categories down to match with ABC– Ultimately workload categorization standards must synchronize
across all accounting and work management systems Combine with the data from the ABC analysis to understand
the total cost impact of the activity– Model the total costs by matching the frequency of activities to the
standard cost for the work Reconcile the cost with budget and headcount and redo
standards and volumes until budget, headcount and total cost are close– In first pass the model should be within 5-10% of explaining all work
and budget
Use TQC to prioritize and analyze activities
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved12
Understand Impact and Set Change Agenda
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Activit
y 1
Activit
y 2
Activit
y 3
Activit
y 4
Activit
y 5
Activit
y 6
Activit
y 70
200400600800
10001200
$
Act
ivity
Co
st
Pareto Analysis
Activity Volume
Sys Admin Database Network PM BA PABreak Fix
Activity 1 10 5 1 0 0 0Activity 2 1 0 5 0 0 0Activity 3 20 5 3 1 2 10Activity 4 0 0 0 2 3 20
Support / MaintenanceActivity 5 2 5 1 10 5 20Activity 6 0 0 0 2 10 5Activity 7 1 8 1 3 9 15Activity 8 4 6 3 1 2 4
Upgrade / EnhancementActivity 9 6 3 3 0 0 0Activity 10 2 4 0 3 6 10Activity 11 9 3 4 6 8 22
Infrastructure Applications
ABC analysis
Analyze and Reconcile
Prioritize and Focus
This effort will identify and prioritize a portfolio
of improvement initiatives
Each targeted initiative should work on both reducing its frequency and cost
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved14
Act
ivity
Cos
t
Activity Volume
$
Drive down activity frequency with TQC and root cause analysis
Drive down activity cost with process redesign
Use Root cause analysis to find drivers of activities
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved15
Activit
y 1
Activit
y 2
Activit
y 3
Activit
y 4
Activit
y 5
Activit
y 6
Activit
y 70
200400600800
10001200
Pareto Analysis
Technology
Policy
Procedure
Training
Improvement efforts
Evaluating the root cause or drivers of efforts identifies changes to reduce frequency of support efforts
Reengineer process to drive efficiency and cost reduction
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved16
Eliminate
• Identifying activities that add no value to the product or service,
• Identifying activities that add no value for the customer,
• Organize around outcomes, not tasks
• Have those who use the output of the process do the process
• Subsume Information work into the real work that produces the information
• Treat geographically dispersed operations as if they were centralized
• Link parallel activities instead of integrating their results
• Put the decision point where the work is performed
• Capture data once at its source
Reengineer workflow
and process
Apply automation judiciously
• Automate after a working model has been piloted and implemented
• Don’t pave over the cow path – restructure, redesign then automate
Work
request
Labor
tracking
KPI’s
It is necessary to establish or rework key IT management systems to monitor and manage this effort– The ABC and initial quality initiatives can identify quick hit and
key process overhaul candidates– Over time, experience has shown that performance degrades and
sometimes costs are as high or higher than before the reengineering effort
It is critical to establish a solid set of KPI’s around the continued performance of these cost driving initiatives– Work tracking and labor management systems need to be tied
together to provide management visibility into ongoing operations
– A standard work breakdown structure is the critical link between the work request (problem / request management) system and the labor tracking system
– Management reports should tie both the volume of work and the cost of work into a coherent management dashboard
– KPI’s and performance management systems need to support continued improvement efforts
Sustaining change and continuous improvement
04/13/2023 Copyright: Crocus Hill Associates, All rights reserved17